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Film General Partnership Agreement Form document sample
Film General Partnership Agreement Form document sample
Entering & Exiting Partnerships & LLC’s The Real Cost! 2009 American Society of Women Accountants Northwest Regional Conference May 14-16, 2009 Presented by: Wendy Wixson Overview Contribution to partnership General rule and exceptions Distribution to partner General rule and exceptions Disposition of partnership interest Sale and exchange Abandonment Contributions General rule §721(a) - Nonrecognition of gain or loss on contribution No gain or loss shall be recognized to a partnership or to any of its partners on a contribution of property to the partnership in exchange for an interest in the partnership Contribution Exceptions §721(b) - Investment partnerships If appreciated stock or securities are contributed to a partnership that would be treated as an investment company (if it was a corporation), gain is recognized The same rule does not apply to losses If 80% of the value of the assets are held for investment and those assets are stock and securities (including real estate investment trusts and regulated investment companies), the partnership will be treated as an investment partnership Contribution Exceptions Certain contributions of encumbered property If relief of debt exceeds basis, gain occurs §752(a) - Any increase in a partner’s share of partnership liabilities, or any increase in a partner’s individual liabilities due to assumption by the partner is considered a contribution of money by the partner to the partnership §752(b) - Any decrease in a partner’s share of partnership liabilities or any decrease in a partner’s individual liabilities due to assumption by the partnership is considered a distribution of money to the partner by the partnership Contribution Exceptions Certain contributions of encumbered property §752(c) - Only taken into consideration to the extent of the fair market value of the property it encumbers §731(a)(1) - In the case of a distribution by a partnership to a partner, gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner’s interest in the partnership immediately before the distribution Contribution Exceptions Certain contributions of encumbered property Rev Rul 84-15 - A partner who recognizes gain upon the contribution of encumbered property to a partnership, does not increase the basis of his/her partnership interest to reflect the gain and the partnership does not increase the adjusted basis of the contributed property to reflect such gain §731(a) - In the case of a distribution by a partnership to a partner, any gain or loss recognized shall be considered a gain or loss from the sale or exchange of a partnership interest Contribution Exceptions Case Study – Recourse Liabilities Ann and Margaret form an equal partnership. Ann contributes $50,000 cash. Margaret contributes land with a FMV of $90,000 and adjusted basis of $10,000, subject to a $40,000 recourse liability. What is Ann and Margaret’s initial tax basis in the partnership? Will either partner recognize gain on contribution? Contribution Exceptions Case Study – Nonrecourse Liabilities James and Dean form an equal partnership. James contributes $20,000 cash. Dean contributes land with a fair market value of $50,000 and an adjusted basis of $10,000, subject to a $30,000 nonrecourse liability. The Partnership has no other liabilities and no §1.704-2(d)(1) “minimum gain.” What is James and Dean’s initial tax basis in the partnership? Will either partner recognize gain on contribution? Exceptions to General Nonrecognition Rule Contribution of encumbered depreciation recapture property Gain will be characterized as ordinary §1245(b)(3) and §1250(d)(d) – If basis of property in the hands of the recipient is determined by reference to the basis in the hands of the transferor due to §721 or §731, then the recapture gain shall not exceed the recognized gain on the transfer §1.1245-2(c)(2) and §1.1250-3(c)(3) – The contributed property continues to be subject to depreciation recapture in the hands of the partnership Contribution Exceptions Case Study – §1245 - Property Contribution In exchange for a 50% partnership interest, Ms. Hepburn contributes a film reel subject to §1245 with a FMV of $50,000, adjusted basis of $20,000 and recomputed basis under §1245 of $40,000. The property is subject to a recourse liability of $45,000. Is any gain recognized on the contribution? What is the character of the gain? Contribution Exceptions Contribution of services – current rules Capital and profits interest have different treatment §1.721-1(b)(1) - To the extent any of the partners gives up any part of his right to be repaid his contributions (as distinguished from a share in partnership profits) in favor of another partner as compensation for services, §721 does not apply Contribution Exceptions Contribution of services – current rules (Cont’d) Rev Proc 93-27 - The receipt of a partnership profits’ interest for services is not a taxable event so long as the person receives that interest either as a partner or in anticipation of becoming one. This rule is not applicable if: The profits’ interest relates to a substantially certain and predictable stream of income from partnership assets The partner disposes of the profits’ interest within two years of receipt The profits’ interest is a limited partnership interest in a publicly traded partnership Contribution Exceptions Contribution of services – current rules (Cont’d) Rev Proc 2001-43 - If service provider receives interest for providing services to or on behalf of partnership, IRS won’t treat receipt of interest as taxable event for either partner or partnership. Determination of whether interest qualifies as profit interest is measured at time interest is granted even if interest is substantially nonvested within meaning of §1.83-3(b), and grant of interest or event that causes interest to be substantially vested won’t be treated as taxable event. §83(b) - Election not required Contribution Exceptions Contribution of services – current rules (Cont’d) §1.83-3(b) - Property is substantially nonvested when it is subject to a substantial risk of forfeiture. Property is substantially vested when it is either transferable or not subject to a substantial risk of forfeiture Exceptions to General Nonrecognition Rule Contribution of services – proposed regulations No differential between profits and capital interest Proposed §1.721-1(b)(1) The transfer of a partnership interest to a person in connection with the performance of services constitutes a transfer of property to which IRC §83 and regulations apply Contribution Exceptions Contribution of services – proposed regulations Recipient partner will recognize compensation income under §83(a) equal to the excess of the fair market value of the partnership interest received over any amount the recipient paid for the interest Service providers receipt of profit or capital interest is taxable depending on whether the interest is substantially vested and , if not, whether and §83(b) election is made Contribution Exceptions Contribution of services – proposed regulations (Cont’d) Proposed §1.83-3(l) - A partnership and all of its partners may elect a safe harbor under which the fair market value of a partnership interest that is transferred in connection with the performance of services is treated as being equal to the liquidation value of that interest Liquidation value equals the amount of cash the partner would receive with respect to the partnership interest if the partnership sold all its assets for cash at fair market value immediately after the actual transfer of the interest, then liquidated When Proposed Reg §1.721-1 is finalized, Notice 2005-43 will obsolete Rev Proc’s 93-27 and 2001-43 Contribution Exceptions §707(a)(2)(B) - Disguised sales – a contribution of property will be treated as a sale when: There is a direct or indirect transfer of property, including money, by a partner to a partnership There is a related direct or indirect transfer of property, including money, by the partnership to that partner; and When viewed together both transfers are properly characterized as a sale or exchange Exceptions to General Nonrecognition Rule §1.707-3(c) – Transfers made within two years presumed to be a sale If within a two year period a partner transfers property to a partnership and the partnership transfers money or other consideration to the partner, the transfers are presumed to be a sale of property to the partnership Form 8275 disclosure may be required Contribution Exceptions Case Study HoldCo (a C corporation) owns an option to purchase a desirable piece of development property. HoldCo does not have the funds to facilitate the purchase HoldCo finds an investor who does have the cash to purchase the real estate and is interested in funding the development Contribution Exceptions Case Study (Cont’d) HoldCo contributes the purchase option to LLC on March 31, 2007. The FMV of the purchase option as stated in the partnership agreement is $1,013,000. HoldCo has a basis in the purchase option of $800,000. HoldCo incurs some cash flow problems. On July 31, 2008, LLC distributes $688,000 cash to HoldCo. What are the tax implications of the above transactions? Contribution Exceptions §707(b)(2) - Gains treated as ordinary income If property is sold (or deemed sold) to a partnership by a person who, directly or indirectly, owns more than 50% of the partnership, or If property is sold (or deemed sold) between two partnerships in which the same persons own, directly or indirectly, more than 50% of the of the capital or profit interests of the partnership, and The property in the hands of the recipient will not be a capital asset (§1221) Then the gain recognized will be characterized as ordinary income Distributions General rule §731(a) – Nonrecognition of gain or loss on distribution Gain shall not be recognized to partner except to the extent any money distributed exceeds the adjusted basis of the partner’s partnership interest immediately before the distribution No gain or loss recognized on property distributions Loss shall not be recognized to partner except upon a liquidating distribution of the partner’s partnership interest where no property other than money, unrealized receivables ( §751(c)), and inventory (§751(d)) are distributed Distribution Exceptions Tainted assets §735(a) – When distributed property is later sold When a partner later sells unrealized receivables ( §751(c)) received via partnership distribution, the resulting gain or loss will be treated as ordinary When a partner later sells inventory (§751(d)) received via partnership distribution, the resulting gain or loss will be treated as ordinary if the inventory is sold within five years of distribution Trigger Distribution Exceptions §704(c)(1)(B) – Precontribution gain triggered by later distribution Gain or loss to partner who contributed asset with precontribution gain is triggered when: Partner contributes an asset with FMV in excess of basis The Partnership distributes the precontribution asset to another partner within seven years of its initial contribution Distribution Exceptions §704(c)(1)(B) – Precontribution gain triggered by later distribution (Cont’d) Gain or loss is computed based on gain that would have been allocated to partner if partnership had sold precontribution asset at fair market value at time of distribution Character of gain or loss is based on the character had the partnership sold the precontribution asset to the recipient Basis of initial contributing partner’s partnership interest is adjusted by gain or loss recognized Distributed property’s basis is adjusted for gain or loss recognized Distribution Exceptions Case Study Fred and Barney form a partnership. Fred contributes $10,000 cash and a rock with a fair market value of $10,000 and adjusted basis of $4,000 in exchanges for a 25% interest in the partnership. Barney contributes $60,000 for a 75% partnership interest. Five years later, the Partnership distributes the rock to Barney in a current distribution. The rock is now valued at $11,000. Fred originally purchased the rock as an investment. The Partnership holds the rock as inventory available for sale. Distribution Exceptions Case Study (Cont’d) What is the precontribution gain? How much gain is recognized by Fred? What is the character of the gain? Distribution Exceptions §737 Precontribution gain triggered by later distribution Gain to partner who contributed asset with precontribution gain is triggered when: One partner contributes an asset with FMV in excess of basis within the previous seven years That partner receives a distribution of another partnership asset within that seven year period Distribution Exceptions §737 Precontribution gain triggered by later distribution (Cont’d) Gain recognition is lesser of: Precontribution gain Excess distribution The fair market value of property other than money distributed less the adjusted basis of the partner’s partnership interest immediately before the distribution minus any money included in the distribution Gain is separately recognized on cash distribution under §731(a) Basis of recipient partner’s partnership interest is increased by gain recognized Partnership’s basis in property contributed by recipient partner is increased by the partner’s §737 gain Distribution Exceptions Case Study Ginger contributed her modeling portfolio (value $1,000 and adjusted basis $600) to a partnership in exchange for 1/3 interest in partnership profits, losses and capital. Six years later, the Partnership still owns Ginger’s modeling portfolio and its value has increased to $1,200. During year six the Partnership distributes Mary Ann’s modeling portfolio (value $800) to Ginger. Ginger’s adjusted basis in the partnership is still $600. Distribution Exceptions Case Study (Cont’d) What is the precontribution gain? What is the excess distribution? How much gain does Ginger recognize from the distribution of Mary Ann’s modeling portfolio to Ginger? What is Ginger’s basis in the partnership? What is the Partnership’s basis in Ginger’s modeling portfolio? Distribution Exceptions Case Study Same scenario as previous except after receiving Ginger’s contribution of her modeling portfolio, the Partnership purchased Mary Ann’s modeling portfolio for $900 and borrowed $900 in nonrecourse debt to facilitate the purchase. Six years after Ginger’s initial contribution, the Partnership distributes Mary Ann’s modeling portfolio (value $900), the related debt and $200 cash to Ginger. There are no tier 1 or tier 2 nonrecourse debt allocations, so the debt is allocated in accordance with the partner’s profits interest (1/3) Distribution of Partnership Interests Primary methods of disposition of a partnership interest Sale or exchange Abandonment or foreclosure Transfer to a corporation Gift or charitable contribution Nontaxable exchange Sale or Exchange Sale or exchange Sales to third parties, other partners, or partial sales are all treated the same Steps in determining tax implications Determine the overall gain or loss Determine the character of the gain or loss Determine the holding period for the partnership interest Sale or Exchange Overall gain or loss Amount realized (cash plus FMV of property) including debt relief Less adjusted basis including debt assumed Equals gain or loss on disposition of partnership interest Sale or Exchange Character of the gain or loss §741 - Gain or loss recognized by the transferor partner shall be considered as gain or loss from the sale or exchange of a capital assets, except as otherwise provided in §751 §751(a) - The money or fair market value of property received by a selling partner in exchange for all or part of his partnership interest attributable to unrealized receivables and inventory is considered an amount realized from the sale or exchange or property other than a capital asset Sale or Exchange Character of the gain or loss (Cont’d) Since sale or exchange, no requirement that inventory be substantially appreciated Partnership required to file Form 8308 when transfer includes §751(a) property §751(d)(3) - Inventory includes any property held by the partnership which, if held by the selling partner would be considered inventory Sale or Exchange Holding period If partnership interest was acquired by purchase, contribution of cash or contribution of non-capital assets Holding period begins the day after acquisition of the partnership interest If partnership interest was acquired by contribution of §1221 and/or §1231 assets Pre-contribution holding period tacks §1223(1) §1.1223(b) - Holding period is determined based on FMV of partnership interest received in the transaction to which the holding period relates divided by the FMV of the entire partnership interest Sale or Exchange Case Study The Three Stooges Partnership is in the retail computer business. Each partner has an equal interest in the partnership’s profits, losses and capital. On January 1, 2009, Moe approached Larry regarding the possible sale of Larry’s partnership interest. On this date, the partnership had the following balance sheet. Sale or Exchange Case Study (Cont’d) Basis FMV Cash $ 150,000 $ 150,000 Inventory 240,000 300,000 Equipment 180,000 150,000 Accumulated depreciation (120,000) - Building 250,000 300,000 Accumulated depreciation (100,000) - $ 600,000 $ 900,000 Liabilities $ 300,000 $ 300,000 Capital - Larry 100,000 200,000 Capital - Moe 100,000 200,000 Capital - Curly 100,000 200,000 $ 600,000 $ 900,000 Sale or Exchange Case Study (Cont’d) The equipment depreciation is subject to §1245 recapture. The building has been held over 12 months and has been depreciated on a straight line basis. Larry received his initial partnership interest in exchange for a $10,000 contribution of cash five years ago. What is the tax implication to Larry if Moe pays $200,000 cash for Larry’s partnership interest? If Larry is a dealer in real estate, how does the result change for Larry? Sale or Exchange Installment sale of partnership interest Defers recognition of gain Income recognized at time of sale Ordinary income related to inventory Ordinary income from §1245 recapture May allow buyer to purchase partnership interest with future partnership distributions Abandonment Character of loss Is the partner relieved of any debt due to abandonment? Partner’s share of liabilities = 0 Ordinary loss Partner’s share of liabilities > 0 Sale or exchange Abandonment Rev Rul 93-80 Under §1.165-2 absent a sale or exchange a loss that results from the abandonment or worthlessness of nondepreciable property is an ordinary loss even if the abandoned or worthless asset is a capital asset (such as a partnership interest) Abandonment Rev Rul 93-80 (Cont’d) §731 and §741 apply to any transaction which the partner receives an actual distribution of money or property from the partnership. There provisions likewise apply to any transaction in which a partner is deemed to receive a distribution from the partnership (e.g. §752(b)). Thus, whether there is an actual distribution or a deemed distribution, the transaction is treated as a sale or exchange of the partnership interest, and any loss resulting from the transaction is capital (except as provided in §751(b) §751(b) §751(b) Certain distributions treated as sales or exchanges Applies to distributions that alter the partners’ interests in unrealized receivables and substantially appreciated inventory Substantially appreciated = FMV > 120% adjusted basis To the extent distribution is taxable and related to these items, gain or loss will be ordinary §751(b) Example The assets of Mary Tyler Moore partnership consist of $90,000 cash and inventory with a FMV of $90,000 and an adjusted basis of $45,000. All partners have equal profit, loss and capital interests. Tyler has an adjusted basis of $45,000 in his partnership interest. If Tyler receives a liquidating distribution of $60,000 cash, the distribution reduces his $30,000 interest in the value of the partnership’s substantially appreciated inventory to 0. Therefore §751(b) applies. §751(b) Tyler received a current distribution of his $30,000 interest in partnership inventory. Tyler’s share of the inventory’s basis was $15,000 (results in $15,000 ordinary income recognition to Tyler) Tyler is treated as selling his interest in the hypothetically distributed inventory back to the partnership for $30,000 (partnership’s basis in inventory is now $60,000 = $30,000 AB from inventory not sold + $30,000 from hypothetical repurchase) The remaining $30,000 distributed to Tyler is taxed under the general distribution rules ($0 gain left to be recognized therefore capital gain is nil) Abandonment How does §752 and §751(b) apply in an abandonment situation?
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