Film General Partnership Agreement Form by yje15417

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									    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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