Federal Tax

Partnerships — Taxable Income; Allocation of Distributive Shares; Capital Accounts (Portfolio 712)

  • This Portfolio analyzes the tax considerations relating to the determination of a partnership’s taxable income and loss and the allocation of such income and loss among its partners.

Description

Bloomberg Tax Portfolio, No. 712 T.M., Partnerships — Taxable Income; Allocation of Distributive Shares; Capital Accounts, analyzes the tax considerations relating to the determination of a partnership’s taxable income and loss and the allocation of such income and loss among its partners. Because a partnership is not a taxable entity, but instead flows through its income and losses to its partners, partnership taxable income and loss (or items thereof) are treated as received directly by the partners in their respective portions (or distributive shares) of each item.

In general, partnerships are granted substantial flexibility in allocating items of partnership income and loss among their partners. If, however, the partnership agreement does not provide for the allocation of such items or such allocation does not have “substantial economic effect,” the determination of the partners’ distributive shares is made in accordance with the partners’ interests in the partnership (taking into account all facts and circumstances). This Portfolio discusses extensively §704(b) and the regulations thereunder, which contain detailed rules for the determination of the partners’ distributive shares.

The Portfolio also describes the special rules regarding the allocation of tax items in respect of appreciated or depreciated property contributed to a partnership and regarding the apportionment of allocations between transferors and transferees that are necessitated by a mid-year transfer of an interest in a partnership (including the sale or exchange of an interest, liquidation of an interest, death of a partner, admission of a new partner, transfers to and from corporations, and gifts and intra-family sales of partnership interests). It also discusses the unique treatment of guaranteed payments (generally salaries and interest-type payments to partners) under §707(c).

Related discussions of partnership topics may be found in 710 T.M., Partnerships — Conceptual Overview (classification of partnerships and determination of partnership income), 711 T.M., Partnerships — Formation and Contributions of Property or Services, and 718 T.M., Partnerships — Disposition of Partnership Interests or Partnership Business; Partnership Termination(effect on the allocation of partnership profits and losses upon the sale or exchange of partnership interests).

Table of Contents

I. Introduction
II. Computation of Partnership Income
III. Partners’ Distributive Shares
IV. Allocations Pursuant to the Partnership Agreement – Section 704
V. Tax Allocations in Respect of Contributed Property – Sections 704(c) and 737
VI. Guaranteed Payments

Eric-Sloan
Eric Sloan
Partner
Gibson, Dunn & Crutcher LLP
sullivan-matt-2015
Matthew Sullivan
Director
Deloitte & Touche
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