No gain or Loss is recongized on a contribution of property in exchange for partnership interest. 

Exceptions: Services Rendered--> Taxed as ordinary income at FMV

Property with Excess Liability assumed--> Excess is treated as boot.

Initial Basis: 

Cash-Amount Contributed

Property-Adjusted Basis (NBV)

(Liabilities)- Liabilities "put in"-incoming partner's liabilities assumed by other partner's assumed by other partners is a reduction 

Services- FMV (taxable to incomng partner)

Liabilities- "take on"-other partner's liabilities assumed by incoming partner.

Capital Asset or Section 1231 asset- assume contributing partner's holding period

Ordinary Income Asset (i.e. inventory)- holding period begins on date of contribution 

When FMV > NBV at contribution, a built in gain or loss exists at date of contribution. When that property is sold, the built in gain must be specially allocated to the contributing partner. 

Partner Basis Formula

(like a bank account)

Beginning Capital Account (Cash, FMV services, NBV assets (liabilities))

+ % All Income (Ordinary, Capital, Tax-free)

- % All Losses (partnership loss as tax deduction up to basis amount)

- Withdrawals (reduce capital by NBV of distributed property) 

= Ending Capital Account 

+ % Recourse Liabilities (Partner's Share of Liabilities)

=Year End Basis (Partnership Basis)

Taxing a Partnership

Not subject to income taxes, flow through organization. 

Must file a Form 1065, describes each partners share of income (loss) 

Calendar Year- generally required 

Returns due April 15

A three month deferral is maximum permitted (so possible to end fiscal year in Oct, Nov, Dec) 

Termination occurs when: 

1. Operations Cease. 
2. 50% or more of partnership interest (capital & profits) are sold or exchanged within a 12 month period
3. There are less than 2 partners-->becomes sole proprietorship

Effects of Termination: 

Distribution to remaining partners and purchaser

Hypothetical recontribution of assets to a new partnership (close old account, open a new one)

Related Party Losses are Disallowed : Losses between controlling partner (someone who has 50% or more interest) and controlled partnership from sale/exchange are not allowed. 

Related Party Gain- Similiar transactions that result in a gain are treated as ordinary income if property is depreciable and not a capital asset. 

Partnership loss Deduction is limited to partner's adjusted basis in the partnership plus any liabilites he is personally liable for ("at risk") 

Carryforwarded indefinitely (excess over basis reduction)

May be subjected to passive loss limitations

Guaranteed Payments : Reasonable compensation paid to a partner for services rendered or use of capital without regard to partnership ratio of income. (ex. salary expense, interest expense)

Tax Deductions for Partnership

Ordinary Income for Partner 

Retirement payments are treated similarly. 

Similar to other business start up cost treatment. 

 Deduct up to $5,000 (dollar for dollar reduction after $50,000) 

Excess organizational expenditures are amortized over 180 months. 

Includable: fees paid for legal services in drafting agreement, accounting services, partnership filings. Capital Raising Costs are EXCLUDED. 

Schedule K-1 

(Each partner gets their own) 

Part of Form 1065

Does not include detials of partnership income and expense--only reported on Form 1065 

Includes details of: 

Net Business Income or Loss

Guartanteed payments to partners

Net "active" and "passive" rental income or loss

Interest income 

Dividend income

Capital gains or losses

Charitable Contributions

Section 179 (expense election)

Investment Interest Expense 

Partners' health insurance premiums 

Retirement plan contributions

Tax credits (reported by partnership, claimed by partners)

Like bank withdrawals--> non taxable 

Reduce partner's basis by cash or NBV of property distributed. (Can not reduce it passed zero)

Basis of property remains the same (NBV)

Exception: Gain is recognized on cash distribution (including assumed liabilities) that exceeds adjusted basis prior to distribution

Liquidating Distributions 

1. Complete Withdrawal (Liquidation)

Partner's basis = adjusted basis of partnership interest 

Beginning Capital Account 

+ % Income (Loss) Up to Withdrawal

Partner's Capital Account 

% of Liabilities

Adjusted Basis @ Date of Withdrawal

(Cash Withdrawn)

Remaining Bais to be Allocated to Assets Withdrawn 

Gain Recognized only when money recieved > partner's basis 

Loss Recongized when money recieved < partner's basis

Liquidating Distributions 

2. Sale of Partnership Interest

General rule: partner has capital gain/loss when transferring partnership because partnership interest is a capital asset. 

Beginning Capital Account 

% Income (Loss) Up to Sale 

Capital Account @ Sale Date

% of Liabilities

Adjusted Basis

(Amount Recieved) Cash, Cancellation of Debt (Equal to Liabilities), FMV of Property 

Capital Gain or Loss 

Exception (treated as ORDINARY INCOME) - Partner's share of Hot Assets--> unrealized recievables & appreciated inventory 

Liquidating Partnership Distribution 

3. Retirement or Death of a Partner

Payments to retiring partner or interest success of deceased partner are allocated between payment for interest in partnership and other payments. 

Payments for interest in partnership- result in capital gain

Other payments- Taxable as ordinary income if measured by partnership income 

Partnership Income & Losses are prorated when sold to other partners based on date of sale. 

Seperate income tax paying entities called fuduciaries. 

Created under fiduciary relationship in which assets (principal, corpus) have been transferred so a person (i.e. trustee or executor) with the responsibility for the entity can hold legal title for the property for the benefit of named beneficiaries. 

1. Income Tax - based on income earned while estate is in existence 
2. Estate Tax- Transfer tax based on value of decedent's estate (taxed to estate BEFORE property is transfered) 

Combined Transfer tax. 

Applicable credit is allowed against estate tax/gift taxes  -> Cumulative lifetime gifts: 2010/2011 gifts of $13,000 or less per year per person are excluded. Lifetime gift credit (345,800) exempts first $1,000,000 of lifetime transfers. 

Classification of all receipts and disbursements as either principal (corpus) or income. 

Capital gains and losses are classified as principal and must remain with the trust (alocated to corpus) to be taxed at the trust or estate level. 

Estate or Trust Gross Income - including capital gains

(Estate or Trust Deduction)-

Ordinary & Necessary Expenses including income production expenses, trustee/exeutor fees, tax costs, charitable contributions provided for in will 

Adjusted Total Income (Line 17 on 1041) 

+ Tax Exempt Income

(Capital Gains)-- Attributable to Corpus 

Distributable Net Income

Equals lesser of: 

1. Actual Distribution to beneficiary

OR 

2. DNI (less tax exempt intrest) 

A legal entity that comes into existence upon death of an individual and continues to exist until all assets of estate are distributed. During this time, income is generated and expenses are paid. 

TAXABLE ENTITY 

Like a ghost, completing all the deceased unfinished business 

Required When Annual Income > $600

Estate may elect to have CALENDAR YEAR (due April 15th) or FISCAL YEAR (15th day of 4th month after year end)

No estimated tax payments are required IN FIRST TWO YEARS. 

Must file with Calendar Year-- December 31st

Trust may deduct amounts distributed to beneficiaries UP TO DNI. 

1.  Makes distributions ONLY from CURRENT income- not from trust principal. 
2. Required to distribute all of its income currently. 
3.  Cannot Deduct Charitable Contribution
4.  Entitled to $300 expetion to arrive at Taxable Income

All trusts not simple are complex. Trust can be simple one year then complex.

1. May accumulate current income
2. May distribute principal
3. May deduct charitable contributions
4. Permitted an exemption of $100 to arrive at taxable income

Transfer tax, NOT income tax. 

Imposed on value of property transferred by decedent at death. 

If gross estate > $1,000,000 (in 2011)-- a form 706 must be filed 

Filed within 9 months of death, unless extension filed

Value (at date of death or 6 months after if alternate value is elected) of all the decedent's worldwide property including:

• Real property, personal tangible property, intangible property
• FMV of jointly held property -- if spouse, split 50/50, other people 100% minus other owner's contribution
• Insurance proceeds
• Incomplete gifts (joint accounts)
• Revocable transfers (no future intert, trust in which child recieve in future)
• All property entitled to be received (income in respect of decedent) 

Gross Estate

[FMV of property, insurance proceeds, incomplete gifts, revocable transfers, income in respect of decendent] 

(Nondiscretionary Deductions)

[Medical expenses, Admin expenses, outstanding debts, claims against estate, funeral expenses, indebtedness of property, certian taxes]

Adjusted Gross Income

(Discretionary Deductions) 

[unlimited charitable bequests & martial deduction]

Taxable Estate

Adjusted Taxable Gifts 

Tentative Tax Base 

X Uniform Tax Base

Tentative Estate Tax

(Gift Taxes Paid)

Gross Estate Tax

(Applicable Credit)

Estate Tax Due

Estate Deductions

Nondiscretionary Expenses

Gross estate is reduced by: 

1.  Medical Expenses - paid within 1 year 
2.  Administrative Expenses 

(Above can be deducted EITHER on income return or estate return NOT both) 

3. Outstanding debts of decedent

4. Claims against estate

5. Funeral Costs

6. Certain Taxes 

Estate Deductions

Discretionary Expense

Unlimited Charitable Deduction 

Unlimited Marital Deduction-

(Unlimited transfers to the decedent's spouse)

Foreign Death Taxes 

Prior Transfer Taxes (prior gift taxes paid) 

Annual Exclusion of $13,000 per year/per person 

Spouses can each gift that amount- MFJ per person is $26,000

Unlimited Exclusions:

1. Payments Directly To Educational Insitution

2. Directly to Health Care Provider for Medical Care

3.Charitable Gifts

4. Marital Deduction 

Does not qualify for the annual exclusion and unless required time has passed, will not be removed from the estate. 

Examples: 

Reversions (figting assets and later getting the property back) "indian giving"

Remainders (distributed at some future time) 

Trust income interests where accumulation of income by trustee is mandatory "wait for your gift to mature"

Present intersts without ascertianable value. "gifts without determinable value"

Qualify for annual exclusion and in most cases removed from estate. 

Examples:

• Outright gifts of cash or property
• Annual or frequent distributions are mandatory
• Life estate (ownership of right to use property presently) 
• Estates for a certain term
• Bond or notes (even if interest isnt payable until maturity)
• Unrestricted transfers of life insurance policies

Qualify for annual exclusion, not considered part of gross estate 

Considered complete (subject to gift tax): 

1. Even though donee is not yet born, provided his identity can later be ascertained 

2. Despite the possibility that the property may revert to the donor at some future time. 

A gift is not considered complete (not subject to gift tax) if it is CONDITIONAL or REVOCABLE. 

Conditional: If subject to conditions and will not be provided unless the conditions have been met. (graduation from college) 

Revocable: If donor reserves right to revoke the gift or change the beneficiaries. 

Seperate tax that is imposed in addition to federal estate and gift tax. 

Applies when inidviduals transfer property to a person who is two or more generations younger than the donor. 

Applies to lifetime transfers in excess of $1,000,000. Married couples may split the transfers for a max. exemption of $2,000,000.