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Forming a Partnership

If you are considering forming a partnership, you may want to discuss the tax and business implications with an attorney.  The video below provides general information regarding the formation of a partnership, but you should discuss your specific business issues and questions with an attorney.

 

Contact The McGuire Law Firm to discuss your business or tax questions with an attorney.  Free consultation and offices in Golden and Denver Colorado.

Formation of the Partnership: Contribution of Property & Basis by Denver Tax Attorney

Formation of the Partnership: Contribution of Property & Basis Denver Business Attorney

At The McGuire Law Firm a Denver tax attorney and business attorney can assist clients with the formation of their partnership and the tax consequences based upon the property contributed by the partners.  The article below has been drafted by a tax attorney may be useful when property is contributed to a partnership for a partnership interest.

When a partnership is formed, the partners will generally contribute property to the partnership.  Under Internal Revenue Code Section 721, the partners will recognize neither gain nor loss when they contribute property to the partnership in exchange for a partnership interest.

There are exceptions to IRC Section 721.  The non-recognition rule of Section 721 does not apply to, the receipt of an interest in partnership capital in return for services that are performed for the partnership or for services to later be rendered, and when the deemed money under IRC Section 731(a)(1) exceeds the sum of the adjusted basis in the property contributed.  Further, Section 721 would not apply to a disguised sale under IRC 707(a)(2)(B) where a partner contributed property and received a priority distribution of cash and property within 2 years from the time the original contribution was made to the partnership.  You must always consider whether the value of the property contributed is equal to the value of the partnership interest received by the partner.

What constitutes property for purposes of IRC 721?  Property includes both tangible (money, personal property & real property) and intangible property.  Intangible property would be goodwill, contract right, accounts receivable, patent rights, secret processes and other types of intangible property, but the property must be owned by the partner who transferred the property (transferor) on their own behalf.  When looking at property transferred to a partnership, if the property has value separate and apart from the partnership, the property should be considered Section 721 property.

What is the partner’s basis?  When a partner contributes property in exchange for a partnership interest, the partner’s basis is the amount of money contributed and the adjusted basis of the property contributed.  Thus, a partner receives a carryover basis in their partnership interest for the property they contribute.

When a partner receives a partnership interest for services performed, this service partner’s basis in their partnership interest is the sum of money paid by the partner for their partnership interest and any amount included in income in connection with the interest transferred.  This recognition of income will only increase the partner’s basis in the partnership if the gain resulted from the non-applicability of Section 721.

What is the partnership’s basis in the contributed property?  The partnership’s basis in the property contributed would be the adjusted basis of the property in the hands of the contributing partner under IRC Section 723.  The contributing partner’s basis would be measured or calculated at the time the partner made the contribution to the partnership.

This article was prepared by John McGuire at The McGuire Law Firm.  John is a tax attorney and business attorney working with individuals and businesses regarding their tax and business matters.  A Denver tax lawyer and business lawyer at The McGuire Law Firm can assist you regarding the formation of partnerships, tax implications of partnership contributions & distributions and partnership transactions.

Contact The McGuire Law Firm to schedule a free consultation with a tax attorney or business attorney!

Partnership Special Tax Allocations

Special Tax Allocations Denver Business Attorney

The special tax provisions included in the majority of partnership agreements such as limited partnership and limited liability company (LLC) operating agreements, exist to satisfy requirements regarding the regulation of partnerships as established within the Internal Revenue Code.  These special allocation provisions can alter the bargained for agreement and understanding of the partners thus, creating disruption between the partners during the operation of the partnership.  A Denver tax lawyer at The McGuire Law Firm can assist partners and partnerships in understanding the impact of special tax allocations.

The Internal Revenue Code allows a partnership to have flexibility regarding the partner’s pass through of income and loss.  However, Internal Revenue Service will not respect allocations that do not have substantial economic effect.  In short, substantial economic effect means that partnership allocations need to be passed through to the partners who receive or enjoy the benefit of the income or hold the economic burden associated with the partnership losses.  The IRS can reallocate income or losses if the IRS determines an allocation or allocations do not have substantial economic effect.

The impact on the substantial economic effect regulations may be most apparent when looking at the limited partners in a limited partnership (or limited liability company).  The benefit of limited liability can result in certain allocations lacking substantial economic effect in the eyes of the Internal Revenue Service.  When considering the special allocations within a partnership agreement, one should note that a safe harbor is provided and can be satisfied in the partnership agreement with the inclusion of certain provisions as outlined below.

Non-Recourse Debt Allocations: Such provisions require that the allocation of losses and deductions to partners associated with non-recourse debt-financed property have substantial economic effect.

Partner Minimum Gain Chargeback: Such provisions apply when there are non-recourse liabilities that a partner bears the risk of economic loss.  The minimum gain related to these liabilities need to be allocated to partners that previously received allocations of losses and deductions related to the applicable liabilities.

Distribution Triggered Special Allocations: Such provisions allocate gain and income to a partner that offset “excess” distributions received by the partner that would be in excess of the partner’s interest.

It is recommended that the partners or partnership consult with a business attorney or tax attorney to discuss the impact of special allocations and to draft the operating agreement of the partnership.  The reallocation of income, loss, gain or deductions by the IRS can create negative individual income tax consequences to the individual partners.  Our tax attorneys and business attorneys are available to consult you regarding these issues.

Contact The McGuire Law Firm to speak with a Denver tax attorney or business attorney.  Free consultation!