Post on 17-Apr-2018
transcript
Guaranteed Payments
andNIIT
1
Guaranteed payments are payments by the partnership to a partner:
1) for services or2) for the use of capital
and are determined without regard to the income of the partnership. 2
Guaranteed payments for services are
NOT NII (whether SE income or not)
3
Guaranteed payments for
capital are like interest thus NII if not subject to SE
tax4
Service Partners
Current Law
5
5-4
Rev Proc 93-27
IRS AdministrativeConcession For
Vested Profits Only Interest
6
5-5
7
Profits Intererst not taxable if NOT:
1) A substantially certain and predictable stream of income.
2) Disposed of within two years of receipt.
3) A limited partnership interest in a publicly traded partnership.
Profits InterestDefinition
8
A partnership interest other than a capital
interest.
Capital Interest Definition
9
A “capital interest is “an interest that would give the holder a share of the proceeds if the partnership’s assets were sold at fair market value and then the proceeds were distributed in a complete liquidation of the partnership.”
AB Partnership
Alice Bill
Land FMV $1,000,000Adj. Basis: $700,000
Services
50%50%
Profits Only InterestFor Bill
11
Traditional “Layer Cake” Allocation
Provision
13
Losses would be allocated
i. 50% to Bill and 50% to the Alice to the extent of income previously allocated in those ratios under clause (c) below,
ii. To Alice to the extent of Alice’s capital account and
14
iii. 50% to the Bill and 50% to Alice.
Income would be allocated
a. to reverse prior allocations of losses under clause (iii) above,
15
b. to reverse prior allocations in clause (ii) above so that the Alice’s capital account is fully restored to its balance prior to such losses and
c. 50% to Alice and 50% to Bill.
16
Liquidate in accordance with
partner book (704(b)) capital
account balances
Target Allocation
Target Allocation:Partnership Profit or Loss shall be allocated in a manner to cause the Partners’ ending Capital Accounts to equal the amount they would receive if the Partnership were to sell all of its assets for Book Value and liquidate pursuant to the liquidation waterfall set forth in Section XX of this Agreement.
Liquidation Waterfall:Cash is distributed:
First to Alice to the extent of her contributed capital and then 50% Alice and 50% to Bill.
Year 1 Profit of $400,000
How Allocated?
Total HypoCash
Alice Bill
Beg $1,000,000End $1,400,000
$400,000
Target Allocation of $400,000
Total HypoCash
Alice Bill
Beg $1,000,000 $1,000,000 $0End $1,400,000
$400,000
Target Allocation of $400,000
Total HypoCash
Alice Bill
Beg $1,000,000 $1,000,000 $0End $1,400,000 1,200,000 $200,000
$400,000 $200,000 $200,000
Target Allocation of $400,000
Hypo Cash Distribution at Year End:1st $1,000,000 to Alice2nd $400,000 50/50
A Year 2 loss of <$400,000>
How Allocated?
Total HypoCash
Alice Bill
Beg $1,400,000 $1,200,000 $200,000End $1,000,000
($400,000)
Target Allocation of $400,000
Total HypoCash
Alice Bill
Beg $1,400,000 $1,200,000 $200,000End $1,000,000 1,000,000 $0
($400,000) ($200,000) ($200,000)
Target Allocation of $400,000
Hypo Cash Distribution at Year End:
1st $1,000,000 to Alice
Yr. 3 Loss of $400,000
(+ Php borrows $400,000)
How Allocated?
Liquidation Waterfall:Cash is distributed:
First to Alice to the extent of her contributed capital and then 50% Alice and 50% to Bill.
Total HypoCash
Alice Bill
Beg $1,000,000End $ 600,000
($400,000)
Target Allocation of <$400,000>
Total HypoCash
Alice Bill
Beg $1,000,000 $1,000,000 $0End $ 600,000
($400,000)
Target Allocation of <$400,000>
Total HypoCash
Alice Bill
Beg $1,000,000 $1,000,000 $0End $ 600,000 $600,000 $0
($400,000) (400,000)
Target Allocation of <$400,000>
Hypo Cash Distribution at Year End:
1st $600,000 to Alice
Capital Interest forServices
32
AB Partnership
Alice Bill
Land FMV $1,000,000Adj. Basis: $700,000
Services
50%50%
Traditional Allocation (layer cake):
Profits split 50-50
Losses split 50-50
Liquidate in accordance with partner book (704(b)) capital account balances
The partnership agreement does NOT entitle Alice
to a priority return of her contributed
capital
36
Bill: $500,000 of ordinary income (liquidation value)
Alice: $500,000 deduction (guaranteed payment).
On Formation of AB Php
Assets: Tax Basis704(b)
Book BasisCash $0 $0Land $700,000 $1,000,000
Total $700,000 $1,000,000Capital:
Alice $200,000 $500,000Bill $500,000 $500,000
Debt + Capital $700,000 $1,000,000
Balance Sheet After Formation
Target Allocation Liquidation Waterfall:
Cash is distributed:
50% to A and 50% to B
Example: If liquidated after formation, Alice and Bill each receive $500,000 cash.
Forfeitable Partnership
Capital Interest
Crescent Holdings LLC (Dec. 2, 2013)
39
5-11
40
The Tax Court addressed the treatment of a partner’s receipt of a nonvested partnership capital interest, which was forfeited prior to vesting (no 83(b) election).
41
The nonvested partner does not recognize partnership income
until the interest vests
(absent an 83(b) election)