
James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Author: James F. McDonough
Date: January 13, 2015
Of Counsel
732-568-8360 jmcdonough@sh-law.comOne might think that determining a partner’s interest in a partnership is easy and that strict rules provide absolute certainty. This is not the case.
The rights conferred by states under partnership, limited partnership or limited liability company law do not define a partner’s interest for federal tax purposes. State law is interested in governing the relationship among partners and transactions between the partnership and non-partners. State law, though helpful in the federal tax analysis, does not control federal tax treatment. Federal tax law is more concerned with the economic arrangement among the partners. IRS of concern to IRS are the assignment of income to lower bracketed taxpayers, the shifting of deductions and losses and gift and estate tax.
A partnership capital interest is very different from a partnership profits interest. A profits interest is given to a partner who must perform services and receives his or her reward from the profits of the venture. If a partnership is liquidated shortly after capital contributions are made, but prior to the partnership generating revenue or expense, a service partner holding only a profits interest will not receive any distribution. The partners holding capital interests would receive a return of their contributions. Any shift of capital to a service partner holding only a profits interest results in compensation. If undertaken in a family setting, an assignment of income or a disguised gift is a possible unwelcome outcome.
During 2014, we were presented with two matters where the business terms were not clear at the outset of discussions. In one transaction, the service partner insisted upon receiving a credit to his capital account that would be immediately deducted from the capital account of the partner contributing property. This shift would result in immediate taxation to the service partner because the credit was not subject to a substantial risk of forfeiture. The second matter was a service partnership which allocated income in a subjective manner considering originations, services and account revenue increases. This raises the prospect of shifting or transitory allocations that the IRS may not respect.
The allocation of interest deductions directly allocable to a partner under IRC §861 relies upon the determination of a partner’s interest in a partnership. Corporations owning 10% or more of a partnership must apply a special rule under that code section. Allocations of non-recourse debt are made in accordance with a partner’s interest in profits of the partnership. In a complex or tiered distribution arrangement, the answer may not be readily apparent. Attribution of corporate ownership through constructive ownership under §318 requires one to measure the partner’s interest in the partnership where applicable.
Perhaps the only point that is clear is that the Service will continue to be able to second guess taxpayers under a facts and circumstances test.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
Author: Christopher D. Warren
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
Author: Dan Brecher
Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]
Author: Bryce S. Robins
Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]
Author: Dan Brecher
For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]
Author: Bryce S. Robins
Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]
Author: Matthew F. Mimnaugh
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!