Reverse sec. 704(c) allocations for securities partnerships.
Under Sec. 704(c), any unrealized gain Unrealized Gain
A profit that results from holding on to an asset rather than cashing it in and using the funds.
Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. or loss on property contributed to a partnership has to be allocated to all partners, to account for any variation between the property's adjusted basis and its fair market value (FMV FMV - full-motion video ) at the time of contribution. Similar rules apply when the property is revalued (e.g., on admission of a new partner) under Regs. Sec. 1.704-1(b)(2)(iv)(f)--a "reverse" Sec. 704(c) allocation The apportionment or designation of an item for a specific purpose or to a particular place.
In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as .
Regs. Sec. 1.704-3(a)(2) generally requires Sec. 704(c) allocations to be made on a property-by-property basis. However, Regs. Sec. 1.7043(e)(3)(i) allows certain securities partnerships (as defined in Regs. Sec. 1.704-3(e)(3)(iii); see examples below for qualifications) to apply an aggregate Sec. 704(c) approach to "reverse" Sec. 704(c) allocations. Such approach can be used only on an allocation resulting from revaluations of partnership property, not from property contributions on partnership formation. This method requires the use of the partial netting approach of Regs. Sec. 1.7043(e)(3)(iv) or the full netting approach under Regs. Sec. 1.7043(e)(3)(v). In most cases, once an aggregate approach has been adopt ed, it has to be applied to all qualified financial assets Financial assets
Claims on real assets. for all tax years in which the partnership qualifies as a securities partnership.
Example 1: Various partners of Partnership P contribute cash at different times. These cash contributions are not pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share.
In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. by partner. The FMV of the underlying partnership assets is different each time a cash contribution is made.
First, it is necessary to analyze whether P qualifies as a securities partnership. Regs. Sec. 1,704-3(e)(3) (iii)(A) defines a securities partnership as a partnership that is either a management company or art investment partnership, and makes all of its book allocations in proportion to the partners' relative book capital accounts (except for reasonable special allocations to a partner that provides management services or investment advisory services advisory services
advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal to the partnership).
"Investment partnership" is defined in Regs. Sec. 1.704-3(c)(3) (iii)(B)(2) as meeting the following criteria:
1. On the date of each capital account restatement Restatement
A revision in a company's earlier financial statements.
The need for restating financial figures can result from fraud, misrepresentation, or a simple clerical error. , the partnership holds qualified financial assets that constitute at least 90% of the FMV of the partnership's noncash assets; and
2. The partnership reasonably expects, as of the end of the first tax year in which it adopts an aggregate approach under Regs. Sec. 1.7043(e)(3), to make revaluations at least annually.
Under Regs. Sec. 1.7043(e)(3)(ii), qualified financial assets are any personal property (including stock) that is actively traded. Actively traded is defined in Regs. Sec. 1.1092(d)-1. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Regs. Sec. 1.1092(d)-1(a), actively traded personal property includes any personal property for which there is an established financial market. Under Regs, Sec. 1.704-1(b)(2)(iv)(f)(5), revaluations occur when:
1. Money or other property (other than a de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. amount) is contributed by a new or existing partner as consideration for a partnership interest;
2. The partnership liquidates or distributes money or other property (other than a de minimis amount) to a retiring or continuing partner as consideration for a partnership interest; or
3. Under generally accepted industry accounting practices, substantially all of the partnership's property (excluding money), consists of stock, securities, commodities, options, warrants, futures or similar instruments readily tradable on an established securities market.
Example 2: The facts are the same as in Example 1 and P's assets are 100% qualified financial assets (stocks tradable on an established securities marker marker /mark·er/ (mahrk´er) something that identifies or that is used to identify.
tumor marker ). P also reasonably expects to make revaluations at least annually, as a result of non-pro-rata cash contributions for additional units. Thus, P is an investment partnership. P makes all of its book allocations in proportion to the partners' relative book capital accounts and, hence, it is a securities partnership. The de minimis exception does not apply.
As a result of P qualifying as a securities partnership, it is eligible under Regs. Sec. 1.704-3(e)(3) to aggregate gains and losses from the sale of stocks by any reasonable approach consistent with Sec. 704(c). Two potential methods are the partial netting approach (Regs. Sec. 1.704-3(e)(3)(iv)) and the full netting approach (Regs. Sec. 1.7043(e)(3) (v)).
Partial netting approach: Under this approach, on the date of each capital account restatement, a partnership:
1. Nets its book gains and losses from qualified financial assets since the last capital account restatement, and allocates the net amount to its partners;
2. Separately aggregates all tax gains and losses from qualified financial assets since the last capital account restatement; and
3. Separately allocates the aggregate tax gain and loss to the partners in a manner that reduces the disparity dis·par·i·ty
n. pl. dis·par·i·ties
1. The condition or fact of being unequal, as in age, rank, or degree; difference: "narrow the economic disparities among regions and industries" between the book capital account balances and the tax capital account balances (book-tax disparities) of each partner.
Full netting approach: Under this approach, on the date of each capital account restatement, the partnership:
1. Nets its book gains and losses from qualified financial assets since the last capital account restatement and allocates the net amount to its partners;
2. Nets tax gains and losses from qualified financial assets since the last capital account restatement; and
3. Allocates the net tax gain (or loss) to the partners in a mariner Mariner
Any of a series of unmanned U.S. space probes sent near Venus, Mars, and Mercury. Mariners 2 (1962) and 5 (1967) passed Venus within 22,000 mi (35,000 km) and 2,500 mi (4,000 km), respectively, and made measurements of temperature and atmospheric density. that reduces the book-tax disparities of each partner.
Once a partnership applies a method (partial or full netting), it should use that method consistently, going forward. Additional rules, contained in Regs. Sec. 1.7043(e)(3)(vi), state that the allocated gain or loss has to:
1. Preserve the tax attributes of each item of gain or loss;
2. Be determined under an approach consistently applied; and
3. Not be determined with a view to reducing substantially the present value of the partners' aggregate tax liability.
Example 3: The facts are the same as in Example 2 and P chooses the full netting approach. In the first year, P has four partners for the first half of the year during which time there is $300,000 of appreciation in the partnership's portfolio, but no realized gains Realized Gain
A gain resulting from selling an asset at a price higher than the original purchase price.
There may be tax consequences for a realized profit. or losses. Halfway through the year, two new partners contribute cash. As a result of the new partners buying units at FMV, they are not allocated any of the $300,000 appreciation, which occurred before they joined the partnership. P realizes $300,000 of capital gains for the year; see the Exhibit on p. 548, which illustrates the results. P is not tracking reverse Sec. 704(c) on a security-by-security basis, because it is using the full netting approach; thus, it allocates the $300,000 only to partners who owned units when the appreciation occurred.
However, it is possible that the actual investments that had appreciated before the revaluation Revaluation
A calculated adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government (i.e. were not yet sold (other investments could have appreciated and then been sold, but nonetheless trigger the reverse Sec. 704(c) allocation).
Each time there is a revaluation, P will have to:
1. Book up or down to FMV, and then appropriately adjust the revaluation accounts of all other partners to reflect that change;
2. Allocate To reserve a resource such as memory or disk. See memory allocation. net gains to all positive revaluation accounts in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.
As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with each partner's relative share of the total positive revaluation accounts, until such accounts reach zero.
3. Allocate the remaining gain pro-rata Pro-rata
Used to describe a proportionate allocation.
For example, a pro-rata dividend means that every shareholder gets an equal proportion for each share they own.
See also: Dividend , based on units owned.
4. Allocate net losses to all negative revaluation accounts in accordance with each partner's relative share of the total negative revaluation accounts, until such accounts reach zero.
5. Allocate the remaining loss pro-rata, based on units owned.
If all revaluation accounts are negative and the current year produces a net gain, there would be no special gain allocations (i.e., P would allocate the gain by units owned, in the same way it would all other items of income and deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. ). The same result would occur if all revaluation accounts are positive and the current year produces a net loss.
Exhibit: P's reverse Sec. 704(c) allocation Capital Cash accounts Increase in FMV contributions Partner 1/1/01 1/1/01-6/30/01 7/1/01 1 $500,000 $50,000 2 500,000 50,000 3 1,000,000 100,000 4 1,000,000 100,000 5 -- -- $500,000 6 -- -- 500,000 Totals $3,000,000 $300,000 $1,000,000 Reverse 704(c) Capital capital gain accounts Partner allocation 12/31/01 1 $50,000 $5,550,000 2 50,000 550,000 3 100,000 1,100,000 4 100,000 1,100,000 5 -- 500,000 6 -- 500,000 Totals $300,000 $4,300,000
FROM SARAH Sarah or Sarai: see Sara.
(flourished early 2nd millennium BC) In the Hebrew scriptures, the wife of Abraham and mother of Isaac. She was childless until age 90. ALLEN MILLER Allen Miller (born April 18, 1940 in Fostoria, Ohio) was an American football linebacker in the NFL for the Washington Redskins. He played college football for Ohio University. , CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , SOUTH BEND South Bend, city (1990 pop. 105,511), seat of St. Joseph co., N Ind., on the great south bend of the St. Joseph River, in a farming and mint-growing region; inc. as a city 1865. , IN