Small business tax solutions.This is pall of a regular series covering tax issues of special interest to small businesses based on questions from the American Institute of CPAs tax certificate of educational achievement (CEA CEA carcinoembryonic antigen. CEA abbr. carcinoembryonic antigen CEA (Carcinoembryonic antigen) ) courses on tax planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. and advising for closely held A phrase used to describe the ownership, management, and operation of a corporation by a small group of people. In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist. businesses. This month, tax CEA authors Robert L. Weitzner, 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. , LLM LLM abbr. Latin Legum Magister (Master of Laws) LLM Master of Laws [Latin Legum Magister] Noun 1. , an assistant director of research planning and policy for AT&T, Morristown, New Jersey Morristown is a town in Morris County, New Jersey, United States. As of the United States 2000 Census, the town population was 18,544. Its estimated population in 2004 was 18,842. It is the county seat of Morris CountyGR6. , and Julian R. Sayre, CPA, JD, PhD, a recently retired tax partner of Clifton, Gunderson Company, Tucson, Arizona, discuss the taxation of certain partnership distributions. Q What are the new rules regarding distributions of marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has from partnerships? A To prevent partners from exchanging their share of a partnership's appreciated assets for a disproportionate share of the partnership's marketable securities and thus deferring gain, the Uruguay Round Agreements Act--related to the General Agreement on Tariffs and Trade--added section 731(c) to the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. . This provision generally applies to distributions from partnerships that are made after December 8, 1994. Recognition of gain Under section 731(a)(1), partners recognize gain on partnership distributions only to the extent the "money" distributed exceeds the adjusted basis of a partner's interest in the partnership. For purposes of section 731(a)(1) (and IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. section 737), money generally now includes marketable securities. As a result, partners generally recognize gain to the extent the value of securities distributed from a partnership exceeds their basis in that partnership. However, the new rules allow partners to receive marketable securities attributable to their share of a partnership's marketable securities without recognizing gain. This is done by reducing the amount of marketable securities treated as money by 1) the excess of the partner's share of net gain that would be recognized if all securities of the type distributed held by the partnership immediately before the transaction were sold at fair market value over 2) the partner's share of gain that would be taken into account if the securities held by the partnership immediately after the transaction were sold. Example: ABC ABC in full American Broadcasting Co. Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928. Partnership holds 300 shares of a publicly traded stock; it also has other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. . Each share has a basis of $10 and a market value of $100. Alden's adjusted basis in her interest in ABC Partnership is $5,000. Her 1/3 interest is liquidated in exchange for the 300 shares of stock valued at $30,000. The $30,000 of stock treated as money under the new rule is reduced by $9,000--the amount of gain that would have been allocated to Alden if the partnership sold the stock. Alden consequently recognizes a $16,000 gain--the amount of stock treated as money ($21,000) in excess of her $5,000 basis in the partnership. What are marketable securities? "Marketable securities" is a broad term; generally it means financial instruments and foreign currencies actively traded within the meaning of the straddle In the stock and commodity markets, a strategy in options contracts consisting of an equal number of put options and call options on the same underlying share, index, or commodity future. provisions of IRC section 1092(d)(1). Financial instruments are stocks, other equity interests, debt, options, forward or futures contracts, notional principal contracts and derivatives. The term "marketable securities" also includes interests in actively traded precious metals Precious Metals Valuable metals such as gold, iridium, palladium, platinum, and silver. Notes: Investing in precious metals can be done either by purchasing the physical asset, or by purchasing futures contracts for the particular metal. and other financial instruments specified in the code and regulations. Exceptions The provision does not apply in three situations. Contributed by partner. If the security itself was contributed to the partnership by the distributee-partner, the provision generally does not apply. Not a security when acquired. The property distributed to the partner was not a marketable security when the partnership acquired it--to the extent provided in the regulations. Investment partnership. The partnership is an investment partnership [defined in section 731(c)(3)(C)(i)] and the partner is an eligible partner [defined in section 731(c)(3)(C)(iii)]. Look-through rules are provided for tiered partnerships. Determining basis The basis of securities distributed is increased by the amount of gain recognized under this provision. The gain is allocated to marketable securities in proportion to the amounts of unrealized appreciation. Gain recognized under this provision does not affect the distributee's partnership basis. In addition, Internal Revenue Code section 734 is applied as if no gain were recognized. Coordination with other provisions Other IRC sections concerning partnership distributions may apply. * IRC section 704(c)(1)(B) may simultaneously apply if another partner contributed the marketable securities. * The code and the legislative history are silent on the provision's application to a termination under IRC section 708(b)(1)(B). * The disguised sale rules of IRC section 707(a)(2)(B) appear to take precedence. * To the extent marketable securities are treated as money, the same amount also is money for purposes of applying Internal Revenue Code section 737. This reduces the amount of gain recognized. In addition, the portion of the marketable securities not treated as money is treated as property for section 737 purposes. * IRC section 751(b) (disproportionate distributions) takes precedence. |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion