Treatment of ownership changes for EIPs under Notice 2005-32.Section 833 of the American Jobs Creation Act of 2004 (AJCA AJCA American Jobs Creation Act of 2004 (US)
AJCA American Jersey Cattle Association
AJCA Association of Juvenile Compact Administrators
AJCA All Japan Cooks Association
AJCA Alabama Junior Cattlemen’s Association ) amended Secs. 704(c) (1)(C) and 743 to limit a partnership's ability to duplicate or shift losses between taxpayers with respect to losses on built-in loss (BIL BIL Brother-In-Law
BIL Band Interleaved by Line
BIL Basic Impulse Level (electrical power switches)
BIL Basic Insulation Level (IEC) ) property held by the partnership. The new law accomplishes this by restricting a partnership's ability to allocate deductions and losses from BIL property and to avoid a stepdown in asset basis under Sec. 754. These provisions are supposed to eliminate loss duplication duplication /du·pli·ca·tion/ (doo-pli-ka´shun)
1. the act or process of doubling, or the state of being doubled.
2. via use of a partnership and apply to "substantial" BILs on partnership property. Notice 200532 addressed some of these issues.
Example 1: Partners A, B and C form Partnership 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. , each contributing $800,000. ABC uses the $2.4 million to purchase X Corp. stock. In year 2, the shares decrease in value to $1.8 million. C sells his interest to D for a fair market value (FMV FMV - full-motion video ) of $600,000. D's inside basis in ABC's assets is $800,000, while his outside basis in ABC is $600,000. C would recognize a $200,000 loss on the sale.
In year 3, ABC sells the X stock for $600,000. It recognizes a $1.8 million loss and allocates $600,000 of it to D, who recognized a true economic loss of only $400,000. The $200,000 remainder was recognized by C on the sale to D. Ultimately, this loss duplication will reverse. In year 4, ABC liquidates; A, B and D each receive $200,000 in liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts.
A type of proceeding pursuant to federal Bankruptcy of their ownership interests. Because A and B have $200,000 of outside basis, they recognize no capital gain, but D, whose outside basis is zero, recognizes $200,000 (the $200,000 he received in the liquidation, less his remaining zero basis in his partnership interest).
Under ACJA ACJA American Criminal Justice Association
ACJA American Cookie Jar Association
ACJA Alberta Criminal Justice Association
ACJA Achyranthes japonica (Japanese chaff flower)
ACJA Arkansas Criminal Justice Association provisions, ABC has to adjust D's basis in the partnership property under Sec. 754, to the amount that D paid for his ABC interest. Sec. 754 becomes mandatory when there is a "substantial" BIL in the partnership's assets. A BIL exists when a partnership's tax basis in its assets exceeds their FMV by more than $250,000 in aggregate. Because ABC's adjusted basis in its property ($2.4 million) exceeded the property's FMV ($1.8 million) by more than $250,000 at the time of C's sale to D, the Sec. 754 basis adjustment is mandatory.
Notice 2005-32 provides interim guidance on the AJCA's provisions for both "regular" partnerships and "electing investment partnerships" (EIPs). Generally, for transfers occurring after Oct. 22, 2004, if there is a substantial basis reduction under Sec. 734(d) at the time of an ownership transfer or a substantial BIL under Sec. 743 at the time of a distribution in liquidation of a partner's partnership interest, the partnership has to treat the ownership change as if a Sec. 754 election had been in effect.
As evidenced by the Committee Reports, Congress was aware that many investment partnerships would incur significant administrative difficulties in making partnership-level basis adjustments in the event of a transfer of a partnership interest. Recognizing this and knowing that many investment partnerships do not currently elect to make partnership basis adjustments (even upward adjustments), Congress provided a partner-level loss limit as an alternative to the mandatory basis adjustment for transfers of ownership in EIPs. Sec. 734(d)'s mandatory basis step-down rules for transfers of partnership ownership apply to both "regular" partnerships and EIPs. However, AJCA Section 833(b) does not treat EIPs as having a substantial BIL under Sec. 743(e) related to a redemption of a partnership interest.
Defining "EIP (1) (Enterprise Information Portal) See corporate portal.
(2) (Extended Instruction Pointer) The program counter on x86 CPUs. "
Under Sec. 743(e)(6), as added by AJCA Section 833(b)(4)(A), an EIP is defined as any partnership that elects to be treated as such and meets the following requirements: 1. Such partnership would be an investment company under Section 3(a)(1)(A) of the Investment Company Act of 1940 (1940 Act), but for an exemption under Section 3(c)(1) or (7) of the 1940 Act (i.e., the company holds itself out as being primarily engaged in the business of investing, reinvesting or wading in securities and meets the 1940 Act's requirements, notwithstanding the rules requiring (1) 100 minimum beneficial owners Beneficial Owner
A person who enjoys the benefits of ownership even though title is in another name.
For example, when shares of a mutual fund are held by a custodian bank or when securities are held by a broker in street name, the true owner is the beneficial and (2) qualified purchasers).
2. Such partnership has never been engaged in a trade or business (Note: under Sec. 731(c)(3)(C)(ii), a partnership is not deemed to be engaged in a wade or business if it only undertakes activity as an investor, trader or dealer of specified investment-type assets).
3. Substantially all of the partnership's assets are held for investment.
4. At least 95% of the assets contributed to such partnership consist of money.
5. No assets contributed to the partnership had an adjusted basis in excess of FMV on contribution.
6. All the partnership interests are issued by the partnership pursuant to a private offering before the date that is 24 months after the date of the first capital contribution to the partnership.
7. The partnership agreement has substantive restrictions on each partner's ability to cause redemption of the partner's interest.
8. The partnership agreement provides for a term not in excess of 15 years (for EIPs in existence on June 4, 2004, the term may not exceed 20 years). EIPs will generally include venture capital funds Venture Capital Funds
An investment fund that manages money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.
Notes: , buyout Buyout
The purchase of a company or a controlling interest of a corporation's shares.
A leveraged buyout is accomplished with borrowed money or by issuing more stock. funds and funds of funds formed to raise capital via a private offering and to make investments during the partnership's term, with the intention of holding them for capital appreciation. Due to the stringent requirements for EIP treatment, many hedge funds hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" will not qualify, primarily due to the fact that, generally, they have terms exceeding 15 years and issue additional units beyond 24 months.
Under the Sec. 743(e) loss disallowance dis·al·low
tr.v. dis·al·lowed, dis·al·low·ing, dis·al·lows
1. To refuse to allow: "[The government] rules, a partner may not claim losses, except to the extent that they exceed the loss recognized by the transferor partner. Such disallowed losses will not reduce the transferee's basis in its partnership interest.
Example 2: The facts are the same as in Example 1, except that ABC elects EIP treatment. Thus, D's allocable al·lo·ca·ble
Capable of being allocated.
Adj. 1. allocable - capable of being distributed
distributive - serving to distribute or allot or disperse share of the loss on the X stock sale is recognized only to the extent that it exceeds the loss C previously claimed on transferring ownership to D. As such, D can claim only a $400,000 loss on the stock sale, which is the amount in excess of C's $200,000 loss that C recognized on the sale. As D's basis in his ABC interest is not reduced by the $200,000 disallowed loss, he has $200,000 of remaining basis in ABC at the end of year 3. On ABC's liquidation, D recognizes no gain or loss, because his basis in the partnership equals the amount he receives in the partnership liquidation.
Qualifying as an EIP
To be treated as an EIP, a partnership must attach a written statement to an original or amended return Amended Return
A return filed in order to make corrections to a tax return from a previous year. It can be used to correct errors and claim a more advantageous filing.
An amended return is filed using Form 1040X. for the tax year in which the election is to be effective. The statement must include (1) the partnership's name, address and tax identification number (TIN); (2) a representation that the partnership is eligible to make the election under Sec. 743(e)(6)(A); and (3) a declaration that the partnership elects EIP treatment under Sec. 743(e). This election is effective for the year made and all subsequent years, and is revocable rev·o·ca·ble also re·vok·a·ble
That can be revoked: a revocable order; a revocable vote.
Adj. 1. only with IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. consent (obtainable only through a letter ruling request). A partnership may also revoke To annul or make void by recalling or taking back; to cancel, rescind, repeal, or reverse.
revoke v. to annul or cancel an act, particularly a statement, document, or promise, as if it no longer existed. an EIP election without official consent by filing an election under Sec. 754 to apply Secs. 734 and 743 to all partnership interest transfers, as partnerships with a Sec. 754 election in effect are not eligible for EIP treatment. The election will also terminate if the partnership fails to meet the definition of an EIP. Further, if a partnership has substantial BILs, it will be subject to the mandatory basis adjustment rules on the first ownership transfer after failing to qualify as an EIP.
Notice 2005-32 also provides guidance on information reporting requirements for transfers of EIP interests. Until further guidance is provided, the transferor must notify the transferee and the EIP in writing within 30 days after the date on which the transferor receives Schedule K-1 from the EIP for the partnership's tax year in which the transfer occurred. This notice must provide (1) the name, address and TIN of both the transferee and the transferor; (2) the partnership's name; (3) the transfer date; (4) the amount of loss recognized, if any, by the transferor on the transfer, including the computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. of the loss; (5) the amount of losses (if any) recognized by any prior transferors to the extent that they were subject to the disallowance under Sec. 743(e)(2) and have not been offset by prior loss disallowances; and (6) any other information needed for the transferee to calculate any losses disallowed under Sec. 743(e)(2).
If the transferor does not provide such notice to the transferee, the transferee must treat all losses allocated from the EIP as disallowed under Sec. 743(e) (2). Alternatively, if the transferee can obtain the information needed to calculate actual or maximum losses that could be disallowed, the transferee may use these calculations in determining the losses disallowed under Sec. 743(e)(2).
The notice also places information reporting burdens on the EIP. For example, losses disallowed under Sec. 743(e) are computed without regard to gains. Thus, an EIP must separately state on Schedules K and K-1 all allocations of losses to its partners, including losses that could be netted against gains at the partnership level if Sec. 743(e) had not been enacted. This requirement continues after an EIP election is terminated, if the partnership has any transferee partners subject to Sec. 743(e)(2).
Under Notice 2005-32, until further guidance is issued, to the extent losses of different character (e.g., ordinary and Sec. 1231) are allocated to a transferee and limited by Sec. 743(e)(2), a proportionate pro·por·tion·ate
Being in due proportion; proportional.
tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates
To make proportionate. amount of each such loss must be disallowed to the transferee.
FROM ROBERT A. VELOTTA, 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. , MT, COHEN cohen
(Hebrew: “priest”) Jewish priest descended from Zadok (a descendant of Aaron), priest at the First Temple of Jerusalem. The biblical priesthood was hereditary and male. & COMPANY, LTD LTD 1 Laron-type dwarfism 2 Leukotriene D 3 Long-term depression, see there 4. Long-term disability ., CLEVELAND, OH