Partnership and LLC Formation, Basis, Allocations, and Distributions

This chapter covers the flow-through entity rules that often generate the densest TCP computations. The emphasis is on Section 721 formation, inside versus outside basis, the allocation framework under Section 704, and the distribution rules that can unexpectedly trigger gain or disguised-sale treatment.

In This Chapter

• Section 721 Formation Rules and Contributions of Built-In Gain or Loss Property introduces partnership formation and contribution rules.
• Partner Outside Basis, Partnership Inside Basis, and Basis Tracking explains the two-level basis system used in partnership taxation.
• Special Allocations, Guaranteed Payments, and Section 704 Rules covers how economic arrangements are translated into tax allocations.
• Partnership Distributions, Liquidations, and Disguised Sales addresses cash or property distributions and two-step transactions that look like sales.

How to Use This Chapter

• Move through the chapter in order because later allocation and distribution questions assume a working basis framework.
• Slow down on the Section 704 and distribution lessons, since exam traps often hide in ordering, character, and disguised-sale details.

In this section

• Section 721 Formation Rules and Contributions of Built-In Gain or Loss Property
  Section 721 formation rules for partnership contributions, built-in gain or loss property, and disguised-sale risk.
• Partner Outside Basis, Partnership Inside Basis, and Basis Tracking
  Partnership basis tracking comparing outside basis at the partner level with inside basis at the entity level.
• Special Allocations, Guaranteed Payments, and Section 704 Rules
  Partnership allocation rules covering guaranteed payments, substantial economic effect, and Section 704.
• Partnership Distributions, Liquidations, and Disguised Sales
  Liquidating and nonliquidating partnership distributions plus disguised-sale treatment.