Cash distributions from passthrough entities may create passive income - allocation rules raise unanswered questions

Article Abstract:

IRS Revenue Ruling 95-5 identifies how partnerships and S corporations should treat distributions when the passthrough entities' business activities include passive activities, but the ruling fails to consider that the allocation rule may be inappropriate. When the distribution to the partners or shareholders is in excess of their basis in their partnership or S corporation interest, the gain must be allocated across all the activities that the entity is involved in. A tracing rule may be more appropriate when some of the activities are passive.

United States, Taxation, Laws, regulations and rules, S corporations, Passive activity (Taxation), Allocation (Taxation), Tax allocation, Partnership distributions

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Sale of land by partnership to mirror corporation produces capital gains

Article Abstract:

The Fifth Circuit, in Bramblett v Commissioner in 1992, overturned the Tax Court's decision in ruling that a partnership's sale of land to its own corporation generates capital gains rather than regular income. The case involved the IRS's attempt to tax a land transaction between Mesquite East Joint Venture and Town East Development Co which Mesquite owned. In deciding against the IRS, the Fifth Circuit declared that Mesquite's earnings from the sale were capital gains since Mesquite was not primarily formed to sell land.

Cases, Real estate industry, Partnership, Partnerships, Capital gains tax

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