Accordingly, since working capital presumably is not “held for investment,” it would not be considered cash that is within the definition of stock or securities for purposes of the 80 Percent Test.Ĭertain practitioners appear to agree that cash held for working capital should not be included in the 80 Percent Test, but, in the absence of formal authority, the most conservative approach would be to treat operating cash as stock or securities for purposes of the 80 Percent Test. Although cash is included in the list of liquid assets treated as stocks or securities, all of the liquid assets considered in the 80 Percent Test must be “held for investment”. While cash is generally included in the 80 Percent Test, it is not clear if cash that is working capital is included. However, if subsequent events occur pursuant to a plan in existence at the time of the contribution, the determination takes into account those subsequent events. The determination of whether a partnership is an investment partnership with respect to a contribution is made immediately after the contribution. Under the 80 Percent Test, “stocks and securities” include a variety of liquid assets, such as cash, stock in corporations and interests in other entities that hold such liquid assets. Under section Internal Revenue Code, an “investment partnership” is a partnership in which more than 80 percent of the value of the assets of the partnership is from “stock and securities” that are “held for investment” (the “80 Percent Test”). However, when property is contributed to an “investment partnership”, that same contribution may be treated as a taxable exchange to the contributing partner. The tax consequences of setting up and contributing property to a partnership can be beneficial because contributing property in exchange for interest in the partnership generally does not result in recognition of gain or loss for the contributing partner or the partnership.
Many taxpayers choose partnership structures (including LLCs taxed as partnerships) to operate their businesses.
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