2. Five years ago T created a partnership to operate a fund to invest in various

Question

2. Five years ago T created a partnership to operate a fund to invest in various private enterprises. He raised $95 million from limited partners and invested $5 million of his own. T is the sole general partner. The partnership agreement provides that T will receive, as compensation for his services as general partner, (i) an annual management fee equal to 2% of the initial capital of the fund ($2,000,000 per year), and (ii) 20% of the fund’s profits (defined as realized gains). Net profits, i.e., realized gains minus T’s 2% management fee and 20% profit share, are divided among the partners in proportion to capital contributions.

The fund has been successful and this year it sold one of the stocks in its portfolio for a long term capital gain of $52 million. As a result, T receives the following in the current year:

(i) $2,000,000 as his annual management fee. (ii) $10,000,000 as his 20% profit share

(iii) $2,000,000 as his 5% share of the net profits that he receives as a result of his 5% capital contribution.

How will T be taxed on each of these amounts?

Explanation / Answer

Taxability of incomes/Amounts recieved by the Partners from his Partneship FIRM

1. $200000 as his annual Mangaement Fee:

This $2000000 is taxable in the hands of Mr. T as PGBP Income

2.$10000000 as his 20% profit Share :

This $10000000 is exemptem in the hands of mr. T, because its already taxed in the hands of FIRM

3. Interest on capital is not allowed in the case of Partnership FIRM if specifically not mentioned in the Partnership Deed, if mentioned also its maximum of 6% on capital contrubute or % mentioned in the deed.,

if not mentioned in the deed then the same be not allowed as expenses while computing the taxable income, so it will be added to the taxable income.

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