Corporate & Partner Tax Instructor: Dwight Drake Partnership Asset Sale Partnership Buyer Partners Partnership liquidated Business Assets Cash, notes Cash, Notes Impacts: 1. Partnership level gain or loss on asset sale, passes thru to partners. 2. Partner’s outside basis for gain or losses. 3. Partnership liquidation governed by normal 731 gain or loss rules. No 751 issues because all assets sold. 4. Sections 197 and 1060 apply to assets acquired by buyer.

Corporate & Partner Tax Instructor: Dwight Drake Purchase Price Allocations – 197, Anti “Soft Dollar” Rule: All intangible assets amortized over 15 years – information bases, customer lists, patient files, know-how, licenses, franchises, trade names, goodwill, going-concern value, covenants not to compete Priority Asset Allocation Rules: Priority One: Cash or cash equivalents. Priority Two: Highly-liquid securities, foreign currencies and CDs. Priority Three: ARs, mortgages, credit card receivables. Priority Four: Inventory and dealer property Priority Five: Other tangible assets (equipment, real estate, etc.) Priority Six: Intangibles except goodwill and going concern value. Priority Seven: Goodwill and going concern value. Note: Parties can agree on values per agreement, but not change priorities.

Corporate & Partner Tax Instructor: Dwight Drake Partnership Interest Sale Partnership Buyer Partners Partnership Interests Cash, notes 338 Election?

Corporate & Partner Tax Instructor: Dwight Drake Partnership Interest Sales General 741 Rule: Gain or loss treated as sale of a capital asset – capital gain or loss. 751(a) Exception: Sale portion attributable to unrealized receivables and inventory treated as non-capital asset – ordinary income gain determined by assuming hypothetical sale at FMV. - Result is netted against total gain (Excess of amount received over outside basis). Net result is 741 capital gain or loss. - “Unrealized receivables” definition very broad to include any future payment for services “rendered or to be rendered”, any contractual right to income which would be ordinary if received by partnership (Ledoux), shrt- term debt obligations, and recapture of cost recovery deductions. - “Inventory” broadly defined to include any asset than is not a capital or 1231 asset if sold by partnership. Thus, some assets could meet both definitions, but their ordinary gain only taxed once.

Corporate & Partner Tax Instructor: Dwight Drake Partnership Interest Sales – Collateral Consequences -Capital Gains Allocation: 28% collectibles; 25% 1250 gain; 15% balance. Compute 28% and 25% assuming cash sale for FMV, and net against total 741 gain for 15% share. -If portion of partnership holding period is short-term (recent contribution) allocate amount realized pro rata to short-term basis and long-term basis to determine character of gain. -Per Rev. Rule , installment 453 reporting not available for portion of purchase attributable to inventory. Presumably, also not available for unrealized receivable portion. -Buyer takes outside basis equal to cost paid. But no adjustment to inside basis unless 754 election to adjust. Can have huge consequences. Adjustment personal to transferee termination potential – If more than 50% interests transferred in 12 month period. Ends partnership year and start anew.

Corporate & Partner Tax Instructor: Dwight Drake Death of a Partner Three Options: 1. Deceased partner’s interest passes to an heir. 2. Other partners buy interest pursuant to buy-sell or negotiated post-mortem deal. 3. Deceased partner’s interest liquidated by partnership. Key Issues: - Partnership tax year for deceased partner terminates at death. Can create income bunching in deceased’s final return. - Value of partnership interest taxed in estate at FMV. Basis step-up allowed for portion of interest that exceeds IRD items. - If partnership liquidation, all 736(a) payment treated as IRD (no step-up) - If interest sold pursuant to buy-sell, unrealized receivables IRD with no basis step-up.

Corporate & Partner Tax Instructor: Dwight Drake Sale of S Corp Stock - Generally all capital. - No requirement, as in partnerships, to treat part of gain as ordinary based on nature of assets in S Corporation. - Still have capital gains look through on 28% collectibles. - Buyer’s stock basis determined by cost. - If Buyer is C corporation, S election terminates with sale. If no 338 election, only corporation continues as C corp with old basis in assets and all built-in gain potential.

Corporate & Partner Tax Instructor: Dwight Drake Sub Triangular A Merger – 368(a)(2)(D) Old Corp New Sub Old Corp Stockholders Merger – Old disappear Buying Corp 100% Stock Token Assets Buyer Stock Impacts: 1.Tax free to all 2.Shareholders basis carryover 3.All corp attributes carryover 4.Key requirements: - Continuity of interest (40%) - Continuity of business enterprise