1. Chapter 10: Special Partnership Issues

2. SPECIAL PARTNERSHIP ISSUES (1 of 2)
Nonliquidating distributions
§751 assets
Liquidating distributions
Sale of partnership interest
Retirement or death of a partner
Exchange of a partnership interest

3. SPECIAL PARTNERSHIP ISSUES (2 of 2)
Termination of a partnership
Mergers and consolidations
Division of a partnership
Basis adjustments
Special forms of partnerships
Electing large partnerships

4. Nonliquidating Distributions
General rules
Precontribution gain (loss)
Basis effects of distributions
Holding period and character of distributed property

5. General Rules No gain or loss by either partner or partnership
“Money” distributions in excess of partner’s basis triggers capital gain recognition by partner
“Money” includes cash, reduction of partner’s liabilities, FMV of securities

6. Precontribution Gain (Loss) (1 of 2)
Precontribution gain (loss) definition
Contributed property w/FMV > tax basis (< for loss) on date transferred to partnership

7. Precontribution Gain (Loss) (2 of 2)
Gain or loss recognized by contributing partner w/in 7 years of contribution if
Distribution of contributed property to any OTHER partner or
Any property distribution to contributing partner if FMV of property > partner’s basis
Gain recognition only

8. Basis Effects of Distributions (1 of 2)
General rule
Partnership’s basis in distributed property carries over to partner
Partner’s basis in partnership reduced by
Money received and
Basis of other property received

9. Basis Effects of Distributions (2 of 2)
If partnership’s basis in property > partner’s basis in partnership after adjusting for money received and preconribution gain
Basis in assets received = partner’s remaining basis x (ptrshp’s basis in asset ÷ptrshp’s basis in total assets distributed

10. Holding Period and Character of Distributed Property
Partner’s holding period includes partnership’s holding period
Character of gain/loss when property sold
Generally same as for partnership
Ordinary income/loss treatment for
Unrealized receivables
Inventory sold w/in 5 years of distribution
After, character determined at partner level

11. §751 Assets §751 assets Unrealized receivables
Property likely to produce ordinary income when sold or collected
Unrealized receivables
Substantially appreciated inventory
Significance of §751

12. Unrealized Receivables
Unrealized receivables include
Accounts receivable for cash basis partnership
Ordinary income recapture items
§§1245 or 1250 (depreciation)
§§617(d) (mining properties)
§§1252 (farmland)
§§1254 (oil, gas and geothermal)

13. Substantially Appreciated Inventory (1 of 2)
Substantially appreciated inventory includes all assets EXCEPT
Cash
Capital assets
§1231 assets

14. Substantially Appreciated Inventory (2 of 2)
Appreciation test
Exclude cash, §1231 & capital assets
Total basis of remaining assets
Multiply sum by 1.20
Compare result of #3 w/FMV of assets
If FMV larger, appreciation exists

15. Significance of §751
If §751 assets exist, certain distributions reclassified as a SALE between partnership & partner
What appears to be a tax-free distribution could be a taxable event
See Example C10-12 and Table C10-1

16. Liquidating Distributions
Gain or loss recognition by partner
Basis of assets received
Holding period carries over to partner
§751 applies to liquidating distributions
Effects of distribution on partnership
No gain or loss unless §751 deemed sale occurs

17. Gain or Loss Recognition by Partner (1 of 2)
Gain recognized if money received (and deemed received) exceeds partner’s basis in partnership

18. Gain or Loss Recognition by Partner (2 of 2)
Loss recognized if
Only money, unrealized receivables & inventory are only assets received AND
Basis in partnership > sum of money plus partnership’s basis in unrealized receivables and inventory received

19. Basis of Assets Received (1 of 2)
Basis of unrealized receivables and inventory same as for partnership
Never increased when distributed from partnership partner

20. Basis of Assets Received (2 of 2)
After reducing partner’s basis for money received, remaining basis in partnership is allocated to remaining property distributed
Gain (loss) is deferred by reducing (increasing) the basis in the property distributed

21. Sale of Partnership Interest (1 of 2)
Impact on Partner
General rule
Capital gain or loss recognized
Partnership liabilities
Relief of liabilities increases the amount realized on the sale

22. Sale of Partnership Interest (2 of 2)
Impact on partner (continued)
§751 property
All inventory and unrealized receivables are considered §751 property
Hypothetical asset sale approach used by Treasury Regs. Under §751 to determine ordinary income or loss
No impact on partnership

23. Retirement or Death of a Partner
Sale of partnership interest to outside party is a “sale”
Surrender of interest to partnership
Payments for property taxed as liquidating distributions
Other payments treated as either guaranteed payment (ordinary income) or distributive share (retain character)

24. Exchange of a Partnership Interest (1 of 2)
Exchange for another partnership interest not a like-kind exchange
Exception: exchanges of interests within a single partnership
Exchange for corporate stock
May qualify for §351 treatment
Partnership interest is property under §351

25. Exchange of a Partnership Interest (2 of 2)
Incorporation
Tax consequences depend on how incorporation is accomplished
Formation of an LLC or LLP
If LLC elects to be taxed as a corp, treatment same as for incorporation
If LLP, same tax-free treatment as partnership-to-partnership transfer

26. Termination of a Partnership (1 of 2)
IRC & state laws treat terminations differently
Termination events
No business operated as a partnership
Sale or exchange of  50% interest w/in 12 month period
If a partner completely liquidates, the partnership tax year closes for that partner

27. Termination of a Partnership (2 of 2)
Effects of termination
Tax year closes upon termination
Could cause short tax year to fall in same calendar year as regular 12-month tax year

28. Mergers and Consolidations
Two or more partnerships join to form a new partnership
If partners of “Old 1” own > 50% of New partnership, then Old 1 partnership is deemed to be continued
All other old partnerships deemed to terminate
Possible that no old partnership continues

29. Division of a Partnership
One partnership divided into two or more partnerships
New partnerships whose partners own collectively > 50% of interests in old partnerships are considered a continuation of the old partnership

30. Basis Adjustments (1 of 4)
New partner’s outside basis
Purchase price plus new partner’s share of partnership liabilities
New partner’s inside basis likely different than outside basis

31. Basis Adjustments (2 of 4)
§754 adjustment allows partnership to adjust basis of partnership assets for new partner’s share of partnership assets
Basis adjustment belongs only to new partner

32. Basis Adjustments (3 of 4)
Example
If §754 adjustment is $30,000 and new partner is 1/3 partner, then new partner’s inside basis increases by $10,000 ($30,000 x 1/3)

33. Basis Adjustments (4 of 4)
Mandatory basis adjustment for substantial built-in loss
Substantial if Built-in loss > $250K,
Exchange of partnership interest, AND
No §754 optional basis adjustment election in effect

34. Special Forms of Partnerships
Tax shelters and limited partnerships
Publicly traded partnerships
Electing large partnerships
Limited Liability Companies (LLC)
Limited Liability Partnerships (LLP)

35. Publicly Traded Partnerships
PTPs are partnerships whose interests are traded on an established securities exchange
PTPs are taxed as a corporation unless  90% of income is “qualifying income”
E.g., Certain interest, dividends, real property rents

36. Limited Liability Companies (LLCs)
May be taxed as a partnership or a corp (using check-the-box regs)
Allows entity to obtain flow-through and flexibility of partnership allocations while maintaining limited liability of a corp.

37. Limited Liability Partnerships (LLPs)
Used by many professional organizations
Taxed as a partnership
Partners not liable for failures in work of other partners or people supervised by other partners

38. Electing Large Partnerships
ELP Qualifications
ELP taxable income
ELP: Termination of partnership
ELP: Audit rules

39. ELP Qualifications Non-service partnership
Not engaged in commodity trading
Have at least 100 partners
File an election to be taxed as a large partnership

40. ELP Taxable Income
Misc. itemized deductions combined & subject to a 70% deduction at partner level
Remaining misc. deductions combined w/other partnership income
Charitable contributions combined and not separately stated by partners
§179 deductions combined

41. ELP: Termination of Partnership
Termination occurs only upon cessation of any business, financial operation or venture
Termination does not occur upon transfer of 50% ownership

42. ELP: Audit Rules
Partners must report all items in same manner as partnership
Audit findings & agreements reached at partnership level binding on all partners
Audit decisions binding on partners who own interest in year of decision, not year of contested transaction

43. End of Chapter 10
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