Consequences of liquidation and sale e. Partnership Terminations FORCED by Statute i. §708(b)(1)(B): partnership is terminated if within a 12 month period there is a slae or exchange of 40% or more of its total interest in partnership capital and profits. ii. This requires different interests; not just, for instance, a sale of 25% twice. iii. Does not apply to dispositions by gift, inheritance, or liquidation of a partnership interest. iv. Consequences: 73
1. Termination occurs on the date of the sale that put the partnership over the 50% level. 2. Deemed to have contributed all of its assets and liabilities to a new artnershi in exchange for an intrest in that new entity. 3. Terminated partnership is then deemed to liquidate by distributing interest in the new partnershp to the purchasing partner and the other remaining partners, 4. New Pship = new taxpayer. 5. Many agreements include provision forbidding S/E that would cause a technical termination. a. Or partner could just sell more slowly, or sell just some parts of his interest (capital, profits). v. Collateral Consequences 1. Capital accts carry over to new pship 2. 754 election stays in effect 3. pship’s assets bases are adjusted pursuant to 743 and 755 before deemed contribution to the new pship. 4. Partner w/ special basis adjustment gets credit for that in the new pship. 5. Mixing bowl provisions- applied with some mercy… do not apply to t=deemed distribution of interests in new pship caused by the termination. 6. No new 7 year period w/respect to built in g/l property contributed. f. Tiered Partnerships i. If sale of an upper tier partnership results in its termination, upper tier partnership is treated as exchanging its entire interest in the capital and profits of any lower tier partnership. ii. Could terminate the lower tier partnership or be combined with actual sales/exchanges of interests in the lower tier partnership to cause a termination. iii. But if no termination, it’s not considered as a sale or exchange of a proportionate interest in the lower-tier partnership. XV. COMPLICATIONS IN CONTRIBUTED PROPERTY a. Allocations i. § 704(c)(1)(A) Income, gain, loss and deduction items with respect to property contributed by a partner to a partnership shall be shared among the partners so as to take account of the variation between the inside basis of the property and its FMV at the time of the contribution. 1. Must deal with gain or loss in contributed property when it is contributed 2. Purpose To prevent the shifting of pre-contribution gains and losses among partners. 3. Principally applies to sales and exchanges by a partnership of contributed property a. Contributed Property = property, at the time it is contributed to a partnership, has a fair market value that differs from the contributing partner’s adjusted basis.
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