Cutting-Edge Basis Planning: Parsing Partnership Divisions

• Published in: Estate Planning 2019-01, Vol.46 (1), p.23
• Main Authors: Yuhas, Michael A, Radom, Carl C
• Format: Article
• Language: English
• Subjects: Capital gains; Divisions; Estate planning; Estate taxes; Income taxes; Limited liability companies; Partnership interest; Profits; Tax exemptions; Tax rates
• ISSN: 0094-1794

Because members of resulting partnership AB owned more than a 50% interest in the capital and profits of partnership ABCD (A, 40%, and B, 20%), partnership AB is considered the divided partnership and a continuation of partnership ABCD. [...]Partnership AB is subject to the preexisting elections that were made by the prior partnership. * Partnership AB is required to file a return for the tax year 1/1/2018 to 12/31/2018, indicating thereon that until 11/1/2018, it was partnership ABCD. * Partnership CD is considered a new partnership formed at the beginning of the day on 11/2/2018, and is required to file a return for the tax year it adopts.29 Forms of partnership divisions The regulations provide that the form of the partnership division will be respected for federal income tax purposes if the partnership division follows either the asset-over form or the asset-up form.30 The regulations describe four different forms of the partnership division, two employing the asset-over form and two employing the asset-up form. ABCD transfers Redacre to new partnership BD and distributes the BD interests received to B and D in full liquidation of their interests in ABCD. Because AC is the only continuing partnership (i.e., whose partners had more than 50% of ABCD), it is treated as the divided partnership, and the transaction is treated as an asset-over transfer of assets to new partnership BD. AC continues the tax elections and tax year of ABCD, but BD is eligible to make all new elections (except depreciation methods). C and D are not taxed on the normal liquidation of their interest because they did not receive cash (or marketable securities treated as cash47) (including the deemed recognition of cash in connection with a Section 752 liability shift)) in excess of their basis. Because AC is the only continuing partnership (i.e., whose partners had more than 50% of ABCD), it is treated as the divided partnership, and the transaction is treated as an asset-up transfer of assets to new partnership BD. AC continues the tax elections of ABCD but BD is eligible to make all new elections (except depreciation methods). [...]per Sections 732(c)(1)(A) and (B), John's $75,000 outside basis is first allocated to the distributed inventory and then to distributed capital Asset C. Thus, A's $75,000 basis in his partnership interest is allocated $50,000 to Asset E and $25,000 to Asset C. Because ordinary income Asset E retained its $50,000 basis, there was no change to the basis o