Technical Termination or not?

[BHoffman]

Lim Ptnr forfeited his 99% interest in a partnership. The agreement states "GP has sole discretion to either keep forfeited interest or disclaim ownership and choose another entity as the owner." GP wishes to disclaim ownership and choose another owner. The other owner will take the 99% interest.

There are no liabilities. Lim Ptnr received nothing. Forfeitures are treated like abandonments.

Would this still constitute a technical termination? There was no sale or exchange, just the forfeiture.

[Lion]

Going from memory on a Friday night of a holiday weekend, if 50% of a partnership changes hands the partnership ends.

[BHoffman]

Happy Weekend!

I think the wording is 50% through sale or exchange, and that's the question. Is there a technical termination through forfeiture? I don't think forfeiture is treated as a sale or exchange but would like other opinions.

[Burke]

I would consider a forfeiture as an exchange, esp if the GP wants to designate another partner for the forfeited interest. If he were to keep it, it seems the ptrshp would become a sole proprietorship.

[erchess]

Consequences of being wrong

If the partnership treats the forfeiture as not being an exchange, that is surely the least painful path for now but what if at some point in the future the IRS decides to announce that the partnership terminated with the forfeiture? The resulting paperwork and fee payments are late. I would think the business would still be a partnership for all years but what are the fees for the late payments?

If the partnership treats the forfeiture as being an exchange the only consequence I am aware of is somewhat of an increase in its government related paperwork and fees for the year in question. The old partnership gets dissolved and files a final return and the new partnership gets formed.

The key fact that I just don't know is the cost of having the IRS later determine that a termination should have been recognized.

[S T]

Under the IRS Audit Guide, one of the ways a partner can dispose of a partnership interest, is by surrendering the partnership interest through abandonment, foreiture or worthlessness of the partnership interest.

If the Partnership Interest has greater than 50% ownership - then would it not become a Technical Termination and the Partnership Fails -??

Too much info in this Audit Guide so I am posting a link as I do not believe the OP has posted all of the the "factual/actual" details. So hoping the link will asssist http://www.irs.gov/businesses/partne...134696,00.html

I am sure the OP has already reviewed this as well, but just in case and to bump to the top.

Sandy