"Sale" of Partnership interest for $1

[KBTS]

In 2010, client, his brother and sister inherit land with FMV of $200K. They form a partnership and transfer land to partnership. The land is rented out to a farmer for a flat amount of rent each year.

Client dropped tax stuff off in my box last week. In his information is a bill of sale agreement dated 11/20/12. The sister sold her interest to the 2 brothers for $1. . I only do a couple very simple partnership returns each year, so I could use some help figuring out exactly how to treat this on the return.

P.S. - I have searched the board, but must not be using the correct phrase to find any relevant info.

[Burke]

A sale of an asset for less than FMV, especially for as little as $1, would be treated as a gift. The partnership's ownership percentages would change with the date of that transfer from 33 1/3% to 50%, and the K-1's would reflect that for the year. There would be 2 sets, one before the transfer and one after. (I do 2 tax returns). The amt of almost $67K would require a gift tax return from the donor, IMO. The new basis would be $100K each to the remaining 2 partners, and they would now have a 50% interest in the partnership. (This is assuming no other adjustments to basis.)

[Roland Slugg]

Joint ownership of property does not constitute a partnership. See the instructions for F-1065. (I believe the heading is something like, "What is a Partnership," or "Who Must File" ... something like that.) Thus, partnership returns should not have been filed for the years 2010 or 2011, and I wouldn't file one for 2012.

Regarding your main point, there may be more to the story than a $1 sale. The sister may (and probably did) receive something else of value from her brothers. Maybe it was more cash, maybe it was other property, maybe an old debt was canceled ... or some other quid pro quo. I would inquire.

[KBTS]

Joint ownership of property does not constitute a partnership. See the instructions for F-1065. (I believe the heading is something like, "What is a Partnership," or "Who Must File" ... something like that.) Thus, partnership returns should not have been filed for the years 2010 or 2011, and I wouldn't file one for 2012.

Regarding your main point, there may be more to the story than a $1 sale. The sister may (and probably did) receive something else of value from her brothers. Maybe it was more cash, maybe it was other property, maybe an old debt was canceled ... or some other quid pro quo. I would inquire.

They did in fact form a partnership - client showed me the partnership agreement and they have an EIN as the "Smith Family Partnership". Property was transferred to the partnership and is titled as such on the deed and property tax records.

[Roland Slugg]

I misspoke in my first reply. I should have written, "Joint ownership of property does not constitute a partnership for tax purposes, even if the owners sign a 'partnership' agreement between themselves."

Your clients' partnership agreement notwithstanding, all that exists for tax purposes is the joint ownership of property, and a partnership return should not be filed. The instructions for F-1065 are clear about this.