"Hide and Seek" Partnership

[Corduroy Frog]

Not wild about partnerships to begin with. 90% of them break up within 2 years. But here comes a new client with a successful business.

G client has a fashion retail outlet. G was engaged to B, an attorney, who comingled their funds to start the store, and applied to state of Kentucky receiving LLC status. Files a 1065 as 50-50 partners for two years. Last return was filed for year ended 12/31/13.

G and B split up, never having married. Judge awards the store to G, who has to pay B for his share of ownership. The award occurs on April 30, 2014, but with an effective date of 12/31/13. The entity continues as an LLC under Kentucky law. G continues to operate the store, and then in November 15, 2014 takes on another 10% partner. Throughout 2014 the store continues under its partnership FEIN.

My concern is the demise of 50% of the partnership ENDS the partnership under Federal law. Would anyone care to address some of these questions? I hope I've given enough info to enable answers.

1. May the store continue to file a 1065 under the same FEIN as a matter of convenience?
2. A divorce settlement is not taxable or deductible, but G and B were never married. Does B have to report gain(loss) on the sale of his 50% interest?
3. If the FEIN has to be dissolved, what is the effective date, 12/31/13 or 04/30/14? Will late-filing penalties apply?
4. If the partnership has to be dissolved, does G have the option of electing some other entity going forward?

[ATSMAN]

Have you looked at the documents of organization of the LLC (between G and B) that were filed with the state?

In my opinion, if they were filing as a partnership, it ended on 12/31/13 after the last return was filed and they split up. The old FEIN is not valid after that when G created a new partnership in 2014 with another partner. G can choose what type of new entity she wants.

The settlement that B got was really G buying out B so go through the usual calculations to figure out B's tax basis and if there is any gain/loss when his interest was sold.

[TXEA]

Corduroy -

I think the partnership completely terminated when G purchased B's interest. She became the sole owner at that time - 12/31/13. On November 15, 2014, a new partnership was created when the 10% partner was added.

B will recognize gain or loss on his sale of the interest to G.

As for the date of FEIN termination, I would use 1/1/4. You need to file a final partnership return that is now delinquent. If the interest was terminated on 12/31/13, the partnership was not in existence at that date. Retroactive transactions are a mess when they cross tax years.

Another complication is that the gain or loss on the partnership interest was determined after the due date of the 1040 of B. And if it terminated on 12/31/13, the final partnership return is either 12/31/13 or 1/1/14. This is kind of tricky.

Another issue that must be addressed is the "hot assets" must be allocated to B as part of the sale proceeds from G. So, he is likely to have both ordinary income and maybe capital gain from the sale of his interest. I may be telling you what you already know, but the balance sheet must reconciled at the date of termination (12/31/13 or 1/1/14 whatever you decide) and FMV assigned to every asset on the books based on the purchase price and sale proceeds allocated accordingly (See IRC 754 and 743(b)). A review of any debts will need to be conducted to see if B has an deemed relief of debt.

State law will determine whether G still has LLC status. She may be able to amend articles to a single member LLC.

However, the biggest issue I see is determining when the partnership terminated for tax purposes. Was it 12/31/13 or 1/1/14. If 1/1/14, he will get a K-1 for a day, and if 12/31/13, then everything needs amended to file a final return at that date and allocate sales proceeds to hot assets and capital assets.

When thinking about the date to use, partnerships tax year for selling partner ends on the date of sale. So, if 12/31/13, everything needs amended. If 1/1/14, then a one day short tax year.

[Corduroy Frog]

Good information

Thanks to the respondents. More are invited to comment.

I'm thinking the dissolution final return should be dated 01/01/14, with no K-1 for 2014 operations. I'll have to review the original capital contributions to see if there were any "hot assets" - certainly hope not.

This puts G into a sole proprietorship for 10 months of 2014, and creates yet another partnership for Nov and Dec. The LLC survives under Kentucky law, so I'm thinking she can have her choice of electing a C corp or S corp for the entirety of 2014 to avoid splitting the entity and having to file a short year. Small partnerships are messy since most partners get to fussin' and fightin' within a year or so, and the current messy situation is what results.

I believe the final partnership return is late and therefor can incur penalties. The 8832 election is late also, but I think that can be navigated around since no return has yet been filed for 2014.

[TXEA]

Remember, hot assets can include inventory, depreciable assets, etc.

Sounds like you are on the right track.