Conversion of S Corp to Limited Partnership

[Happy Camper]

Client is converting an S Corp to a limited Partnership. The S Corp will have a short year.

Questions:
This is a taxable event and the FMV of the S Corp assets have been appraised. I understand that the FMV of the assets will go on the books of the Partnership. Are the assets of the S Corp increased to FMV on the last day of operations before the sale?

How is the distribution of the FMV of assets reported to the S Corp shareholders on the K-1? Sch D? Property distributions?

Should the short year return be filed on the 2016 Form 1120S? Conversion date is 4/1/17-2017 Forms are not available in my software (ATX). When I put the 2017 dates on the 1120S Form the K-1 shows the year beginning 1/1/2016 and ending 3/31/17!

Client is also converting a LLC to the limited Partnership. From my research, this is NOT a taxable event and a short tax year return is not required. It appears that the tax year doesn't close and there is no requirement to adjust the assets to FMV at the time of the conversion. Can anyone confirm that?

I appreciate the time!

[Roland Slugg]

This is a taxable event and the FMV of the S Corp assets have been appraised. I understand that the FMV of the assets will go on the books of the Partnership. Are the assets of the S Corp increased to FMV on the last day of operations before the sale?

Before the sale? What sale? Is the partnership going to buy the assets from S Corp? When I read your post I got the impression that the assets are going to be distributed to the shareholder(s) who, in turn, will contribute them to the partnership. Either way, though, I believe the effect will be the same. If the assets are distributed to the shareholder(s), the gain recognized by the Corp is equal to the FMV of the assets in excess of the assets' basis. Depreciation recapture is triggered, whether the assets are sold or distributed. The date for determining each asset's FMV is the date it's distributed. See Code §301(c) and §1368(a).

How is the distribution of the FMV of assets reported to the S Corp shareholders on the K-1? Sch D? Property distributions?

If capital assets are distributed, they are to be reported on Schedule D (1120-S). Distributions of depreciable property are reported on Schedule K-1, and a statement should be attached disclosing certain information. See the instructions for form 1120-S, pages 33 and 38. I don't see how it would hurt, however, to report the distribution of depreciable assets on F-4797, and that's what I'd be inclined to do.

Although you didn't specifically ask about the way the distributions affect the shareholder(s) basis and taxation, it will depend on whether or not the Corp has any E&P. There is an "ordering" to distributions, but there are also a couple of elections that can be made to change that ordering. This is covered in the instructions for form 1120-S. See also Code §1368(b), (c), (d) and (e).

Should the short year return be filed on the 2016 Form 1120S? Conversion date is 4/1/17-2017 Forms are not available in my software (ATX). When I put the 2017 dates on the 1120S Form the K-1 shows the year beginning 1/1/2016 and ending 3/31/17!

Well, you can get the starting and ending dates to appear correctly on page 1 of form 1120-S, but you're right, the K-1 shows a start date of January 1, 2016, because the year 2016 is pre-printed on the K-1s. Since you have to use the 2016 edition of the forms, I would just take a pen and line through the 2016 date on each K-1 and write "2017" right above it. I assume you read the instructions about which form to use on page 11 of the form 1120-S instructions.

Client is also converting a LLC to the limited Partnership. From my research, this is NOT a taxable event and a short tax year return is not required. It appears that the tax year doesn't close and there is no requirement to adjust the assets to FMV at the time of the conversion. Can anyone confirm that?

Without looking into it I'd say you are probably right. However, if a member receives assets whose FMV exceeds his basis in the LLC, there may be income recognized. If this applies to your situation, you should look into that possibility.

[spanel]

Client is converting an S Corp to a limited Partnership. The S Corp will have a short year.

Questions:
This is a taxable event and the FMV of the S Corp assets have been appraised. I understand that the FMV of the assets will go on the books of the Partnership. Are the assets of the S Corp increased to FMV on the last day of operations before the sale?

How is the distribution of the FMV of assets reported to the S Corp shareholders on the K-1? Sch D? Property distributions?

Should the short year return be filed on the 2016 Form 1120S? Conversion date is 4/1/17-2017 Forms are not available in my software (ATX). When I put the 2017 dates on the 1120S Form the K-1 shows the year beginning 1/1/2016 and ending 3/31/17!

Client is also converting a LLC to the limited Partnership. From my research, this is NOT a taxable event and a short tax year return is not required. It appears that the tax year doesn't close and there is no requirement to adjust the assets to FMV at the time of the conversion. Can anyone confirm that?

I appreciate the time!

How is the LLC setup as? LLC partnership? LLC taxed as a C or S corp?

[Happy Camper]

LLC Partnership

How is the LLC setup as? LLC partnership? LLC taxed as a C or S corp?

The LLC is taxed as a partnership.

[Happy Camper]

Thanks so much!

Roland-I appreciate your time & the concise response as well as the Code Sections to refer to. You have answered many of my questions!

Re: 'the sale' - you are correct in your impression-I misspoke. There is no sale the assets will be distributed to the shareholders who will then contribute to the partnership.

What I am not sure about is, do the assets get increased to FMV on the books prior to the date of distribution (3/31) then these updated books are used to complete the tax return? Or are the 'new' books just updated with the FMV's (on 4/1/17) and I use a separate spreadsheet to calculate any gain on capital assets. I am thinking the 'disposal' of the asset in the tax program will calculate any depreciation recapture. They will use the same set of books for the 'new' partnership.

Thanks!

[Roland Slugg]

What I am not sure about is, do the assets get increased to FMV on the books prior to the date of distribution (3/31)?

The increase to FMV on the corp's books will take place simultaneously with the distribution of the assets to the shareholders. It's as if the assets were sold to the shareholders, in a cash sale, and then the cash was distributed to the shareholders.

They will use the same set of books for the 'new' partnership.

Well, the new p'ship will start with the same assets, but at the FMVs of those assets. However, I would start fresh with new "books" for the p'ship. Don't keep using the corp's books.