Partnership and Change of Partners

[S T]

If sale of partnership interests is not sold through the partnership, but done just with the old and new partners (outside of partnership), is there any reporting on form 1065 or k-1 forms?

Form 8308 only if there is inventory?, and possibly 754 election for new partner.

Or does the selling partner simply report the appropriate ordinary income or capital gain. And is that to be reported on either 4797 or Schedule D?

Thanks,

Sandy

[JAinNC]

Is this less than 50% change?

[S T]

Percent Change

There originally were 3 partners 33.3% each.

Partner A - remaining

Partner B - sold 16.7 to Partner A and 16.6 to Partner D (new partner)

Partner C - sold 33.3 to Partner D (new partner)

Partner A - now 50%

Partner D - now 50%

Transaction date 1/1/06.

Sandy

[Bees Knees]

TTB, page 20-11 says:

A partnership terminates when one of the following events takes
place.
1) All the partnership operations are discontinued and no part of
any business, financial operation, or venture is continued by
any of its partners in a partnership.
2) At least 50% of the total interest in partnership capital and
profits is sold or exchanged within a 12-month period, including
a sale or exchange to another partner.
Effect of termination by sale or exchange. If a partnership is terminated
by a sale or exchange of an interest, the partnership is deemed
to have contributed all of its assets and liabilities to a new partnership
in exchange for an interest in the new partnership. Immediately
thereafter, the terminated partnership is deemed to
have distributed interests in the new partnership to the purchasing
partner and the other remaining partners in proportion to
their respective interests in the terminated partnership, in liquidation
of the terminating partnership. [Reg. §1.708-1(b)(4)]

IRS Pub 541, page 3 goes on to say that the old partnership’s final tax year ends on the date of termination, meaning a final short year partnership tax return should be filed.

In your case you have Partner B selling his/her 33.3% interest and Partner C selling his/her 33.3% interest. Those two interests add up to more than 50%, meaning the partnership terminated. A final return for the old partnership should be filed reporting the liquidation.

[S T]

Technical Termination

Bees and All,

I have not had to prepare one of these before so please excuse me if I post some really "not so bright" questions.

Bees, I can see, that from this info below

"There is a technical termination of a partnership when within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits (§708(b)(1)(B)).
The "old" partnership files a final return for the period starting with the first day of its tax year and ending on the day of the technical termination. The "new" partnership files an initial return for the period starting with the day after the day of the technical termination and ending on the last day of the "old" partnership's tax year. The "new" partnership has the same name and EIN as the "old" partnership."

Now how do I apply the mechanics of form reporting to this particular situation.

The transaction was on 1/1/06, old partners are not participating in any income on 1/1/06, other than the gain generated by the sale of their partnership interests.

So based on above, technically the new partnership would start on 1/2/06, and I allocate any income on 1/1/06 (yes there was income on 1/1/06 - 24 hour retail store) in total to the new partners (per signed agreement) , and then prepare another form 1065 for 1/2/06 - 12/31/06.

I am really confused right now, so some mechanical reporting clarity from TMI posters would be most helpful. Do I report the retired partners capital gain/ordinary income on their K-1 for 1/1/06? Each retiring partner has approximately $ 3,000 in ordinary income (inventory buyout) and approximately $190,000 in capital gain.

Then I am able to do a 754 election for Partner A for the 16% and Partner B for the 50%. However Partner A will continue to only depreciate his original basis on the 33.3%, and the step up (754 election) on the 16.7%

Thanks everyone for always being here to help!

Sandy

[Bees Knees]

The transaction was on 1/1/06, old partners are not participating in any income on 1/1/06, other than the gain generated by the sale of their partnership interests.

So based on above, technically the new partnership would start on 1/2/06, and I allocate any income on 1/1/06 (yes there was income on 1/1/06 - 24 hour retail store) in total to the new partners (per signed agreement) , and then prepare another form 1065 for 1/2/06 - 12/31/06.

Technically yes. But it seems silly to do that. I’m sure the partners doing this on 1/1/06 was meant to have a clean break at the end of 2005, with the new arrangement starting 1/1/06. Thus the sale took place on 12/31/05 and the final partnership return ended 12/31/05. Of course, if the partnership return for 2005 has already been filed and did not take into consideration the change of ownership, then it is just as easy to do it correctly and file a one day short partnership final return for the period 1/1/06 12:01 AM to 1/1/06 11:59 PM, and the new partnership filing for the period 1/2/06 through 12/31/06.

I am really confused right now, so some mechanical reporting clarity from TMI posters would be most helpful. Do I report the retired partners capital gain/ordinary income on their K-1 for 1/1/06? Each retiring partner has approximately $ 3,000 in ordinary income (inventory buyout) and approximately $190,000 in capital gain.

Gain or loss is reported at the partner level, not the partnership level. It is not a K-1 reporting item, other than the K-1 reports the amount of distribution made to each partner. In a complete liquidation of a partnership, each partner receives his or her share of the partnership assets at the partnership's basis.

TTB, page 20-9 says:

Tax Effects of Distributions
A distribution to a partner will be either (1) a current distribution
that does not completely retire the partner’s interest in the partnership,
or (2) a liquidating distribution that does retire the partner’s
interest in the partnership.
Tax effects on partnership. A partnership does not recognize gain
on a distribution of money or property to a partner. [IRC §731(b)]

Note that in both a current distribution and a liquidating distribution (including a complete liquidation of all partnership property), it says the partnership does not recognize any gain or loss.

That means all tax consequences are handled at the partner level, and gain or loss can depend on what the partner does with the property.

TTB, page 20-9 goes on to explain how the partner treats current distributions, liquidating distributions, liabilities, and the sale of a partner’s interest. Gain or loss could be capital gain or ordinary income, depending on certain factors such as unrealized receivables, sale of inventory, etc.

[S T]

As Usual

Bees,

As usual thanks so much for clearing matters up. Although I reserve the right to post another question or two before this project is done.

The reporting procedures seem odd to me, but then what isn't odd in the Tax Code.

Maybe TMI will integrate more partnership and S Corp examples into their 2007 Book or Web CD. Actual examples would be wonderful.

Sandy

[Bees Knees]

Word on the street has it that the new Small Business TaxBook will have examples of how to report the liquidating of an S corporation and a partnership.

[Gretel]

Word on the street has it that the new Small Business TaxBook will have examples of how to report the liquidating of an S corporation and a partnership.

Bummer, but also good news. I was planning on getting the Deluxe book again but I really would like to have the additional info. I guess I have to chance my mind.

[S T]

Doesn't

Gabriele,

the Deluxe Edition have the same information as the 1040 and Small Business Edition?

Sandy

[Brad Imsdahl]

Gabriele,

the Deluxe Edition have the same information as the 1040 and Small Business Edition?

The ad for the Deluxe Edition, http://www.thetaxbook.com/book_deluxe.asp , says: “Same great coverage as previous two years.”

The ad for the new Small Business Edition, http://www.thetaxbook.com/book_smallbusiness.asp , says: “Our new Small Business Edition will contain the same information about small business topics that is found in the Deluxe Editions, with some expanded coverage. Also, as is typical with producing multiple books, topics such as depreciation, business deductions, etc., will have some duplicate information between our Small Business and 1040 Editions."

In general, the most efficient and non-duplicating option is the Deluxe Edition.

The more expensive option with some duplication is the combination of the 1040 edition plus the Small Business edition. However, since the page count between the two books is over 680 pages (over 340 each), compared to over 500 pages in the Deluxe Edition, the extra 180 or so pages allows us to add some new information that isn’t included in the Deluxe Edition. In other words, not all of the 180 additional pages will be duplicated information between the two books. Some will be expanded information that was never found in the Deluxe edition from the previous two years.

It should be noted, however, that the WebCD contains both the 1040 edition and Small Business editions. For those who want the convenience of the Deluxe Edition in the hard copy book, plus the extra research tools found in the WebCD, you will get the new information found only in the Small Business Edition on your WebCD while continuing to have the convenience of using one hard copy deluxe book. The combo of the WebCD plus the hard copy Deluxe edition is the one I will be using next tax season.

[Gretel]

Thanks for clarifying this. Since I will be getting the WebCD I will be fine.

[S T]

Me as well

It seems like I could have made the right decision as well. I love the one book, for the Deluxe Edition instead of having 2 books open. I also have found that I use the Web CD more and more, and don't actually look at the actual book so often anymore.

So my choice for Value Pak #1 seems it might be the right choice, I can have almost all of it.

Brad, if you don't have an example on a partnership scenario, I would be happy to furnish my info on the one I am working on.

Sandy