Fun fact re partnership terminations

[LCP]

So I guess I was right that I've been wrong all of these years..........

Partner changes resulting from distributions do not trigger a termination even if a greater than 50% change in ownership.

Or am I still confused?

[les grans]

>>How about > when you have no more partners, the partnership ends.<<

Yup, that's IRC section 708(b)(1)(A).

[BOB W]

What the regulation says is this: "A partnership shall terminate when 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a period of 12 consecutive months. Such sale or exchange includes a sale or exchange to another member of the partnership. However, a disposition of a partnership interest by gift (including assignment to a successor in interest), bequest, or inheritance, or the liquidation of a partnership interest, is not a sale or exchange for purposes of this subparagraph."
But the regulation doesn't spend any time defining "liquidation" of a partnership interest, which leaves our question still unanswered.

How about > when you have no more partners, the partnership ends.

[les grans]

What the regulation says is this: "A partnership shall terminate when 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a period of 12 consecutive months. Such sale or exchange includes a sale or exchange to another member of the partnership. However, a disposition of a partnership interest by gift (including assignment to a successor in interest), bequest, or inheritance, or the liquidation of a partnership interest, is not a sale or exchange for purposes of this subparagraph."

But the regulation doesn't spend any time defining "liquidation" of a partnership interest, which leaves our question still unanswered.

And here's what the Revenue Ruling says, reciting pretty much the law and the reg that apply to terminations by sale or exchange, again not defining "liquidation": "Section 708(b)(1)(B) of the Code provides that a partnership is considered terminated if, within a 12 month period, there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits. Section 1.708-1(b)(1)(ii) of the regulations provides that the liquidation of a partnership interest is not a sale or exchange for purposes of section 708(b)(1). Section 761(e) provides that, for purposes of sections 708 and 743, any distribution of an interest in a partnership (not otherwise treated as an exchange) is treated as an exchange.

[Bees Knees]

Hmmmmm, not sure ... this from an associates National Real Estate Tax Conference manual:

Liquidation of a partnership interest is not considered a sale or exchange for purposes of section 708(b)(1)(B) according to Treas Reg Section 1.708-1 (b)(2). Rev Rul 92-15 (1992) clarified that a partial liquidation of a partner’s interest is also not a sale or exchange for these purposes.

Haven't had a chance to dig into those cites yet.

A liquidation is not the same as a partner who is "bought out." In a liquidation, the partner gets the partnership property in exchange for his interest. In a "buy out" the partner gets cash.

Anytime you get cash in excess of basis, you have a taxable sale or exchange. [IRC Section 731(a)(1)]. That rule applies regardless of whether you call it a sale, exchange, distribution, or whatever.

[JON]

Liquidation

by passing assets out to the partners does not create a taxable event until the partner sells those assets. That is an advantage of a partnership vs. a corporation.

[LCP]

Hmmmmm, not sure ... this from an associates National Real Estate Tax Conference manual:

Liquidation of a partnership interest is not considered a sale or exchange for purposes of section 708(b)(1)(B) according to Treas Reg Section 1.708-1 (b)(2). Rev Rul 92-15 (1992) clarified that a partial liquidation of a partner’s interest is also not a sale or exchange for these purposes.

Haven't had a chance to dig into those cites yet.

[Bees Knees]

What do you think the term "exchange" means?

If a partner has his interest bought out by the partnership, what did he do with his interest? And what did he get in exchange for his interest?

[LCP]

I had always thought that any 50+% change of ownership triggered a forced termination.

I'm now given to believe that those rules only apply to sales and exchanges. If a partner is "bought out" by the partnership it does not apply. and the partnership goes on.

Correct me if I'm wrong please.