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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3159
Experience:  I've prepared all types of taxes since 1987.
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CLIENT IS A PARTNERSHIP WITH 2 PARTNERS AND ALOT OF DEBT.

Customer Question

CLIENT IS A PARTNERSHIP WITH 2 PARTNERS AND ALOT OF DEBT. NEW PARTNER PAYS OFF DEBT IN EXCHANGE FOR 70% OWNERSHIP OF THE PARTNERSHIP. THIS HAPPENED 4/3/14 AND NEW PARTNER HAS A 6/30 FISCAL YEAR END. WE WERE ADVISED TO FILE A 6/30 TAX RETURN AND A 12/31 TAX RETURN. DO WE NEED TO FILE A RETURN AS OF 4/3 OR DO WE JUST DO A SPECIAL ALLOCATION ON THE 6/30 RETURN?
NEW PARTNER CAME IN AND REVALUED ASSETS, HOW DOES THAT GET TREATED TAX WISE? ANY GUIDANCE WOULD BE GREATLY APPRECIATED
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.
Greetings,
Since more than 50% of the partnership interest was transferred a return is required for the old partnership as of 4/3 as a technical termination has occurred.
See http://www.aicpa.org/publications/taxadviser/2014/june/pages/case_study_june2014.aspx
"For tax purposes, the termination of a partnership or an LLC classified as a partnership (collectively referred to here as an LLC) is triggered if there is a sale or exchange of 50% or more of the total interests in the LLC's capital and profits within a 12-month period (Sec. 708(b)(1)(B)). "
As to revaluation, there is generally no tax impact to the partnership or the contributing partner as it is the partnership basis in assets on contribution to the new partnership that is being adjusted.
But the partners that continued in both the old and new partnerships likely could have a tax consequence since the technical termination is treated like a deemed distribution and the relief of liability due to the new partner can result in taxable income for the partners that no longer have such a large share of the partnership liabilities.
http://www.mondaq.com/unitedstates/x/25677/Corporate+Tax/Adding+a+New+Cash+Partner+to+an+Operating+Partnership
" Because a reduction in a partner's share of partnership's liabilities is treated as a distribution of cash, see §752(b), the contribution of cash can be taxable to a continuing partner whose outside basis is insufficient to absorb the constructive distribution, see §731(a)(1)."
Regulations on the basis adjustment are at
https://www.law.cornell.edu/cfr/text/26/1.743-1
A good plain language explanation of section 754 adjustment is at
http://www.forbes.com/sites/anthonynitti/2014/03/11/tax-geek-tuesday-tackling-the-dreaded-section-754-adjustment/
Based on the facts given in your question there will be a final return of the old partnership as of 4/3 and a short year return of the new partnership from 4/3 to 6/30 (presuming the new partnership does use a 6/30 fiscal year end).
You will be well advised to engage a tax practitioner with experience in partnership terminations and formations to assist in applying the complex rules to your particular facts and circumstances.
The links included above (sorry you will have to copy and paste to a browser) can give basic guidance.
Thank you.