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Tax issues to consider when a partnership interest is transferred.

By Colleen McHugh - Co‑Partner‑in‑Charge, Alternative Investments

Tax Issues to Consider When a Partnership Interest is Transferred

There can be several tax consequences as a result of a transfer of a partnership interest during the year. This article discusses some of those tax issues applicable to the partnership.

Adjustments to the Basis of Partnership Property Upon a transfer of a partnership interest, the partnership may elect to, or be required to, increase/decrease the basis of its assets. The basis adjustments will be for the benefit/detriment of the transferee partner only.

  • If the partnership has a special election in place, known as an IRS Section 754 election, or will make one in the year of the transfer, the partnership will adjust the basis of its assets as a result of the transfer. IRS Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner.
  • The partnership will be required to adjust the basis of its assets when an interest in the partnership is transferred if the total adjusted basis of the partnership’s assets is greater than the total fair market value of the partnership’s assets by more than $250,000 at the time of the transfer.

Ordinary Income Recognized by the Transferor on the Sale of a Partnership Interest Typically, when a partnership interest is sold, the transferor (seller) will recognize capital gain/loss. However, a portion of the gain/loss could be treated as ordinary income to the extent the transferor partner exchanges all or a part of his interest in the partnership attributable to unrealized receivables or inventory items. (This is known as “Section 751(a) Property” or “hot” assets).

  • Unrealized receivables – includes, to the extent not previously included in income, any rights (contractual or otherwise) to payment for (i) goods delivered, or to be delivered, to the extent the proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or (ii) services rendered, or to be rendered.
  • Property held primarily for sale to customers in the ordinary course of a trade or business.
  • Any other property of the partnership which would be considered property other than a capital asset and other than property used in a trade or business.
  • Any other property held by the partnership which, if held by the selling partner, would be considered of the type described above.

Example – Partner A sells his partnership interest to D and recognizes gain of $500,000 on the sale. The partnership holds some inventory property. If the partnership sold this inventory, Partner A would be allocated $100,000 of that gain. As a result, Partner A will recognize $100,000 of ordinary income and $400,000 of capital gain.

The partnership needs to provide the transferor with sufficient information in order to determine the amount of ordinary income/loss on the sale, if any.

Termination/Technical Termination of the Partnership A transfer of a partnership interest could result in an actual or technical termination of the partnership.

  • The partnership will terminate on the date of transfer if there is one tax owner left after the transfer.
  • The partnership will have a technical termination for tax purposes if within a 12-month period there is a sale or exchange of 50% or more of the total interest in the partnership’s capital and profits.

Example – D transfers its 55% interest to E. The transfer will result in the partnership having a technical termination because 50% or more of the total interest in the partnership was transferred. The partnership will terminate on the date of transfer and a “new” partnership will begin on the day after the transfer.

Allocation of Partnership Income to Transferor/Transferee Partners When a partnership interest is transferred during the year, there are two methods available to allocate the partnership income to the transferor/transferee partners: the interim closing method and the proration method.

  • Interim closing method – Under this method, the partnership closes its books with respect to the transferor partner. Generally, the partnership calculates the taxable income from the beginning of the year to the date of transfer and determines the transferor’s share of that income. Similarly, the partnership calculates the taxable income from the date after the transfer to the end of the taxable year and determines the transferee’s share of that income. (Note that certain items must be prorated.)

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the interim closing method, the partnership calculates the taxable income from 1/1 – 6/30 to be $100,000 and from 7/1-12/31 to be $50,000. Partner A will be allocated $10,000 [$100,000*10%] and Partner H will be allocated $5,000 [$50,000*10%].

  • Proration method – this method is allowed if agreed to by the partners (typically discussed in the partnership agreement). Under this method, the partnership allocates to the transferor his prorata share of the amount of partnership items that would be included in his taxable income had he been a partner for the entire year. The proration may be based on the portion of the taxable year that has elapsed prior to the transfer or may be determined under any other reasonable method.

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the proration method, the income is treated as earned $74,384 from 1/1 – 6/30 [181 days/365 days*$150,000] and $75,616 from 7/1-12/31 [184 days/365 days*$150,000]. Partner A will be allocated $7,438 [$74,384*10%] and Partner H will be allocated $7,562 [$75,616*10%]. Note that this is one way to allocate the income. The partnership may use any reasonable method.

Change in Tax Year of the Partnership The transfer could result in a mandatory change in the partnership’s tax year. A partnership’s tax year is determined by reference to its partners. A partnership may not have a taxable year other than:

  • The majority interest taxable year – this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%.

Example – Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority interest.

  • If there is no majority interest taxable year or principal partners, (a partner having a 5% or more in the partnership profits or capital) then the partnership adopts the year which results in the least aggregate deferral.

Change in Partnership’s Accounting Method A transfer of a partnership interest may require the partnership to change its method of accounting. Generally, a partnership may not use the cash method of accounting if it has a C corporation as a partner. Therefore, a transfer of a partnership interest to a C corporation could result in the partnership being required to change from the cash method to the accrual method.

As described in this article, a transfer of a partnership interest involves an analysis of several tax consequences. An analysis should always be done to ensure that any tax issues are dealt with timely.

If you or your business are involved in a transfer described above, please contact your Marcum Tax Professional for guidance on tax treatment.

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Withholding and information reporting on the transfer of private partnership interests

November 2020

Treasury and the IRS released on October 7 Final Regulations (the Final Regulations ) under Sections 1446(f) and 864(c)(8). Section 1446(f), added to the Code by the 2017 tax reform legislation, provides rules for withholding on the transfer or disposition of a partnership interest. Proposed Regulations were issued in May 2019, which laid the framework for guidance on withholding and reporting obligations under Section 1446(f) (the Proposed Regulations). The Proposed Regulations also addressed information reporting under Section 864(c)(8); these rules were finalized in September 2020. The Final Regulations retain the basic structure and guidance of the Proposed Regulations, but with various modifications. 

The Final Regulations apply to both publicly traded partnerships (PTPs) and private partnerships. This insight summarizes some of the changes applicable to PTPs but primarily focuses on private partnerships. A separate detailed Insight will be circulated with respect to PTPs. 

The Final Regulations generally are applicable to transfers occurring on or after the date that is 60 days after their publication in the Federal Register. However, the backstop withholding rules only apply to transfers that occur on or after January 1, 2022.

PTPs . Significantly, beginning January 1, 2022, the Final Regulations will require withholding under Section 1446(f) on both dispositions of and distributions by PTPs. This is a significant evolution of these rules, which to date have not been extended to PTPs due to the informational and operational challenges associated with imposing withholding taxes in respect of publicly traded securities. As will be discussed in more detail in the separate alert, these challenges result from the expansion of withholding obligations to new parties (e.g., executing brokers) that traditionally may not have been withholding agents and a substantial expansion of the qualified intermediary (QI) obligations. 

Other partnerships . The Final Regulations retain the presumption that withholding is required unless an applicable certification is provided. However, they now provide a limitation on the transferee’s liability to the extent the transferee can establish the transferor had no tax liability under Section 864(c)(8). The Final Regulations also include new or expanded exceptions to the withholding requirements. These include the ability to rely on a valid Form W-9 to prove US status as well as a new exception from withholding for partnerships that are not engaged in a US trade or business.

is assignment of partnership interest taxable

Download the full publication Withholding and information reporting on the transfer of private partnership interests

The takeaway.

The Final Regulation package retains the basic approach and structure of the Proposed Regulations, with some modifications. Taxpayers (particularly minority partners and taxpayers in tiered structures) who are intending to either eliminate or reduce the withholding tax should be mindful of the time restrictions in order to be compliant with a reduction or elimination of withholding and the potential difficulty in obtaining information from a partnership and should plan accordingly.

  • Final Regulations modify treatment of gain or loss on sale of partnership interest by foreign partner (October 21, 2020)
  • PwC Client Comments re Section 1446(f) Proposed Regulations (July 12, 2019)
  • Proposed regulations address tax withholding, information reporting on partnerships with US trade or business (May 31, 2019)

is assignment of partnership interest taxable

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is assignment of partnership interest taxable

The US Department of the Treasury and Internal Revenue Service (IRS) recently issued  final regulations under section 1446(f) , a provision enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) that generally imposes a withholding obligation on transfers of certain partnership interests (Note: All references to “section” are to the Internal Revenue Code of 1986, as amended (the “Code”) unless otherwise indicated). That provision, in conjunction with the enactment of section 864(c)(8) also under the TCJA, imposes a new statutory scheme in response to the ruling of the Tax Court in  Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner , 149 TC No. 3 (2017), aff’d, 926 F.3d 819 (DC Cir. June 11, 2019). The final regulations largely retained the rules set forth in the proposed regulations, with some additions and modifications. The following discusses some of the noteworthy provisions in the regulations.

SECTIONS 864(C)(8) AND 1446(F): IN GENERAL

Section 864(c)(8) generally provides that gain or loss derived by a nonresident individual or foreign corporation from the sale or exchange (or other disposition) of an interest in a partnership engaged in a US trade or business is treated as effectively connected income (ECI) to the same extent as such partner’s portion of distributive share of gain or loss that would have been ECI if the partnership had sold all of its assets at their fair market value as of the date of the partner’s sale or exchange. Section 864(c)(8) further provides that withholding is not required to the extent a transferor provides a nonforeign affidavit to the transferee, or if other regulatory exceptions are adopted (as discussed below).

Section 1446(f) generally requires a transferee of a partnership interest described in section 864(c)(8) to withhold 10% of the amount realized by the transferor. Moreover, if the transferee fails to withhold such amount, the partnership is required to deduct and withhold from distributions to the transferee a tax equal to the amount the transferee failed to withhold plus interest.

EFFECTIVE DATES

Generally, the final regulations apply to transfers of partnership interests occurring on or after 60 days after the final regulations are published in the Federal Register ( i.e. , December 2020). However, a partnership’s requirement to withhold amounts not withheld by the transferee applies to transfers that occur on or after January 1, 2022.

AMOUNT TO WITHHOLD

Amount realized.

The final regulations retained the definition of “amount realized” set forth in the proposed regulations, namely, that it generally includes (i) consideration paid by the transferee and (ii) the transferor’s share of partnership liabilities (determined under section 752 and the regulations promulgated thereunder). Thus, the amount realized includes any reduction in the transferor’s share of partnership liabilities. One commentator suggested the inclusion of any reduction to a transferor’s share of partnership liabilities could cause liquidity concerns when the amount of liabilities assumed exceeds the cash or other property exchanged in the transfer. Treasury and the IRS concluded that it was inappropriate to exclude a reduction in a transferor’s share of partnership liabilities from the amount realized, citing that such concerns are addressed in regulation 1.1446(f)-2(c)(3).

For purposes of determining the amount realized, the final regulations retain the look-through rule set forth in the proposed regulations for situations involving a transfer by a foreign partnership transferor that has a direct or indirect partner not subject to tax on gain from such transfer as a result of an applicable US income tax treaty. Specifically, the final regulations provide that a treaty-eligible partner is not a presumed foreign taxable person for purposes of determining the modified amount realized. A foreign partnership that provides a certification of modified amount realized must include, in addition to IRS Form W-8IMY ( Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting ) and a withholding statement, the certification of treaty benefits (on IRS Form W-8BEN ( Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) ) or Form W-8BEN-E ( Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) ), as applicable from each direct or indirect partner that is not a presumed foreign taxable person.

Certification of Maximum Tax Liability

The final regulations adopt the procedure in the proposed regulations limiting the withholding amount based on the maximum tax liability the transferor would be required to pay on the gain attributable to the partnership interest transfer. Specifically, the procedure allows a transferee to withhold based on a certification received from the transferor containing certain information relating to the transferor and the transfer, including the transferor’s maximum tax liability. A transferee may rely on a certification received from a transferor that is a foreign corporation, a nonresident alien individual or a foreign partnership regarding the transferor’s maximum tax liability. In addition, the final regulations permit transferors that are foreign trusts to use the maximum tax liability procedure to reduce the amount otherwise required to be withheld. Similar to the approach taken with respect to foreign partnerships, such rules treat the foreign trust as a nonresident alien individual for purposes of computing its maximum tax liability.

OBLIGATION TO WITHHOLD

In general, as noted earlier, the transferee of a partnership interest must withhold a tax equal to 10% of the amount realized by the transferor on any transfer of a partnership interest unless an applicable exception applies (as discussed below).

The final regulations maintain this broad presumption, despite comments to the proposed regulations noting that such presumption may impose a withholding obligation on  any  transfer of a partnership interest, regardless of whether the partnership in question has assets in, or a connection to, the United States. Treasury and the IRS justified this broad approach in the final regulations by noting that a transferee will not know whether a transfer results in tax on gain without information from the transferor or the partnership. Therefore, the transferee must presume that a transfer is subject to withholding unless it obtains a certification establishing otherwise.

Given the broad application of the final regulations, even non-US partners in non-US partnerships may be caught up in the withholding requirements of partnership interest transfers. This can be a trap for the unwary because it is not always obvious whether a non-US entity or investment vehicle is, by default, classified as a partnership for US income tax purposes. For example, in the absence of a US entity classification election confirming its US income tax classification, the US income tax classification of Brazilian funds, such as FIMs ( fundos de investimento multimercado ) and FIPs ( fundos de investimento em participações ), depends on certain peculiarities of the given entity’s governing documents. Thus, investors and their advisors should be careful to consider the impact of the final regulations not only on US partnerships but also on non-US partnerships and investment vehicles.

The final regulations provide that a partnership is permitted to determine that it does not have a withholding obligation under the final regulations if it possesses a valid IRS Form W-9 ( Request for Taxpayer Identification Number and Certification)  for the transferor to establish the transferor’s non-foreign status, even if the transferee does not provide a withholding certificate to the partnership.

LIABILITY FOR FAILING TO WITHHOLD

As noted above, if a transferee fails to withhold any amount required to be withheld, the partnership must deduct and withhold from distributions to the transferee a tax in an amount equal to the amount the transferee failed to withhold, plus interest. A partnership may determine its withholding obligation by relying on information provided in a certification received from the transferee ( i.e. , a withholding certificate). Generally, a transferee is required to provide a partnership with a certification that it has complied with its partnership interest transfer withholding obligation, including whether it is relying upon an exemption from such withholding. The final regulations add a provision that any person required to withhold is not liable for failure to withhold, including any interest or penalties resulting therefrom, if such person establishes to the satisfaction of the IRS that the transferor had no effectively connected gain subject to tax on the transfer of the partnership interest. However, it may be difficult for the withholding agent to convince the IRS that no such taxable gain exists without cooperation from the transferor.

Because partnerships can become liable for deducting and withholding tax (and interest) that a transferee failed to withhold from a transferor, partnerships should consider reviewing their partnership agreements and due diligence requirements related to transfers of partnership interests. For instance, a partnership may include provisions in its partnership agreement that a transfer of a partnership interest may only be permitted if (among other customary requirements) a transferee provides a valid certificate establishing an exception to withholding or certifies that it will withhold on the transfer (accompanied by proof of such actual withholding).

RELIANCE ON CERTIFICATIONS PROVIDED BY TRANSFEROR, TRANSFEREE AND PARTNERSHIP

In order not to withhold or to withhold a reduced amount, a transferee is permitted to rely on a certification it receives from a transferor or the partnership unless it has actual knowledge that the certification is incorrect or unreliable. Moreover, the partnership may rely on a certification received from the transferee unless the partnership knows or has reason to know it is incorrect or unreliable. Such “reason to know” standard requires the partnership to review the certification to confirm that it does not have information suggesting the certificate is incorrect or unreliable. On that basis, transferees might consider including a pre-closing condition (and other relevant contractual provisions) in a purchase agreement that the partnership will confirm the certification from the transferor and/or the partnership will itself provide a certification.

WITHHOLDING EXCEPTIONS

The final regulations generally retain the withholding exceptions of the proposed regulations with certain modifications. Importantly, the transferor’s distributive share of ECI exception no longer requires effectively connected income or loss in a given tax year, and a new no trade or business exception has been adopted.

The final regulations do not include any withholding exceptions for: (i) disguised sales; (ii) transferors that are “withholding foreign partnerships” and “withholding foreign trusts” if they enter into a withholding agreement with the IRS; and (iii) earnout payments entitling the transferor to future payments based on specific goals or metrics.

Non-Foreign Status

The transferor may provide a certificate to a transferee certifying as to its non-foreign status. For that purpose, a certification of non-foreign status includes a valid IRS Form W-9. Moreover, a transferee may rely on a valid Form W-9 it already possesses from the transferor provided it meets the certification requirement as set forth in the final regulations.

The transferor may provide a certification that no gain will be realized by the transferor. Importantly, the transferor must certify that ordinary income attributable to property described in Code section 751 (“hot assets”) utilized in or attributable to a US trade or business would not be recognized in connection with the transfer.

Deemed Sale

A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the partnership that if the partnership sold all of its assets on the “determination date,” either: (1) the partnership would have no effectively connected gain, or if the partnership would have a net amount of such gain, the amount of the partnership’s net gain that would have been effectively connected gain would be less than 10% of the total net gain; or (2) the transferor would not have a distributive share of net gain from the partnership that would be ECI, or if the transferor would have a distributive share of ECI, the transferor’s allocable share of the partnership’s net ECI would be less than 10% of the transferor’s distributive share of the total net gain from the partnership. For this purpose, and generally, the “determination date” is the transfer date or any day that is no more than 60 days before the date of the transfer.

No US Trade or Business

Addressing comments to the proposed regulations, Treasury and the IRS included a new exception from withholding not included in the proposed regulations. Specifically, a transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the partnership that it was not engaged in a US trade or business during the partnership’s tax year, up to and including the date of the transfer. Partnerships that invest in assets that do not give rise to ECI ( e.g. , corporations, real estate investment trusts, etc.) should find this exception useful.

Transferor’s Distributive Share of ECI

A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the transferor stating that: (a) it has held its partnership interest for the prior three tax years (the “look-back period”); (b) the transferor’s (and its related partners’ within the meaning of sections 267(b) and 707(b)) distributive share of gross ECI in each of the taxable years within the look-back period was less than $1 million in the aggregate; (C) the transferor’s distributive share of gross ECI in each of the years within the look-back period is less than 10% of its total distributive share of gross partnership income; and (D) the transferor’s share of ECI was timely reported on its tax return and all US taxes on such ECI were timely paid.

Notably, a transferor may only provide a certificate pursuant to that exception if it has received a Schedule K-1 from the partnership reflecting distributable gross income for each of the years within the look-back period. Importantly, unlike the proposed regulations, the final regulations do not require that the transferor have received an IRS Form 8805 ( Foreign Partner’s Information Statement of Section 1446 Withholding Tax ) and have effectively connected gain or loss, thus making this exception available for partners of partnerships without ECI. Practically, the use of this exception may be limited because some partnerships do not provide K-1s to their foreign partners unless and until the partnership derives ECI.

Certification of Nonrecognition by Transferor

A transferee may rely on a certification from the transferor stating that by reason of the operation of a nonrecognition provision of the Code, the transferor is not required to recognize any gain or loss with respect to the transfer of the partnership interest. The final regulations also contain a partial nonrecognition exception that may apply in certain circumstances.

Treaty Claims

A transferor may provide a certification to the transferee that it is not subject to tax on any gain upon transfer of the partnership interest because of an applicable tax treaty limiting the ability of the United States to tax income that does is not attributable to a permanent establishment. To avail itself of that exception, the transferor must make the certification on a valid IRS Form W-8BEN, or Form W-8BEN-E. In addition, the transferee must mail a copy of the certification to the IRS within 30 days of the transfer. Before making such certification for purposes of invoking the treaty claim exception, a transferor should consider other factors that may give rise to a permanent establishment, including whether the US office of the partnership constitutes a fixed place of business as defined by the applicable treaty.

The IRS indicated its intention to revise the instructions to Forms W-8BEN and W-8BEN-E to describe the information required to be provided for making a treaty benefits claim for purposes of section 1446(f), including a treaty claim made with respect to a transfer of a publicly traded partnership (PTP) interest.

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Assignment Of Partnership Interest

Jump to section, what is an assignment of partnership interest.

  • Information about the partnership like the name of the business
  • The type of interest being transferred
  • The names and information of both the assignor and the assignee
  • Information about the remaining partners

Common Sections in Assignments Of Partnership Interest

Below is a list of common sections included in Assignments Of Partnership Interest. These sections are linked to the below sample agreement for you to explore.

Assignment Of Partnership Interest Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.37 15 dex1037.htm FORM OF AGREEMENT AND ASSIGNMENT OF PARTNERSHIP INTEREST , Viewed October 25, 2021, View Source on SEC .

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Yvette Brooks-Williams: I see that we're nearing the top of the hour. So for those of you just joining, welcome to today's webinar Sale of Partnership Interests: Comprehensive Case Study. We are glad you're joining us today. My name is Yvette Brooks-Williams, and I am a Senior Stakeholder Liaison with the Internal Revenue Service. And I will be your moderator for today's webinar, which displayed it for 90 minutes. Now, before we begin, if there is anyone in the audience that is with the media, please send an email to the address on the slide. And make sure you include your contact information. And the news publication that you're representing. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. And as a reminder, this webinar will be recorded and posted to the IRS video portal in a few weeks. The portal is located at www.irsvideos.gov. Please note, continuing education credit or certificates of completion are not offered if you view any version of our webinars after the live broadcast. Now we hope you won't experience any technology issues. But if you do, this slide shows helpful tips and reminders. We posted a technical help document and you can download from the material section on the left side of your screen. It provides the minimum system requirements for viewing this webinar, along with some best practices and quick solutions. And due to compatibility issues, we encourage you to use a browser other than Internet Explorer, you may experience frozen screens and other technology issues if you choose to use Internet Explorer.

Now if you're using anything other than Internet Explorer and you're still having problems, try one of the following. First, close the screen where you're viewing the webinar and relaunch it.

And you can also just click on settings on your browser viewing screen and select HLS. Now you should have received today's PowerPoint and a reminder email. But if not, no worries we got to cover. You can download it by clicking on the materials drop down arrow on the left side of your screen as shown on this slide. And we've also included a resource document with links related to today's topic that you can download. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers, please click the closed captioning drop down arrow located on the left side of your screen. This feature will be available throughout the webinar. If you have a topic specific question today, please submit it by clicking the ask question drop down arrow to reveal the textbox. Type your question in the textbox and then click submit or send. Very important, please do not enter any sensitive or taxpayer specific information into the textbox. Now during the presentation, we'll take a few breaks to share knowledge based questions with you. And at those times a polling style feature will pop-up on your screen with a question and multiple choice answers. So select the response you believe is correct by clicking on the radio button next to your selection and then click submit. Some people may not get the polling question and this may be because you have your pop-up blockers on. So please take a moment to disable your pop-up blocker now, so that you will be able to answer the question. So we're going to take some time right now and assess the polling feature. Here's your opportunity to ensure that your pop-up blocker is not on. So that you can receive the polling questions throughout the presentation. So here's the polling question. How many times have you attended an IRS national webinar? A, this is your first time; B, One to five times; C, six to 10 times; D, 11 to 15 times; or E, 16 or more. So take a moment and click the radio button that corresponds to your answer. Select your answer to this question, how many times have you attended an IRS national webinar? A, this is your first time; B, one to five times; C, six to 10 times; D, 11 to 15 times; or E, 16 or more. So I will give you just a few more seconds to make your selection. Okay, we're going to stop the polling now. Let's see how often you've attended an IRS national webinar. Okay, I see that 18% of you are first time attendees. So welcome. We are glad you are joining us today. For those of you who have joined us for multiple webinars, welcome back. And I see that 27% of you have attended one to five webinars, 17% of you have attended six to 10 webinars, 10% of you have attended 11 to 15 webinars. And wow. 28% of you have attended 16 or more webinars. Now we hope you received the polling question and were able to submit your answer. If not, now is the time to check your pop-up blockers to make sure you have turned it off. We've included several technical documents that describe how you can allow pop-up blockers based on the browser you're using. We have documents for Chrome, Firefox, Microsoft Edge, and Safari for Mac users. You can access them by clicking on the materials drop down arrow on the left side of your screen. So again, I want to welcome you and thank you for joining us for today's webinar. Before we move along with our session, let me make sure you're in the right place. Today's webinar is Sale of Partnership Interest: Comprehensive Case Study.

And this webinar is scheduled for approximately 90 minutes. So Marietta is a Team Manager in LB&I's Pass-Through Entities Practice Area and leads the PTE Campaign Development Team. So I'm going to turn it over to Marietta to introduce our speakers. Marietta? Marietta Pietrzak: Thank you, Yvette. My name is Marietta Pietrzak and I'm the Team Manager of LB&I's Pass-Through Entities Practice Area. And I've been with the IRS for 35 years. I lead the Pass-Through Entities Campaign Development Team, which develops and evaluates campaigns involving pass-through entities. And my team was instrumental in getting the sale the partnership interest campaign approved into the field. I would like to now present the speakers too, they are Andrew Dux, who is currently a Senior Revenue Agent with a Partnership Practice Network Team and has been with the IRS for 16 years. Andrew has been serving as and as one of our best partnership subject matter experts co-leading the sale of partnership interest campaign for the past four years.

Geoff Gaukroger is currently another of our best partnerships Subject Matter Experts in the Partnership Practice Network, and has been with the IRS for 19 years. Prior to joining the IRS, Geoff worked in Public Accounting for five years, and also in the corporate world for seven years. Geoff has been the lead on the Sale of Partnership Interest Campaign for the past four years. And with that, I hope you enjoy the webinar, and I will now hand it over to Geoff. Geoff Gaukroger: All right. Thanks, Marietta. So for today's webinar, first of all, what we plan to do is introduce the tax law relating to the Sale of Partnership Interest. Then we plan to do an overview of what we've learned from co-leading this campaign. And we're going to do that through a case study that we've created. And then finally, our goal is to explain what the IRS position is with respect to some of the common sale of partnership interest tax issues we've seen. Okay, so this is not going to be the same old sale of partnership interest class. There's going to be some new things that you haven't heard before. So we know, yes, you've all heard the tax law. What is going to be new is Andrew and I we've worked with tax practitioners across the country. We've identified various ways in which the sale partnership interests have and Section 751 have been reported, so we've seen what practitioners are doing, I'll describe that. In addition, we're going to dive into the important concept of valuation. So, as part of the sale of partnership interest, Section 751 hypothetic sales needs to be done. And valuations are required. And that is a very subjective topic. But we plan to bring a straight forward approach that the IRS is using as our position in these exams. Okay, to get started this position of a partnership, and there's five ways a partner may dispose of a partnership in which are sale, exchange, gift, death, or abandonment. And then for today's webinar, we're going to limit our discussion just to sales of partnership interest. So a sale of a partnership interest, that's when an existing partner sells part or all of their partnership interest to an existing or new partner. Okay, so two theories of partnership taxation. You've probably seen a slide like this, that breaks up the two major theories underlying partnership taxation, which is Entity Theory, and the Aggregate Theory. So Entity Theory, this is the concept that most of us are more familiar with. This is where the business is a distinct and separate entity from its owner.

Whereas the Aggregate Theory, this is a more complex concept. And in this webinar, we're going to dig into this concept of Section 751, which has Aggregate Theory as its base. Again, real quick, Entity Theory, the business is treated as a separate and distinct entity in and of itself.

Partnership or LLC units can be purchased or sold to transfer ownership of the entity. And the entity on its own makes its own elections and has methods separate of counting from their partner. So let's jump back to Aggregate Theory. Aggregates Theory, here the business is considered, an aggregate of the individual co-owners, the co-owners, they bound themselves together with intention of sharing gains and losses. So, under the Aggregates Theory, each partner is treated as the owner of an interest in the partnership assets, liabilities and operations. So, for example, we have two 50-50 partners, each partner is considered an owner of all the assets and liabilities, and each have a 50% ownership interest in each item held by the partnership. A computation of gain or loss. So when a partner who sells their partnership business, they must recognize gain or loss on that sale. The total gain or loss is the difference between the sales proceeds received less the partners tax bases in their partnership venture.

This is a concept most accountants would know, sales proceeds minus basis equals gain. Let's not go too fast here, let's focus on each one of these items. So the first one, sales proceeds, those items are listed on this slide at $50,000 in cash received, in this example. The second item basis, this is computed by computing the partners interaction with the partnership since inception. So you'd start with the partners initial contribution to the entity, then you adjust each year based on the Schedule K-1 for income loss, debt distributions, et cetera rather straightforward. Okay, now the last item the gain. Here in our example, we're showing a $40,000 gain. This is the gain and we're done. And that's it. So no, that is the whole point of this webinar is to understand how this $40,000 gain will be taxed. The gain may be bifurcated into components and parts taxed at different tax rates. You may ask why? Well, because of that Aggregate Theory, we must look inside the entity to see the type of assets held by the partnership. So if this $40,000 gain had been from the sale of corporate stock, well, you would be done and you would just tax that gain at the correct tax rate. That is the Entity Theory.

However, for partnerships, the Aggregate Theory is employed for determining how to tax this $40,000 gain. Okay, as Andrew and I have presented this in the past we've got a lot of commonly asked questions, so we're going to address some of them as we go. So one of our first commonly asked questions from previous webinars is: Can the service determine the buyer should have paid more for the sellers partnership interest? The service would not say the buyer should have paid $500,000 in cash for partnership interest when they actually paid $50,000. Bargain sales are allowed in that outside transaction. However, the service may challenge the methodology and with the partnership has assigned fair market value to its assets. So this internal computation, the IRS may question. All right character of gain or loss. So, this is what we're going to dig into it. The first bullet here states that gain or loss in the sale of partnership interest results in capital gain. That is the simple Entity Theory concept, and that is the general rule on partnerships. And it is possible that is the answer. But the tax law requires us to employ the Aggregate Theory here and look within the partnership and the type of assets it holds, if the partnership entity holds certain types of assets, which are called, 751 assets, then a portion of the gain or loss on the sale of partnership interest by the partner must be treated as ordinary instead of capital. Okay, next slide, we're going to see what this looks like. Character of gain or loss continue. So, this ordinary gain or loss portion, it is subtracted from the total gain or loss. The remaining gain is then capital gain or loss. So it is possible for a partner to recognize ordinary gain and capital loss on the sale of its partnership interest. The remainder of this webinar we're going to address what these 751 assets are and how the computation is made in order to determine the amount of the ordinary portion. So I want to mention a second complexity here. So we stated the ordinary portion of the gain is going to be subtracted from the total. Remainder would be capital. However, not all capital gains are taxed at the same rate.

The capital gains from collectibles are taxed at a maximum rate of 28%. Unrecaptured Section 1250 gain is taxed at a rate of 25%. And then all other capital gains are taxed at a maximum rate of 20%. And real quick note that, this 20% capital gain rate, that's not taking into account the additional 3.8% tax relating to the net investment income tax, which can apply in certain situations. So my point here is that in step one, we are going to bifurcate the total gain on the sale the partnership interest between its ordinary portion and its capital portion. Then once we determine the capital portion, we're then potentially going to bifurcate the capital gain into components. This to emphasize again, this is all done based on the Aggregate Theory. Okay, so if I confuse you at all, hang in there. This is the extent of the new topics we're going to discuss today. The rest of this webinar explains it in more detail and we're going to provide examples. Okay, real quick, another commonly asked questions we want to cover. Why is Section 751 gain considered ordinary gain instead of capital gain? So partnerships and the partners, they receive ordinary deductions under Schedule K-1. So Section 751 gain, it's a way of equaling out the economic reality when a sale transaction occurs. Okay, Yvette. We are ready for our first polling question. Yvette Brooks-Williams: That is right. So before we get to our first polling question, there were some questions and comments about not receiving the test polling question, then if you did not receive the polling question, now it's the time to check your pop-up blocker to make sure you have turned it off. We've included several technical documents that explain and describe how you can allow pop-up blockers based on the browser you're using. So we have the documents in Chrome, Firefox, Microsoft Edge, and Safari if you're using a Mac. And you can access them by clicking on the materials drop down arrow on the left side of your screen. So I hope that information is helpful. And audience I hope you are ready. Here is our first polling question. What code section requires a partner to report ordinary gain if the partnership owns assets that generate ordinary income at the time the partner sells its partnership interest? Now, is it A, Section 61; B, Section 731; C, Section 741; or D, Section 751. So take a moment to review the question again, and click the radio button that best answers the question. What code section requires a partner to report ordinary gain if the partnership owns assets that generate ordinary income at the time the partner sells its partnership interest? Your choices are again A, Section 61; B, Section 731; C, Section 741; or D, Section 751. And I'll give you a few more seconds to make your selections. Okay, we're going to stop the polling now and let's share the correct answer on the next slide. And the correct response is D, Section 751. I see that 83% of you responded correctly. Great job. Let me turn it back over to Geoff to give you some more information. Geoff Gaukroger: All right, thank you, Yvette. Okay. So, last question was something, what are Section 751 assets. So we introduced the gain for sale partnership interests.

Then we discussed the Section 751, which applies due to the aggregate theory. So what is it? So, as listed on this slide, Section 751 assets includes one, unrealized receivables and two, inventory items. And note, the most common type of Section 751 assets are depreciable and amortizable assets, which we're going to discuss further on the next slide. Since depreciable assets are such a big deal, we want to begin to emphasize it. So some practitioners will state Section 751 doesn't apply to their case, or state section 751 doesn't apply because there's no depreciation recapture in the underlying assets. But in reality, that's almost impossible in the majority of the cases, for a company that has hundreds to thousands of assets being just depreciated at accelerated rates, it's very unlikely the fair market value of these assets will be exactly equal to the tax net book value for each and every asset. So although this concept of 751 is more complicated, it's often overlooked or not dealt with correctly. The fact is sales of partnership interests are very common issues and practitioners need to be aware of the correct 751 treatment for their clients. All right, we're going to jump into the hypothetical sale of partnership assets. So, the portion of the gain or loss that is subject to ordinary income treatment under Section 751, it is determined through a hypothetical sale of all partnership assets. Partnership is treated as selling all of its property in a fully taxable transaction for cash in an amount equal to the fair market value. So the Accounting Controller is going to do a side computation to determine this, a five step hypothetical sale requirement is discussed in more detail on the next slide. Note Section 751 assets or items that will cause ordinary income treatment and this includes unrealized receivables and inventory and depreciation recapture is a component of unrealized receivables as defined in the code. All right, hypothetical sale partnership asset. Each partnership asset must be classified as a 751 property or an item of other property. Once that's separated, then the gross fair market value of each asset must be determined. Basically allocating the total sales price of all your assets, the amount of the computed Section 751 total gains must then be allocated to each partner based on the partnership agreement, or the partners interest in the partnership. The amount of any 751 gain computed in Step 3 must be adjusted for any pre-contribution built in gain or loss that certain partners have contributed that type of property or any Section 743(b) basis adjustments allocable to the selling partner. Lastly, the residual gain is computed which is the total gain on the sales of the partnership interest, overall total gain less the amount of the 751 ordinary portion, computed in Step 4, it is this residual gain that is subject to the capital gain treatment. Okay, now that we've introduced the hypothetical sale of partnerships assets concept, we wanted to discuss some common areas of non-compliance that Andrew and I've seen as executing these exams.

In our experience, it is common that partnerships do not perform a hypothetical sale partnership assets as required when one or more partners sell their partnership interest, they need to notify the partnership and that Accounting Controller needs to perform this hypothetical sale because the partners do not have the general ledger or the fixed asset schedule to do this computation. Additionally, for partnerships that do conduct a hypothetical sale partnership assets, it is common that the fair market value assigned to the partnership assets at the time of the sale, not reasonable. So, another point I want to emphasize starting in 2019, the Form 1065 Schedule K-1 was changed to require partnerships to report each selling partners' share of Section 751 gain or loss, collectibles gain or loss or unrecaptured Section 1250 gain directly on the Schedule K-1 in box 20., you have to include an Alpha Code. In the past, this was just provided by the partnership as a white paper attachment to the Form 1065. Okay, real quick, two more of these commonly asked questions we have. How does a minority partner determine if there's any gain subject to Section 751 recapture? The answer, any partner that sells a partnership interest should notify the partnership and the partnership should provide the selling partner the information needed to prepare a correct return. Another question that Andrew and I get in LB&I (Large Business and International) is: Does Section 751 apply to the smaller SBSE partnerships?

Yes, requirements to conduct a hypothetical sale computation and inform the partners of the gains tax at these higher rate than the long-term rate applied to all Form 1065. Okay, Yvette. I think we're ready for our second polling question. Yvette Brooks-Williams: I think you're right, Geoff.

Audience, here's our second polling question. Who is responsible for conducting a hypothetical sale computation to determine Section 751 ordinary gain? Is it A, the purchasing partner; B, the selling partner; C, the partnership; or D, no hypothetical sale computation is required. So take a moment and review the question again, and click the radio button that best answers the question who is responsible for conducting a hypothetical sale computation to determine Section 751 ordinary gain? Again, the choices are A, the purchasing Partner, B, the selling partner, C, the partnership or D, no hypothetical sale computation is required. I'll give you a few more seconds to make your selection. And okay, we're going to stop the polling now. And let's share the correct answer on the next slide. And the correct answer is C, the partnership. Now let's see, I see that 76% of you responded correctly. So Geoff, I'm going to ask you to clarify why C is the correct answer? Geoff Gaukroger: Sure, understand. This is great and this is a good question. So and the audit regimes have changed by TEFRA, non-TEFRA BBA. It's very clear now that the partnership is the one that has the books and records for the fixed assets. They're the ones that have the information. And along with this new requirement that it must be put on the Schedule K-1, it is the requirement of the partnership to do this computation. All right, let's move on to our next slide. So we said there'd be some new things that we can share about non-compliance that Andrew and I have seen as we've been doing all these exams. And so we're going to start with the partnership. So the first area of non-compliance we've seen is the hypothetical sale computation is not being performed, the information is not being provided to the partners and they are not made aware of the Section 751 and components of capital gains that must be taxed at the higher unrecaptured Section 1250 gain. So once we start an exam, partners may initially indicate that they don't have to conduct a hypothetical sale computation claiming that all their assets have a fair market value equal to the tax net book value. However, assets tax net book value is not an estimate of fair market value. You know rarely would the tax net book value be the same as the fair market value. Good examples are if a taxpayer takes bonus depreciation or expense an asset under 179 or uses MACRS double-declining accelerated depreciation method, these methods do not mean that assets fair market value decrease at the same accelerated rate at which the tax net book value has decreased. We often see partnerships using the wrong method valuation methodology as well. So, a lot of the people think the correct fair market value is a liquidation or fire sale value for each asset. However the correct valuation methodology should be a going concern and in-continued-use methodology is where the buyer is going to continue to use these assets in this business to generate revenue. Another commonly asked question, how can a partnership determine Section 751 gain, if it does not know the partners outside basis? Again, just the component, how can the partnership figure out for the partner. The answer is: The partnerships responsibility is to look at the assets owned by the partnership at the time the sale took place. The partnership is really looking at the fair market value of the 751 assets and just providing the partner with their share of the ordinary gain, it is the partner who then would be responsible for determining the overall gain based on their sales proceeds and basis and then adding in the ordinary portion based on the information from the partnership. Okay, next slide please. Here we have more non-compliance and now at the partner level. What are we seeing? Let's just assume the partnership conducted the hypothetical sale analysis of partnership assets and did the correct hypothetical sale with the right fair market values. The partnership should have provided each selling partner their share of the gain to be taxed at the higher rates on their Schedule K-1 in Box 20. So what we've seen is that even if the partnership does everything right it is not uncommon for the partner to fail to report its share section 751 or unrecaptured 1250 gain on their taxable partner return. Again another item, if the installment method is used. The selling partner does not always report the entire amount of the 751 gain in the year of the sale, which is required under the law. And a final area of partner non-compliance is the partner underreporting the total amount of the gains from the sale of its partnership interest due to either overstating its basis or understating the sales proceeds. All right, on the next slide, more partner level common areas of non-compliance. So mentioned a few slides ago that starting in 2019, the Schedule K-1 instructions have been modified to include this requirements of reporting the Section 751 collectibles and unrecaptured Section 1250 gain, a separately stated item with an Alpha Code in Box 20. Two more of these commonly asked questions, Is all Section 751 gain recognized in the year of the sale even if the sale as a partnership interest qualifies as installment sale? Yes, Section 751 gain is not eligible to be reported on the installment method. Second one, If a partnership interest is sold at no economic gain or loss, breakeven, is it possible that 751 gain still exists? Yes, a partner could recognize ordinary gain under 751 and have a capital loss in an equal amount. So even if partner has an overall net loss on the sale of partnership interest transaction, they still could have a 751 ordinary gain component to report, the total loss would be the same. Okay, so I'm going to start the example here. So let's look at a fact of a hypothetical example. Andrew and I are going to go over throughout today's webinar, ABC Partnership, they own and operate an apartment complex, it is a calendar year entity and one of the partners in ABC Partnership, Partner C sells his entire 40% interest on September 30, 2020 for $20,000 in cash and Partner C was relieved of $4,000 of liabilities as part of this sale transaction. Continuing on, Partner C's outside basis at the time the sale was $6,000. But note this included $2,000 in tax capital plus his allocated $4,000 of partnership liability, giving him a total outside basis of $6,000. Therefore, Partner C has an $18,000 gain, and let's focus on a number here, we're going to be revolving around that a lot, is it a sale, so the total sales price was $24,000, which is $20,000 in cash plus because they're relieved the partial liabilities, additional $4,000 in proceeds. So, the total proceeds is $24,000. We computed the basis of $6,000, $24,000 minus $6,000 gives us the $18,000 gain. All right, throwing some more facts here in the setup for Andrew, the partnership did not conduct a hypothetical sale computation as of September 30, 2020. It did not determine the fair market value of all partnership assets as of the date of the sale. The partnership took the position that all the partnership assets had a fair market value equal to their tax net book value. The partnership did not file a Form 8308 to disclose the transaction on its partnership tax return, partnership did not check the box on Partner C's Schedule K-1 to acknowledge Partner C had a sale of a partnership interest in 2020. So during an exam, partnership's position was that all gain to be recognized by the selling partner would be capital gain that $18,000. Therefore, the partnership did not provide information on the selling partner's Schedule K-1 in the box 20 with Alpha Code to classify any of the gain as subject to ordinary or unrecaptured 1250, Section 1250. All right, couple more facts here. Partner C, is an individual that files a 2020 Form 1040. So I mentioned the gain was $18,000. The partnership reported the entire $18,000 gain on Form 8949 as capital gain, and no ordinary was reported on Form 4797. Okay, let me hand over to Andrew, he's going to delve deeper into this example. Andrew Dux: Okay, thanks, Geoff. This is the depreciation schedule of ABC Partnership that Geoff discussed in the previous couple of slides. Partner C sold his 40% interest in ABC Partnership, as Geoff just discussed, so as you can see, there were six assets owned by the partnership at the time the partner sold his interest, a building, carpet, a parking lot, a range, a refrigerator and goodwill. The building was placed in service in 1996 and the other assets were placed in service more recently. ABC accelerated depreciation of these assets for tax purposes. The tax net book value column or the Partnership claimed bonus depreciation for both the parking lot and the refrigerator which adjusted tax basis, shows the tax net book value on the date when the partner sold his partnership interest on September 30 2020. So the question that we need to consider is what is the fair market value of these assets on the date of the sale. This spreadsheet is exactly the same as the one on the previous slide with the exception of using the tax net book value of each asset as the assets fair market value. It is common to see partnerships use tax net book value as the fair market value of their assets. By doing this, the partnership is saying the selling partner does not have to taint any portion of their gain on the sale as subject to higher than the long-term capital gains tax rates. The building has an estimated fair market value of $924, if we just use tax net book value. However, buildings generally do not decrease in value, except for in unusual situations like an economic depression. The carpet has an estimated fair market value of $0, is $0 really an appropriate fair market value if the carpet is still being used by the partnership in their business operations? The parking lot has an estimated fair market value of approximately 31% of cost. However, parking lots generally last many years in a partnership's business operations. The range has an estimated fair market value of $432, which is less than 20% of costs even though the asset is only three years old at the time of the hypothetical sale.

Using the fair market value methodology, we are saying that the partnership replaces the ranges quicker than every four years. Is the apartment complex really replacing their ranges this often?

The refrigerator has an estimated fair market value of $0, is $0 really an appropriate fair market value. The refrigerator was only nine months old at the time of the hypothetical sale, and will likely be used for many more years by the apartment complex. Finally, the tax goodwill asset has an estimated fair market value of just over $3,000 in comparison to its cost basis of $7,000. So with the limited amount of information available, let's ask ourselves, is the fair market value equal to each assets equal to tax net book value really correct. And we're going to come back to that question a little bit later, when we revisit this depreciation schedule again.

We've introduced the facts with example 1 and before we go further with this example, we wanted to take a step back and consider what is meant by the term fair market value. Most of us on this webinar are accountants, not valuation experts. However, it's important to consider what the definition of fair market value is for purposes of conducting a hypothetical sale of partnership assets. This area of the tax law does not provide valuation techniques for assets. Rather, the internal revenue code just uses the term fair market value. The most commonly referenced IRS cite regarding fair market value is Revenue Ruling 59-60. Revenue Ruling 59-60 characterizes the arm's length definition of fair market value as the price at which the property would change hands between a willing buyer and a willing seller. Therefore, when a partner sells a partnership interest, we look at a fair market value using a going concern or in-continued-use valuation.

The seller is not selling these partnership assets at a bankruptcy auction or a liquidation sale.

Instead, they're selling them to a willing buyer that wants to continue to use them in an ongoing business to continue to generate revenue. Often when there's a sale of a partnership interest, the buyer and seller have a signed sales agreement, which discusses the fair market value, they agreed to assign to the partnership's assets. One of the reasons this agreement exists is to treat these assets consistently between the buyer and the seller. A buyer assigns values for purposes of determining how their purchased assets will be depreciated. We have reviewed sale of a partnership interest transactions where the buyer prepares a Section 743(b)

adjustment to depreciable assets with short class lives. So they are taking the position that the fair market value of the partnerships depreciable assets is greater than the assets' adjusted tax basis. However, in the same transaction, the seller takes the position that all depreciable fixed assets have a fair market value equal to their adjusted tax basis. Additionally, we have reviewed sale of a partnership interest transactions where the buyer and seller's fair market value allocations for partnership assets is consistent. If the service believes the fair market value assigned for Section 751 purposes is not reasonable. It will make adjustments even if the partnership Section 751 valuations are consistent with how the buyer allocated them for Section 743(b) purposes. It is common for a seller to obtain an appraisal for further support its valuation assigned to the partnership assets. Although the seller may get an independent appraisal to support their position, the seller is motivated to have lower fair market values assigned to the partnership assets. These appraisals often are not arm's length. Treasury Regulation 1.1060-1(d) Example 2 gives the service the authority to determine the correct fair market value when the taxpayer has failed to do so. Just because the taxpayer has an appraisal or there's an agreement between two unrelated third-parties does not mean the service will respect it. Agreements often seek to maximize tax savings between the buyer and the seller. However, these agreements do not override the tax law requiring items to be valued at their fair market values. Okay, so two more commonly asked questions that we've received from prior webinar presentations. If the partners agree in the sales agreement, that all assets have a fair market value equal to tax net book value, does the partnership still have to conduct a hypothetical sale of all assets? And the answer is yes, just because the legal agreement states the fair market value of all assets is equal to their tax net book values does not mean this is the reality of the situation. A partnership is required to conduct a hypothetical sale computation with reasonable fair market values in order for the selling partners to report their correct share of ordinary gain on the sale transaction. IRS counsel supports the agents' requirement under Treasury Regulation 1.1060-1(d) Example 2 to correct valuations when the amounts are not representative fair market values even though buying and selling taxpayers have agreed upon asset allocations in an arm's length agreement. The next question, do partnerships always need to hire an appraiser? And I would say no. Partnerships just need to assign reasonable fair market values to all partnership assets. Okay, now we want to further discuss some common problems with the partnership's hypothetical sale computations on the next six slides before we get back to discussing the facts from Example 1. Some of these concepts might be a little repetitive. But the point of these next six slides is to provide an overview of the main areas of non-compliance identified by the Sale of Partnership Interest Campaign. A taxpayers depreciation method has no impact on an asset's decline in fair market value. When considering fair market value, let's ask a couple questions. Is the taxpayer using accelerated depreciation methods, such as MACRS, Section 179 and bonus depreciation? The fact that a taxpayer claimed bonus depreciation on a specific asset does not mean that this asset's fair market value decreased faster than if the taxpayer would not have taken accelerated depreciation deductions. Has the taxpayer taken tax amortization deductions? For Section 1250 assets taxpayers sometimes take bonus depreciation. If an accelerated depreciation method was used, such as bonus depreciation or MACRS, then the gain on the sale will be recaptured as ordinary income to the extent by which the amount of accelerated depreciation taken exceeded depreciation that would have been allowed if straight line depreciation was used. One common practice we wanted to point out is cost segregation studies. Taxpayers obtain cost segregation studies to separate out their depreciable assets into various asset categories in an effort to obtain accelerated depreciation deductions. Just because a partnership obtained a cost segregation study does not mean that the partnership assets decreased in value faster than if a cost segregation study was not obtained. Another commonly asked question that we wanted to cover, If the partnership has assigned fair market values to all assets at the time of the sale, how does the service determine whether the fair market values were correct? This is really based upon the examiner's judgment based upon all the facts of the case. If the partnership used reasonable fair market values, then the service would accept the partnerships hypothetical sale computation as being reasonably correct. When a partnership values its assets by conducting a hypothetical sale analysis. At the time a partner sells its partnership interest. It is common for taxpayers to use a liquidation or fire sale valuation methodology. What would the assets be worth if the business ceased operating and the assets were sold at an auction? By using this valuation methodology, it produces a lower fair market value than if a going concern valuation methodology was used. The service believes a partnership should use a going concern or in-continued-use valuation methodology. The buyer and seller agreed to an overall purchase price and then this purchase price must be allocated across all assets. The correct methodology is to consider each asset to continue to be used to operate a business to generate revenue. Okay, Yvette, I think we're ready for our third polling question. Yvette Brooks-Williams: I think you are right. And I think you should have a glass of water. Before we do our polling question, I just want the audience to know that we are aware of the closed captioning issue and we are working diligently to resolve it. So audience with that, here's our third polling question. What is the IRS's position on the proper valuation methodology when a partner sells its partnership interest? Is it A, going concern or in-continued-use; B, liquidation or fire sale; C, net book value or D, GAAP book value. So take a moment and review the question again, and click the radio button that best answers the question. What is the IRS position on the proper valuation methodology when a partner sells its partnership interest? A, going concern or in-continued-use; B, liquidation or fire sale; C, net book value; or D, GAAP book value. So I'll give you a few more seconds to make your selections. Okay, we're going to stop the polling now. And let's share the correct answer on the next slide. And the correct answer is A, going concern or in-continued-use. And I see that 78% of you responded correctly.

And I'm going to ask Andrew to clarify why going concern or in-continued-use is the correct answer for the IRS position on the proper valuation methodology. Andrew Dux: Yes, no problem, Yvette. It seems like 78% most people did get the right answer. But the point the service was trying to make is when we have a sale of a partnership interests, the seller is selling it to the buyer. And in most cases, the buyer is coming in and they are wanting to continue to have a share of the partnership assets, the partnership is going to continue to operate and it's going to continue to generate revenue. So a going concern or in-continued-use valuation methodology should be used to value the partnerships to asset. So okay, yes. Yvette Brooks-Williams: Thanks for the answer. Yes, Thank you. Andrew Dux: No problem. Yvette Brooks-Williams: So I'm going to send it back to you. Andrew Dux: Yes, thanks, Yvette. Well, we'll continue on with our presentation. So another concept that we want to discuss is older assets that have been fully depreciated. A common observed filing position is that these assets are old and do not have any value. However, the service does not believe that position is correct. The service believes all assets that the taxpayer still owns and uses in its business operations have value. Since they've been fully depreciated., whatever value was assigned to these assets would be recaptured under Section 751. In order to continue to operate the taxpayer's business, they need these assets, or they would have to purchase new assets to replace them to continue to operate at their current level. If the taxpayer no longer owns these assets, then they should have removed them from their depreciation schedule. Another common issue is leasehold improvements. We have reviewed common arguments regarding leasehold improvements. Some of these arguments include: Leasehold improvements have minimal value, as they would have to be removed and sold to someone that would not use them in the same way that the taxpayer was using them. Removing the leasehold improvements would damage them and diminish their value. The partnership doesn't own the building and if the business is abandoned, the contract states the leasehold improvements belong to the building owner. The service understands these arguments. However, the correct valuation methodology is not being applied with these arguments. There is a reason the taxpayer put these leasehold improvements in service. The taxpayer believes they will add value and increase revenue for a long period of time. At the time of the sale, the buyer is planning on using these assets in their current use, they are not planning on selling them. Therefore the correct valuation methodology is to use a going concern value. When certain partnership interests are sold, some partnerships have existing and intangible assets on the books. These intangible assets were created in a prior transaction where the fair market value paid by the buyer of the entity at that time was greater than the tax net book value. The partnership has amortized these intangible assets over the years by claiming ordinary deductions as amortization expense. In the current year when this latest sale of a partnership interest occurs. Some entities are not allocating value to the prior intangible assets. Instead they create new intangible assets. This results in the selling partner not having to recapture any of the prior amortization deductions.

The services position in many cases is: The existing tax intangible assets on the books still have substantial value. The existing intangible assets represent the ongoing knowledge and know how existing in the entity and the workforce in place. The existing intangible assets are normally worth at least its original recorded value, or even more. And the valuation of the entity at the date of the sale should properly allocate value to these prior existing intangible assets. So one more commonly asked question that I wanted to cover. Why is amortization taken on a goodwill asset subject to Section 751 recapture? And the answer is an amortizable Section 197 asset is considered Section 1245 property and potentially subject to Section 751 depending on the goodwill assets' fair market value. If you remember the facts from Example 1 from a few slides ago, we updated the spreadsheet to show estimated fair market values using a going concern or in-continued-use valuation methodology. The following fair market value estimations are purely for this example, for discussion purposes and we're not addressing the methodology used. Generally, buildings do not decline in value unless there's a recession or an unusual fact pattern. For this building, we are using an estimated fair market value of $14,000. For carpet, value of $2,000 or 50% of cost for this asset. The carpet is completely depreciated. If the this asset was about five years old at the time of the sale, we have estimated a fair market taxpayer were to rip the carpet up and sell it, it's likely they would not receive much money if any money at all. However, the carpet is still being used in the taxpayer's business operations, and therefore still has value. If the apartment complex replaces the carpet about every 10 years than a 50% fair market value is appropriate. The parking lot was about 4.5 years old at the time of the sale. We have estimated a fair market value of $4,650, which estimates the parking lot would last about 15 to 20 years. For the range this asset was about three years old at the time of the sale, we have estimated the fair market value of $1,875, which estimates the apartment replaces its ranges about every 12 years. For the refrigerator, this asset was about nine months old at the time of the sale, it will likely be used for another 10 years by the apartment complex. And since it is less than one year old at the time of the sale transaction, we have used an estimated fair market value of $3,000, which is equal to the cost of this assets. For goodwill, this is a goodwill asset that was placed in service in 2012, which the taxpayer has been amortizing for tax purposes. The estimated fair market value of this intangible asset is $10,000. The partnership has increased in value since 2012 and therefore its existing goodwill asset went up in value as well. And I want to express that I understand the numbers on this table are not very large. However, if we added several zeros to the end of them, you could see the materiality of this issue greatly increases. When partnerships have taken ordinary depreciation and amortization deductions over the years, reasonable going concern fair market values must be used in order to determine the proper character of the gain to be reported by the selling partners. Okay, so on this slide, we are continuing with Example 1 and we are conducting a hypothetical sale computation. We are using the estimated fair market values that were discussed on the prior slide. On this slide, it shows the 40% selling partner share of Section 751 and unrecaptured Section 1250 gain. On the top part of this computation, we just determined the partnership's total Section 751 and unrecaptured Section 1250 gain amounts that would exist if 100% of the partnership interests were sold in the sales transaction. Then on the bottom part of the computation, we use the selling partners ownership percentage to determine the amount applicable to each selling partner. For buildings, we can see the total unrecaptured Section 1250 gain is $9,076. For carpet, there is a total of $2,000 of Section 751 gain. For parking lots, there's $2,330 of Section 751 gain and $451 of unrecaptured Section 1250 gain. Remember, if an accelerated depreciation method was used, such as bonus depreciation or MACRS and the parking lots are Section 1250 assets, then the gain on the sale will be recaptured as ordinary income to the extent by which the amount of accelerated depreciation taken exceeded depreciation that would have been allowed, if straight line depreciation was used. Any gain in excess of the amount treated as ordinary income because of Section 1250 recapture, but not exceeding the total depreciation claimed is unrecaptured Section 1250 gain. For the range, the entire $1,443 of gain is Section 751 gain. For the refrigerator, the entire $3,000 of gain is Section 751 gain. For goodwill, there's $3,968 of Section 751 gain, and the remaining gain above the amount of previously taken tax amortization deductions is treated as capital gain. So as you can see, the 40% selling partner must report $5,097 of Section 751 ordinary gain and $3,811 of unrecaptured Section 1250 gain. These amounts are simply computed by taking the total Section 751 and unrecaptured Section 1250 gain amounts and multiplying them by the 40% selling partners ownership percentage. Okay, so one more commonly asked question that I wanted to go over is: If the selling partner is willing to sell its interest at a certain price, why wouldn't that be the fair market value? And so this kind of goes back to what Geoff said earlier, we would not challenge the amount paid to purchase a partnership interest, just the allocation of fair market value to partnership assets, which would impact the character of the gain to the selling partners. Now that we've discussed example 1 in detail, let's discuss the partnership's reporting requirements.

The partnership is required to prepare the selling partner's Schedule K-1 reflecting Box 20 Alpha Code AB with $5,097 and Section Technical Difficulty]. Geoff Gaukroger: Yvette, did we lose Andrew? Yvette Brooks-Williams: I think so, Andrew, are you still there? Geoff Gaukroger: I could take over until he comes back. So what Andrew was saying. Yvette Brooks-Williams: Thank you.

Appreciate that. Thank you. Geoff Gaukroger: Okay, and Andrew was just going over the reporting requirements. So here's those new Alpha Codes I was mentioning that 751 portion just computed would go in Box 20 with AB code with $5,097 and then Alpha Code AD with $3,811 for the unrecaptured Section 1250. We talked about this in prior years partnerships just attached the statement to their return which showed the selling partner's share of section 751 gain but starting in 2019 this information is now reported on Box 20 of the Schedule K-1. The partnership is also required to check the box on the selling partner's 2020 Schedule K-1 showing the partner had a sale of a partnership interest. And also, we want to note the partnership is required to attach a Form 8308 to its Form 1065 tax return to explain the key information regarding the sales transaction such as the date and the parties involved. Okay, Yvette, do we have another polling question? Yvette Brooks-Williams: We do, we do, we have a polling question. I have an announcement that the close capturing has been fixed and my condolences that we lost Andrew on the call. So hopefully he'll be back with us soon. So audience, our final polling question is, Which of the following requirements is new starting in 2019? A, partnership computing Section 751 gain; B, partners reporting gain on the sale of a partnership interest; C, partnerships reporting partner's Section 751 gain on Schedule K-1 of Form 1065 Box 20, Alpha Code AB; or D, partnerships filing Form 8308. So please take a minute and review the question again. And then click the radio button you believe most closely answers the question, which of the following requirements is new starting in 2019? A, partnership computing Section 751 gain; B, partners reporting gain on the sale of a partnership interest; C, partnerships reporting partner's Section 751 gain on Schedule K-1 of Form 1065 Box 20, Alpha Code AB; or D, partnerships filing Form 8308. So I'll give you a few more seconds to make your selections. Okay, we are going to stop the polling now. And we will share the correct answer on the next slide. And the correct answer is C, partnerships reporting partner's Section 751 gain on Schedule K-1 Form 1065 Box 20 Alpha Code AB and yes, 84% of you responded correctly. That's great. Awesome, guys. Got through the job, Andrew, are you back with us? Geoff Gaukroger: I can keep going, Yvette. Yvette Brooks-Williams: Thank you. I appreciate it. Andrew was going to talk about discussing partner level reporting.

Geoff Gaukroger: Okay, sounds good. You know, so if you remember when I started this, I mentioned this $18,000 gain. So here we've come full circle. So the partner will use the information provided from the partnership reported sale on its Form 1040 tax return, the partner will have to report this on the correct forms, for example, Form 4797 for the 751 gain, the Form 8949 for the capital gain, partner will consider the total proceeds received, and subtract its basis to determine the total gain, the taxpayer subtracts the gain amounts taxed at rates higher than the long-term capital gain tax rates from the total gain to determine the remaining residual capital gain amount. So in this example $9,092 is the residual amount that will be taxed at the long-term capital gain tax rates. Real quick, two more that's commonly asked questions we've gotten. Where does the selling partner report their gain or loss on the sale of a partnership interest? So, a selling partner reports ordinary Section 751 on Form 4797, Part 2 and reports capital gain on Form 8949, which then flows to the Schedule D. Another question, How does the departing partner's negative capital account impact a sale of a partnership interest? So that's outside the partnership. So determining the total amount of gain or loss is a partner level determination. So, a negative tax capital accounts just means the taxpayer would have a larger total gain than a partner with a positive tax capital account. Okay, let's move to partnership audit regimes. So before we finish up today's presentation, we want to take three slides to talk about partnership audit regimes. And the reason we're doing this is during exams the last couple of years, we've been asked a lot of questions from tax practitioners as we've executed the sale partnership interest campaign. The Centralized Partnership audit regime, which is probably more commonly known that you heard BBA, generally applies to all partnerships required to file tax returns whose years begin on or after January 1 2018, except for partnerships electing out of the BBA, Okay, there is a hyperlink in your documents that will link you to irs.gov website. And it has most aspects of the BBA partnership audit process laid out in a nice graph and additional information. If a partnership elects out of the BBA, it is generally subject to the investor level statute control or ILSC procedures. IRM, Internal Revenue Manual 4.31.5 provides detailed field examination procedures for partnerships that are subject to the ILSC procedures. Okay, we could have multiple pass-throughs on BBA. But we're going to go quick here and just explain how BBAs can apply to what we've discussed when there is a sale of a partnership interest. So this slide shows that when a partnership is being examined under the BBA procedures, how we would treat the sale of partnership interest component. So under the hypothetical fact pattern number one on this slide, we're saying the partnership did not conduct a hypothetical sale computation and did not inform the selling partner their share of the 751 ordinary gain on Schedule K-1.

However, the partner did report $2 million of 751 gain as ordinary income on its tax return. If a partnership audit is conducted, and the Service determines the selling partner's correct share of the Section 751 ordinary gain is $3 million, the examiner would propose the entire $3 million adjustment as a partnership related audit adjustment. Now note that even though the partner did report the $2 million, the partnership could request a modification or make a push-out election in order for the correct amount of tax to be assessed to account for the selling partner's $2 million reported 751 gain. But the key thing here, since the partnership did not properly put any 751 gain amount on the Schedule K-1, the service is required by law to make this entire $3 million partnership related item adjustment at the partnership level. Yes, let's go to the next one, under this example number two here, the partnership did conduct a hypothetical sale computation and informed the selling partner of their share of 751 ordinary gain, put on Schedule K-1 Box 20 Alpha Code AB and they put the $2 million and the partner then reported this $2 million of 751 ordinary gain. The partnership is audited by the IRS, the service determines the selling partners correct share again should be $3 million. Now the examiner is going to propose a $1 million adjustment as the partnership related item adjustments. And this is because the partnership did originally compute $2 million of 751 on the K-1 and exam adjustment is just increase that by $1 million. Okay, one more real quick on BBA here. The partnership representative may submit a request to modify the imputed underpayment only after the NOPPA or PPA has been issued. Note the partnership is liable for that, that is what else is different in BBA. So the partnership representative will have 270 days from the date of NOPPA to make such a request. Partnership representative must complete and electronically submit Form 8980 to request this modification. So a simple example when a taxpayer may want to request modification. Let's say the whole adjustment is on unrecaptured Section 1250 gain at the partnership level, originally, the examiner has to assess that at the highest tax rate of 37%. But since on unrecaptured Section 1250 gain is only taxed at 25%, the partnership representative would fill out the Form 8980 and request a modification of the payment due by the partnership. The partnership representative may submit an election to push out audit adjustments that's different.

Underlying the IU, this imputed under and push it out to the partners rather than make it payment itself. This can be done only after the FPA has been issued. Partnership representative who have 45 days from the date of the FPA to make this push out election. If a partnership representative does not make the election, then it's actually the partnership and the partnership is liable for the imputed underpayment amounts. The partnership representative must complete and electronically submit Form 8988, Election to Alternative to Payment of the Imputed Underpayment, under IRC Section 6226. All right. this is a summery here. Good job, everybody. Now, you should be able to identify the correct tax law related to sale partnership interest. Next thing we did, we want to share with you what the Service has encountered during sales of partnership interest examinations and give you some insight of what's going on out there. And then what's most important, we want to explain the Service's position on valuations placed on assets as part of the hypothetical sale computation. Okay, Yvette, that's all we have for today. So back to you.

Yvette Brooks-Williams: Thanks. Yes, hello again. It's me Yvette Brooks-Williams and I will be moderating the Q&A session. But before we start the Q&A session, I want to thank everyone for attending today's presentation, Sale of Partnership Interest Comprehensive Case Study. Now earlier, I did mention that we wanted to know what questions you have for our presenters. So here's your opportunity. Now, if you haven't already done so, there's still time to input your questions. Go ahead and click on the drop down arrow next to the Ask Question field, type in your question and click Send. Now Geoff is on with us to answer your questions. And we're still trying to get Andrew back on. Andrew, are you back with us yet? Andrew Dux: Yes, I'm back on.

Thanks. Yvette Brooks-Williams: Okay, so Andrew and Geoff are going to stay on with us to answer your questions. And one thing before we start, we just need you to know we might not have time to answer all of the questions submitted. However, let me assure you, we will answer as many as time allows. If you are participating to earn a certificate, and related continuing education credit, you will qualify for one credit by participating for at least 50 minutes from the official start time of the webinar which means the first few minutes of chatting before the top of the hour does not count towards the 50 minutes. So let's get started, so we can get to as many questions as possible. So Andrew, since you're back, we're going to give Geoff a little break on his voice. And ask you the first question, Why is there unrecaptured Section 1250 gain for a building when it has been depreciated, using straight line depreciation? Andrew Dux: Okay, sure. Yes, I'll go ahead and answer that question. Basically, unrecaptured Section 1250 gain is a special 25% capital gain tax rate for Section 1250 assets, normally buildings or leasehold improvements. They're subject to these higher tax rates, just because that's the tax law that has existed. So buildings, other 1250 assets, even though straight line depreciation is taken, they have the special 25% unrecaptured section 1250 gain rate. Yvette Brooks-Williams: Thank you.

Geoff, Do buildings maintain their value or is all excess value based upon the increase in the value of the land? Geoff Gaukroger: Okay, so it really depends on fact, but I think we all know in general, and watch the real estate go up, we believe in general buildings maintain their value or go up in value. So the building replacement placed in service 20 years ago it is very likely the cost to build a similar building would be much greater than the old building. Yvette Brooks-Williams: Okay, Andrew, back to you conducting a Section 751 analysis will significantly increase tax preparation fees excessively for smaller partnerships. What are your thoughts on this? Andrew Dux: Okay, yes, we understand smaller partnerships might not spend as much on tax preparation fees as larger partnerships. However this requirement to do a 751 analysis is required for small and large partnerships. So maybe the smaller partnership doesn't have to have an appraisal, but they still need to make an effort to determine reasonable fair market values for the partnership's assets. Yvette Brooks-Williams: Thank you. Geoff, what is the easiest way for a small partnership to determine the fair market value of all assets as required by Section 751? Geoff Gaukroger: Yes, sure. Even though, lot of this can be very sophisticated, we get it you know, a small partnership doesn't want to incur a lot of fees, you can do it yourself. I mean, we've prepared this. I think the most important thing to know is that in-continued-use methodology, don't do the liquidation value and just look at the age, the tax basis and consider that the value should be for purchasing new partners' hands and what is the overall value of these assets that continue in conducting the business in place. Yvette Brooks-Williams: Andrew, are you there? Andrew Dux: Yes, I'm here. Yvette Brooks-Williams: Okay. Does the service see a lot of disagreements or disputes regarding fair market value? Andrew Dux: Okay, when we talk to taxpayers and their representatives, at first they really do believe they did a reasonable 751 analysis and there might be a little bit of disagreement at the beginning, but after we discuss the facts, the tax law requirements. In the end, the service and the taxpayers are able to reach agreement on almost every single case. Yvette Brooks-Williams: Okay, thank you, Geoff, what is Section 743(b)? Geoff Gaukroger: Okay, so that is the matching of inside and outside basis. So a business, partnership starts with their general ledger, that is their inside basis, partners, that is if one of the partners were to sell to new partner, that new partners possibly pay the higher price for the partnership interest. And because of that, they get to make their 754 election basis, just for their related assets portion that they get to step up the inside basis of assets equal to their outside basis as an equalization of inside and outside basis. And if they step up depreciable assets that partner will get additional depreciation deduction from the 743(b) assets. Yvette Brooks-Williams: Okay, and Andrew, so the seller of a partnership interest, does the tax of the seller differ if the seller one sells his interest to an existing partner or two sells his interest to a new partner? Andrew Dux: Okay, yes, it doesn't matter if the seller sells to an existing partner or new partner. The partnership still has the hypothetical sale analysis, the 751 or unrecaptured Section 1250 gain amount. And then at the partner level, their total amount of the gain the proceeds minus the basis, that would be the same too. So it really doesn't matter. Yvette Brooks-Williams: Good to know, good to know. Geoff, so I have an example here from one of our audience members. The LLC purchases $10,000 asset in 2014 with estimated useful life of 10 years, which the LLC depreciates on a straight line basis and Partner A sells its interest in 2021. What is Partner A Section 751 gain or loss? Geoff Gaukroger: Okay, so what would happen is we go to fix assets schedule, and we look at this asset that's being depreciated over 10 years. So I tried to scribble down the facts real quick, it sounds like the things just about fully depreciated. So Andrew and I have had the position that even I think and Andrew mentioned that that assets are now have a zero tax net book value. We'll throw out like a kitchen table in the office room or something, it still has some value because it's being used. And we know it's minimal. So I can't give you the exact, but we're using maybe residual values 20% like you had sent that maybe 2001 that we just always depends on the facts and circumstances. But it's not zero, not the tax net book values here. There would be -- and the 751 is going to be right up to whatever the fair market value is, because that had zero basis. Let's just -- I'll just say -- let's say we agreed $1,600. So they'd have a $1,600 751 amount. Yvette Brooks-Williams: Thank you for that. Andrew Dux: And, Geoff, I wanted to add one thing. I think, if I remember the facts correctly on that example, it said a $10,000 asset that only it was about seven years old. The taxpayers established that, they have a history that they only use this asset for 10 years. And they only took straight line depreciation on that, but no bonus. So if it's really a 10 year asset, they're taken straight line over 10 years, and they really have facts to support that it's only used for 10 years, and then they always dispose of it, then in that particular case, maybe the fair market value is equal to the adjusted tax basis.

But that type of fact pattern I would say is relatively rare. I was just going to clarify. Geoff Gaukroger: Yes, no, thanks Andrew. I scribbled quickly and now that you say that. So I feel like yes, the question was trying to throw something out very reasonable. And it's like, we will accept that then. Yes, that would be exactly right. There would be no adjustment, it would be equal to tax net book value it is possible. Yvette Brooks-Williams: Andrew, if Section 751 calculated is a loss.

Is the loss treated as an ordinary loss? Andrew Dux: Okay. So most of the time we're going to have 751 gains due to the partnership accelerated depreciation method, but it is possible that there could be a 751 loss, which would be an ordinary loss for the partner. Yvette Brooks-Williams: Okay. Geoff, where does the ordinary 751 gains get reported on a Form 1040?

Geoff Gaukroger: It goes to the Form 4797 and flows on through. That's where it'll be picked up as ordinary. Yvette Brooks-Williams: Okay, and Andrew, what if the seller has a negative basis?

Andrew Dux: Okay. So again, we covered that throughout the presentation. And we do get that question a lot. And this hypothetical sale requirement, that's a partnership responsibility, they have to look at the asset. And the partners basis has no impact on the 751 computation. The partnership does this hypothetical sale, they inform the selling partner their share of gain at rates higher than the long-term capital gain rate on the Schedule K-1 on Box 20. And then the partner is going to use that information to report their character of the gain and any residual gain or loss, that would be reported by the partner as well. So that's just a partner level determination that would not impact the hypothetical sale of partnership assets computation.

Geoff Gaukroger: Yes, if I could just add a little bit. But it's a fine question, we get that question. Technically, you can't have negative basis. So there is there's loss limitations, and you're in a partnership, you can't go below zero. So maybe the person mentioned, kind of really thinking negative capital. But then they have debt basis that it allows them to increase their basis to zero. If in fact, an error was made and then went negative, you're going to have your proceeds less your basis, you get it truly had a negative paces, then that would increase the overall gain. Yvette Brooks-Williams: My thanks to both of you. How are the 751 gains reported to the selling partner? Geoff Gaukroger: Okay, I'll grab that one real quick. So again, this is responsibility, the partnership controller does this hypothetical sell, which is really means it's not in the general ledger accounting records to the side computations done, taking all the fixed assets, assigning fair market value to each and every one, whether 10,000 assets. Figure out the portion in total for the whole entity, then once they get that computation, which is or running it through 4797, or pretend and get the total. Let's say the partner, I think and our example was 40%, then we now know, that is that partners share of the ordinary components. And we mentioned in the presentation, they used it for many years, decades, that that would be attached to the K-1, there wasn't a spot in the K-1 for it to be. A lot of the tax software had statements that would be attached to K-1 to get that information. But now starting 2019 there is a separately stated item now it goes in Box 20, which can have a lot of different items and get to Alpha Code, and that partner share of the gain is put there and so real quick note you know Schedule K-1s mostly income items, ordinary, all that that's P&L type stuff. That partnership interest. It's not income at the entity for the year. It's how you report yourself Box 20 is information. And that's going to go to the separate transaction of you selling your partnership interest, the information to have the ordinary component. Yvette Brooks-Williams: Thank you so much. Audience, I am sad to say that that is all the time we have for questions.

This has been a rich dialog and I hope you guys have gleaned some knowledge from it as I have. I want to thank Andrew and Geoff for sharing their knowledge and expertise and for answering your questions. Now before we close the Q&A session, Geoff, what key points do you want the attendees to remember from today's webinar? Geoff Gaukroger: Okay, so I started off, mentioning Section 751. And use that word unrealized receivables, which is common, wherever you might just know unrealized receivables are depreciable and amortizable assets. So that is most of the Section 751 assets. If your partnership has that you've got 751. When throughout that and then these are things that we don't want to solve by just doing lots of exams, we want to share with you right now just because there's an appraisal, or there's an agreement between two unrelated third-party that does not mean the Service will respect the fair market value allocation. Again, not the sales price between the two. But when they go to allocate in that hypothetical sale analysis and assign a reasonable fair market value to each asset. There would be a focus to try to minimize ordinary and we know that and so that tax law cannot be overwritten by an agreement. Next one, just that when they do the fair market value assignment as part of the sale, it is not liquidation value. It's not like how much would that one item sell out in the parking lot. No, you have to use it's an overall sale of partnership interest is performed, it's actually a group of assets which is a trade or business and so you have to use them in that context, that is a going concern and in-continued-use valuation. We want to mention that this Form 8308, that goes in the partnership return when a partner has sold, so the Schedule K-1 is going to get marked that there was sale of partnership interest in the main partnership tax return, there needs to be a Form 8308, when they emphasized and because since this is new in 2019, there were new requirements from the K-1, so there, you have to prepare the partnership return, you need to put this information on the Schedule K-1, that is required and expected. And if you're preparing the partners returns, look at that box to see if your partner needs to report that portion.

Lastly, just want to add, you know this issue that we're talking about this expensing of assets in the quickest accelerated depreciation, under the Tax Cut and Jobs Act, this allows taxpayers to expense 100% of the cost of assets acquired after September 27, 2017. So this is going to have a lot of partnerships embedded with potential for 751. Back to you, Yvette. Yvette Brooks-Williams: Thanks, Geoff. Audience we are planning additional webinars throughout the year on Tuesday, July 19, the IRS is offering a webinar called Accessing IRS Online Services Understanding the Identity Verification Process. So if you haven't registered, there's still time and to register for all upcoming webinars, please visit irs.gov. Use keyword search webinars and select the Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering Certificates and CE credit for upcoming webinars. We invite you to visit our video portal at www.irsvideos.gov, there you can view archived versions of our webinars. And please note continuing education credit and or certificates of completion are not offered if you view any version of our webinars after the live broadcast. Again, a big thank you to our speakers, Andrew and Geoff for a great webinar, sharing their expertise and answering your questions. And I also want to thank you our attendees for attending today's webinar, Sale of Partnership Interest Comprehensive Case Study. Now if you attended today's webinar for at least 50 minutes from the official start time of the webinar, you qualify for one possible CE credit. Again, the time we spent before the webinar started does not count towards those 50 minutes. If you're eligible for continuing education from the Internal Revenue Service, and you register with your valid PTIN, your credit will be posted in your PTIN account. If you qualify and you have not received your certificate and or credit by August 4, please email us at [email protected]. The email address is shown on the slide as well. If you are interested in finding out who your local stakeholder liaison is, you may send us an email using the address shown on this slide and we will send you that information. Now we would appreciate it if you would take just a few minutes to complete a short evaluation before you exit. If you would like to have more sessions like this one, let us know. If you have thoughts on how we can make them better, please let us know that as well. Now if you have requests for future webinar topics, or if you have pertinent information you would like to see in an IRS Fact Sheet or a Tax Tip or even an FAQ on irs.gov, then please include your suggestions in the comment section of the survey. Click the survey button on the screen to begin. If it doesn't come up check to make sure you've disabled that popup blocker.

And I just want to say that it has been an absolute pleasure to be here with you and on behalf of the Internal Revenue Service and our presenters, we would like to thank you for attending today's webinar. It's important for the IRS to stay connected with a tax professional community, individual taxpayers, industry associations along with federal, state and local government organizations. You really make our job easier by sharing the information that allows for proper tax reporting. Thanks again for taking time out of your day to attend today's webinar, and we hope you found the information helpful. You may exit the webinar at this time.

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Granting partial summary judgment for the government, the U.S. District Court for the Northern District of Texas has held that the IRS properly denied a charitable deduction stemming from a couple's donation of a 4% limited partnership interest to a private foundation to establish a DAF, so the couple was not entitled to a refund for the resulting tax paid ( Kevin M. Keefer, et ux. v. United States ).

Kevin Keefer was a limited partner in Burbank HHG Hotel, LP (Burbank), which owned and operated a single hotel. On April 23, 2015, Burbank and the Apple Hospitality REIT (Apple) exchanged a nonbinding letter of intent (LOI) for Apple to purchase Burbank. Burbank had not signed the LOI and continued courting potential buyers. On June 18, 2015, Keefer assigned to Pi Foundation a 4% limited partner interest in Burbank to establish a DAF. Although Burbank had tentatively agreed to sell the hotel to Apple for $54m, the sales contract had not been signed, and Apple had not yet reviewed the property or associated records. The parties signed a sales contract on July 2, 2015, and the sale closed on August 11, 2015.

The Keefers commissioned an appraisal of the donated interest as of June 18, 2015, which:

  • Described the appraiser's qualifications
  • Did not include the appraiser's tax identification numbers
  • Included a "Statement of Limiting Conditions," stating that Keefer and Pi had agreed that Pi "would only share in the net proceeds from the Seller's Closing Statement [and] not in Other Assets of the Partnership not covered in the sale"

The appraisal concluded the fair market value of the donated interest was $1.257m. Pi sent Keefer a 12-page packet of documents related to establishing the DAF (DAF Packet), which he signed on June 8, 2015. In early September 2015, Pi sent Keefer a brief letter acknowledging the donation (Acknowledgment Letter).

In their timely filed joint federal income tax return for 2015, the Keefers claimed a $1.257m charitable contribution deduction for the donation to the DAF. Their Form 1040 provided their appraiser's tax identification number, the appraisal, the DAF Packet, and the Acknowledgement Letter.

The IRS issued a deficiency notice in July or August 2019, denying the charitable deduction and increasing the Keefers' 2015 tax liability by $423,304 plus penalties and accruing interest. The IRS asserted that (1) the Keefers did not have a CWA from the donee showing the DAF "has exclusive legal control over the assets contributed" and (2) their appraisal did not include the appraiser's identifying number.

The Keefers paid the additional tax and filed a refund claim in November 2019, which the IRS denied in March 2020 as untimely. In November 2019, the Keefers filed the instant refund action in district court.

District court refund claim

Both parties moved for summary judgment. The Keefers made four claims:

  • Claim 1 : The IRS erred in denying their deduction and refund request
  • Alternative Claim 2 : If the court finds the contribution was actually an anticipatory assignment of income, the Keefers are nonetheless entitled to a refund of tax, interest and penalties
  • Alternative Claim 3 : If the court disallows the charitable contribution deduction, the IRS should be required to recalculate the Keefers' basis in the contributed asset and refund resulting overpaid taxes, penalties and interest
  • Claim 4 : The court should grant summary judgment denying the IRS's defense of variance to the Keefers' two alternative claims

The government asserted that (1) the defense of variance barred the Keefers' two alternative claims and (2) the Keefers' were not entitled to any refund.

Ultimately, the court concluded that:

  • The Keefers' refund claim was timely
  • The Doctrine of Variance did not bar the taxpayers' claims
  • The donation was an anticipatory assignment of income
  • The IRS properly denied the Keefers' charitable deduction because their CWA did not meet the requirements of IRC Section 170(f)(8) and (18)
  • The taxpayers were not entitled to a refund of their 2015 taxes

A discussion of the last three points follows.

Assignment of income

Noting that a taxpayer may not escape tax on earned income by assigning that income to another party, the court stated, "[T]he critical question is whether the [donated] asset itself, or merely the income from it, has been transferred." The Keefers argued that their donation of the 4% interest met both prongs of the test established in Humacid Co. v. Commissioner , 42 T.C. 894 (1964), which provided that courts will respect the form of a donation of appreciated stock if the donor donates the property and title to it completely before the property produces income from a sale. Specifically, the Keefers contended that the hotel's sale to Apple remained uncertain when they assigned to Pi the 4% partnership interest, including all rights and interest pertaining to the interest. The government contended that the hotel's sale was "practically certain" at the time of the donation and "the Keefers carved out and retained a portion of the partnership asset by oral agreement."

When the Keefers signed the agreement to assign the partnership interest to Pi on June 18, 2015, the court concluded, the hotel was not yet under contract. The contract to sell the hotel was signed on July 2, 2015, and Apple had 30 days to review the property and potentially back out of the contract. Absent a binding obligation to close the sale, "the deal was not 'practically certain' to go through," the court found. The pending sale of the hotel, "even if very likely to occur considering the presence of backup offers and as reflected in the appraiser's estimate that the risk of no sale was only 5% — does not render this donation an anticipatory assignment of income," the court stated.

Turning back to the first Humacid prong, however, the court concluded that the Keefers had carved out a partial interest in the 4% partnership interest when they donated it, and thus did not give the entire interest to Pi. The Keefers asserted that their assignment of the 4% interest subject to an oral agreement that Pi would receive the net proceeds from the sale of the hotel, as opposed to other partnership assets not covered in the sale, "is not a 'carving out' from the 4% partnership interest to Pi any more than the partnership paying a liability for a pre-existing light bill is a 'carving out' from some partnership interest."

The government argued that the oral agreement showed the taxpayers "did not donate a true partnership interest [but gave] away 4% of the net cash from the sale of one of the Partnership's assets [that] the Keefers would otherwise have received from the sale of the hotel. This is a classic assignment of income."

The court rejected the Keefers' light-bill analogy, noting that the funds held back in the Keefers' transfer to Pi were funds that the general partner (1) chose to maintain to comply with loan agreements and (2) had the discretion to withhold from partner distributions. The taxpayers had not made a complete donation of the 4% interest, the court concluded, finding no genuine issue of material fact that they had carved out part of the 4% partnership interest before donating it to Pi. Thus, the anticipatory assignment of income doctrine applied.

Insufficient CWA

The court found that the CWA the Keefers received from Pi did not meet the requirements of IRC Section 170(f)(8) and (18).

The Keefers argued that the Acknowledgement Letter and DAF Packet together constitute a statutorily compliant CWA. The government contended that multiple documents cannot be combined to constitute a CWA unless the documents include a merger clause, and neither document in this case stated that Pi had "exclusive legal control" over the donated assets.

The court concluded that the CWA was not statutorily compliant; therefore, the IRS properly denied the charitable deduction. The court based this conclusion on its finding that (1) the DAF Packet did not constitute a CWA; and (2) the Acknowledgement Letter cannot supplement the DAF Packet. Specifically, the court found that the June 8, 2015 "DAF Packet did not complete the donation or legally obligate Kevin to donate the interest to Pi." The September 9, 2015 Acknowledgement Letter constituted the CWA in this case but did not meet the necessary statutory requirements because it did not "reference the Keefer DAF or otherwise affirm Pi's exclusive legal control, as required by [IRC Section] 170(f)(8)," which requires "strict compliance."

Implications

Taxpayers contemplating making a transfer to a DAF should consider the court's discussion on CWAs. As a general matter, the donee is not required to record or report the information provided on a CWA to the IRS, so the burden falls on the donor to ensure that proper documentation is received for the charitable organization. The court noted that the CWA requirements, under IRC Section 170(f)(8), required strict compliance; thus, IRC Section 170(f)(18) must also require strict compliance because it supplements and cross references IRC Section 170(f)(8): "The taxpayer obtains a [CWA] (determined under rules similar to the rules of [IRC Section 170(f)(8)(C)] from the sponsoring organization (as so defined) of such [DAF] that such organization has exclusive legal control over the assets contributed" (citing Averyt v. Commissioner , T.C. Memo. 2012-198 (internal citations omitted)).

The court noted that the specific language included in IRC Section 170(f)(18) ("exclusive legal control") was not required. Given the lack of guidance in this area, however, failure to make clear that the donee organization had exclusive legal control may result in denial of the donor's charitable deduction. Absent subsequent guidance, a more conservative approach may be for donors to DAFs to request CWAs that contain such language (e.g., "exclusive legal control of contributed assets was held by the [DAF]").

Another small, but important nuance, is that the court in Keefer rejected the government's position that the court should apply the Ninth Circuit's expanded view of the assignment of income doctrine, whereby a deal that is "practically certain to proceed" would cause the assignment of income doctrine to apply ( Ferguson v. Commissioner , 174 F.3d 997, 1003 (9th Cir. 1999)). Given the differences in approach, taxpayers should consult their tax advisor to ensure the proper precedent is being considered pursuant to any charitable contribution.

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Court Rules on Gifting a Percentage of Partnership Interests Versus a Fixed Amount

Depending on the attorney and the wants of their client, gift transfer documents may indicate either a specific number of units or a percentage. They may also be “backed into” based on the dollar amount of the valuation conclusion via a formula clause.

This month’s highlighted business valuation case study reiterates the importance of drafting transfer documents so that the language within the documents matches the intentions of the attorney and their client. If the language does not match the intent, the client may be locked into specific details of a gift transfer that are different than originally planned.

If you require the perspective of a valuation services professional, we’d love to discuss how KSM can help. Please contact a member of our team or  complete this form .

5th Circuit Court of Appeals Upholds Tax Court Finding That Taxpayer Gifted a Percentage of Partnership Interests and Not a Fixed Amount

Nelson v commr., 2021 u.s. app. lexis 32741 (nov. 3, 2021).

“Mary P. Nelson and James C. Nelson appeal from the Tax Court’s denial of their petition for a redetermination of a deficiency of gift tax issued by the commissioner of Internal Revenue for the tax years 2008 and 2009. For the following reasons, we AFFIRM.”

Facts. Mary Pat and James Nelson sought to plan their estate and formed a limited partnership, Longspar Partners Ltd., in 2008. Mary Pat and James named themselves general partners, with a 0.5% interest each. The limited partners were Mary Pat and trusts for their daughters. The majority of Longspar’s assets were shares of stock in Warren Equipment Co., a holding company for several businesses. Mary Pat also contributed her limited partner interests to a trust where Mary Pat was the settlor, James the trustee, and their daughters the beneficiaries. The interests were transferred in two transactions, a gift and then a sale. The transfer agreement stated:

[Mary Pat] desires to make a gift and to assign to [the trust] her right, title, and interest in a limited partner interest having a fair market value of TWO MILLION NINETY-SIX THOUSAND AND NO/100THS DOLLARS ($2,096,000.00) as of December 31, 2008 (the “Limited Partner Interest”), as determined by a qualified appraiser within ninety (90) days of the effective date of this Assignment.

The transfer agreement for the sale used largely the same language and was for a limited partnership interest having a FMV of $20 million. The qualified appraiser rendered a report valuing a 1% interest at $341,000. “The Nelsons’ attorney then used the fair market value as determined by the accountant to convert the dollar values in the transfer agreements to percentages of limited partner interests—6.14% for the gift and 58.65% for the sale.” The IRS audited the Nelsons’ gift tax returns and issued a deficiency notice of $611,208 for 2008 and $6,123,168 for 2009.

The Nelsons challenged in Tax Court, arguing that “they had sought to transfer specific dollar amounts through a formula clause and that the amount of interests transferred should be reallocated should the valuation change.” The Tax Court found that a 1% value was worth $411,235 and that the language in the transfer documents was not a valid formula clause that could support reallocation of the interests. “The Nelsons timely appeal the court’s finding that the transfers consisted of percentage interests, rather than fixed dollar amounts.”

Discussion. With the amount of gift tax, the nature of the transfer is determined by looking at the transfer documents. The language in the documents here expressly stated “fair market value” for purposes of determining the interests transferred. The appraiser thus determined the fair market value. “The Nelsons defined their transfer differently; they qualified it as the fair market value that was determined by the appraiser. Once the appraiser had determined the fair market value of a 1% limited partner interest in Longspar, and the stated dollar values were converted to percentages based on that appraisal, those percentages were locked, and remained so even after the valuation changed.” The Nelsons’ documents lacked specific language describing what should happen to any additional shares transferred if the valuation was sufficiently challenged.

The fact that the trust did return excess units was irrelevant and was the type of “subsequent occurrence” that “this court” has said is “off limits” when valuing the value of a gift. ( Succession of McCord, 461 F.3d at 626.) For tax purposes, the value at the date of the gift was determined to be the amount of the gift. With a formula clause, the transaction was still closed even if a reallocation occurs. “The reallocation clauses thus allow for the proper number of units to be transferred based on the final, correct determination of valuation.” Both parties agreed that the transfer was complete at the date of the gift. The Nelsons attempted to draft a formula clause but failed to do so.

The interpretation of the transfer documents was not changed by looking at any objective facts outside of the language of the documents. The documents were not ambiguous, and the Nelsons’ interpretation was not reasonable as a matter of law. The Nelsons’ interpretation would amount to changing and overriding the language in the transfer documents and Texas law did not allow for that. The subjective intent of the contracts considering the estate planning intent would not be allowed. “To support the Nelsons’ reading, we would be required to disregard significant differences between these contracts and the transfer documents used in similar cases.”

The appraisal was delayed, but that had no bearing on the nature of the transfers. It does mean that the trust might have a claim against Mary, or the trust and Mary might have a claim against the appraiser. Also, “the lack of concern demonstrated for the tardy appraisal is yet another indicium of subjective intent which similarly cannot be considered under Texas’ parole evidence rule.”

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Tax Implications on Sale of a Partnership Interest

In determining gain or loss on sale of a partnership interest, taxpayers are often surprised to find they have a taxable gain..

For income tax purposes gain or loss is the difference between the amount realized and adjusted basis of the partnership interest in the hands of the partner.

Amount Realized

Tax Implications on Sale of a Partnership Interest

Examples of Amount Realized:

Example 1 – Sale of Partnership interest with no debt:

Amy is a member in ABC, LLC which has no outstanding liabilities. Amy sells her entire interest to Dave for $30,000 of cash and property that has a fair market value of $70,000. Amy’s amount realized is $100,000.

Example 2 – Sale of partnership interest with partnership debt:

Amy is a member of ABC, LLC and has a $23,000 basis in her interest. Amy’s membership interest is 1/3 of the LLC. When Amy sells her 1/3 interest for $100,000 the partnership has a liability of $9,000. Amy’s amount realized would be $103,000 ($100,000 + ($9,000 x 1/3).

Gain Realized

Generally, a partner selling his partnership interest recognizes capital gain or loss on the sale. The amount of the gain or loss recognized is the difference between the amount realized and the partner’s adjusted tax basis in his partnership interest.

Example 1 (from above)- Sale of Partnership interest with no debt:

Assume Amy’s basis was $40,000. Amy would realize a gain of $60,000 ($100,000 – $40,000).

Example 2 (from above) – Sale of partnership interest with partnership debt:

Amy’s basis was $23,000. Amy would realize a gain of $80,000 ($103,000 realized less $23,000 basis).

Character of Gain

Partnership taxation establishes the general rule that gain on sale a partnership interest receives favorable capital gain treatment.  However, gains attributable to so-called “hot assets,” which include inventory, depreciation recapture, and accounts receivable of a cash basis partnership are taxed at less favorable ordinary income rates.

To the extent that a sale is attributable to the selling partner’s share of the hot assets, the resulting gain or loss is taxed at ordinary income rates. When real estate is sold to the extent the gain on sale is attributable to depreciation deductions, the resulting gain is treated as unrecaptured IRC §1250 section gain. §1250 gain is taxed at a flat 25% rate.

Like-Kind Exchange

It is important to note that in IRC §1031 (like-kind exchange), non-recognition treatment does not apply to exchanges of partnership interests.

We’ve Got Your Back

If you’re selling your partnership interest, we can help you plan the sale so that you pay no more tax than necessary. Contact Simon Filip,  the Real Estate Tax Guy , at  [email protected]  or 201.655.7411 today.

is assignment of partnership interest taxable

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The ERC: Practitioners’ responsibilities to amend income tax returns

The employee retention credit (ERC), as authorized under pandemic-era legislation to assist businesses with the costs of retaining employees, has been claimed by many employers for applicable quarters in 2020 and 2021. This article discusses the requirement to amend income tax returns in connection with an ERC claim and to review the professional responsibility to which all CPAs must adhere in amending these income tax returns.

Note: Legislative changes to the ERC could occur proximate to publication of this article. One such proposal under consideration in Congress as of this writing would retroactively eliminate the credit for any claims filed after Jan. 31, 2024 (see §602 of the Tax Relief for American Families and Workers Act of 2024, H.R. 7024; see also Waggoner, " House OKs $78B Tax Bill With Changes to ERC and Child Tax Credits ," The Tax Adviser , Feb. 1, 2024). The proposed legislation would also increase penalties and extend the IRS's statute-of-limitation period on assessment of erroneous ERC refunds to six years with a correlative extension of the statute-of-limitation period for taxpayers to amend income tax returns for wage deductions attributable to ERC claims. In addition, it would enact several additional provisions intended to address unscrupulous ERC promoters.

Claims for the ERC are based on the amount of "qualified wages" paid by eligible employers during applicable quarters. These claims are made by amending employment tax returns (e.g., Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund ). In connection with an ERC refund for 2020 or 2021, the company (and in some cases, its owners) is required to amend corporate and individual income tax returns to reduce related wage or salary expenses the employer could otherwise deduct on its federal income tax return for the applicable tax year. Partnership income tax returns will need to be amended, or the Administrative Adjustment Request (AAR) procedure must be used. While many tax practitioners (and their clients) are familiar with this rule requiring amendment of income tax returns, uncertainty exists as to how it applies, including the timing of making an income tax return amendment and to what extent tax practitioners helping clients file amended income tax returns are required to assess the validity of a client's ERC claim that they did not prepare.

As enacted, the law provides that rules similar to those of Sec. 280C(a) apply for purposes of the ERC (Sec. 3134(e); §2301, Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136). These rules disallow a deduction for the portion of the employer's wage or salary expense that equals the total credit for the tax year. Because many ERC refund claims are filed well after the income tax return for the same tax year, the employer in these cases must amend its income tax return to pay the additional income taxes resulting from the corresponding wage disallowance (see also Notice 2021-20, Q&A 60, and Notice 2021-49, §IV(C)). With an IRS moratorium in place as of this writing limiting processing of claims, income tax returns will need to be amended before claimed ERC refunds are paid by the IRS to an employer (see IRS News Release IR-2023-169; see also Waggoner, " Moratorium Imposed on New ERC Claim Processing to Curb Abuse ," The Tax Adviser , Sept. 15, 2023).

In March 2023, in the wake of mounting publicity on the multitude of ERC claims that were prepared by entities that may not have undertaken a sufficient analysis to determine whether the employer is entitled to the amount of ERC refund claimed, the IRS Office of Professional Responsibility (OPR) issued Alert 2023-02 to detail how Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), applies to amended tax returns for the ERC. The alert explains that tax professionals requested guidance regarding the application of Circular 230 to the preparation and signing of "original tax returns, amended returns, or claims for refund relating to these credits." While the alert is not explicit with respect to which federal tax returns it covers, OPR has informally stated that it is instructive with respect to amended federal income as well as employment tax returns.

The alert explains the standards and due diligence that should be undertaken with regard to clients that applied for ERC refunds. The alert concludes that "the practitioner must also follow Circular 230's requirements of (1) due diligence in the practitioner's advice and in preparing and filing returns (including the specific standards in section 10.34); (2) full disclosure to a client of their tax situation; and (3) reasonable reliance on client-provided information and on any advice provided by another tax professional." Applying the guidance in the alert to amending federal income tax returns, it could be read to mean — and OPR has informally agreed with this interpretation — that the income tax return preparer needs to understand the ERC rules and feel comfortable that the employer qualifies for the credit and has properly computed the amount of the credit for which there is a corresponding wage deduction disallowance.

Practitioner responsibility

Circular 230 details the required due diligence and standards a practitioner must take with respect to tax returns, stating that a practitioner generally can rely in good faith and without verification on reasonable representations from the client. In relation to preparers of income tax returns, the message of the alert is that good-faith reliance would require a practitioner to make reasonable inquiries of a client to confirm eligibility for the ERC and to determine the correct amount of the credit. The client's responses can be accepted at face value if reasonable, but the practitioner cannot ignore other information the practitioner knows. If the ERC seems incorrect or inconsistent with other facts the practitioner knows, the practitioner must make further inquiries to reconcile the incorrect or inconsistent facts. In reviewing the facts and the law regarding ERC claims, Circular 230 does not permit practitioners to sign a return containing a position that lacks a reasonable basis (Circular 230, §§10.34(d) and (a)(1)(i)(A)).

In addition to Circular 230, AICPA members must follow the AICPA Code of Professional Conduct , and members providing tax services must apply the Statements on Standards for Tax Services (SSTSs). SSTS No. 2, Standards for Members Providing Tax Compliance Services, Including Tax Return Positions , contains standards that apply to members preparing original returns, amended returns, claims for refund, and information returns. These standards generally require the member to follow the taxing authority's written position unless the position being taken by the member has only a realistic possibility of success administratively or in the courts and the taxing authority does not have an applicable written standard. A member may prepare or sign a return when there is a reasonable basis for the tax return position and it is adequately disclosed. This is consistent with Circular 230's requirements.

As with all tax positions, tax preparers review the facts, apply the law, and determine the level of authority with respect to a specific position. Some ERC claims take positions that are not consistent with IRS guidance or public statements but might still be considered to have a realistic possibility of success or a reasonable basis. While percentages are not assigned to the likelihood of success when applying levels of authority, practitioners generally agree that a realistic possibility of success is a 30%–33% likelihood of being upheld in court, and a reasonable-basis position has a 20%–25% likelihood of being upheld in court.

If the tax return preparer determines that the positions taken in calculating the ERC have at least a reasonable basis, the employer's income tax return should be amended to reduce the wage deduction in accordance with the ERC requirements. The practitioner may decide to notify a particular client that, although they are assisting with the income tax return amendment, they did not determine the ERC refund amounts; and the assistance with the amendment is not an endorsement of, or support for, the ERC amounts or basis for the claim.

If the practitioner's analysis results in a conclusion that the ERC does not have a reasonable basis, the practitioner needs to discuss the conclusion with the employer. If the employer understands the practitioner's position that even courts might not uphold the ERC claim but does not want to amend the ERC claim to an amount that is reasonable, the practitioner needs to evaluate whether this employer is a client for whom services (including the filing of an amended income tax return to disallow the wage deduction) should be rendered. For two scenarios in this regard, see the sidebar "Practitioner Responsibility Case Studies."

In its examinations of the ERC, the IRS will generally determine that such a deduction disallowance has been made. For claims filed after the due date of the income tax return, as it processes the ERC claim, the IRS can easily determine if a required amended income tax return has not been filed.

Amendments and timing

The ERC applies for periods during calendar years 2020 and 2021. The statute of limitation for 2020 income tax returns (such as Forms 1120, U.S. Corporation Income Tax Return ) will generally expire in 2024. (This deadline could be extended if pending legislation mentioned above is enacted as currently drafted.) Clients that have not already amended their income tax returns to take into account the ERC loss of tax deduction will need to amend them relatively quickly.

For example, assume a practitioner determines that an ERC claim has a reasonable basis, but the claim has not yet been paid. An amended 2020 income tax return must be filed reflecting the decreased wage deduction, with a payment of additional income tax to the IRS, before the statute of limitation expires in 2024. If the IRS denies the ERC claim after the expiration of the statute of limitation for the income tax return, the wage deduction disallowed on the 2020 amended return is no longer correct (and the employer may have overpaid 2020 taxes). Practitioners need to understand the professional responsibilities they have for amending these tax returns, which can result in difficult discussions with clients.

Practitioner responsibility case studies

Case study 1

The client receives a refund of $100,000 related to an ERC claim for 2020. The practitioner knows that the client had only five employees during 2020, one of which was the owner's daughter. With only five employees, four of whom were unrelated to the owner, the maximum ERC claim is $20,000. The practitioner concludes that $80,000 of the $100,000 claim has no reasonable basis.

The practitioner should discuss the claim with the client and evaluate whether to continue to provide services if the client is unwilling to amend the claim and repay the $80,000 — or the entire amount if the employer is found to not be an eligible employer. Note that this client communication should include a discussion of the IRS program for withdrawing unpaid claims, which has no expiration date at this time, and the IRS Voluntary Disclosure Program for ERC claims, which expires March 22, 2024. (See IRS News Release IR-2023-193 and Fact Sheet FS-2023-24 regarding the Withdrawal Program and Announcement 2024-3 regarding the Voluntary Disclosure Program.)

Case study 2

The client, a retailer, used a third-party provider to determine that the client is an eligible employer in 2020 due to a partial suspension of operations as a result of a government mandate on supplier parts and delays in shipping. The third-party provider assisted the client to file a claim for an ERC. The IRS may not agree with the position that a more-than-nominal portion of the employer's business was affected by these government orders.

The tax practitioner acts with due diligence to consider the ERC claim prepared by the third party. The tax practitioner uses her knowledge of the client and the client's business, reviews the report from the third-party provider, applies the statute, evaluates the IRS's position explained in its notices and Generic Legal Advice Memorandum 2023-005, considers the level of authority of the Service's guidance, and determines that the client's position to claim the ERC has more than a reasonable basis. In this case, the income tax return should be amended to disallow the deduction for the amount of the credit claimed, and any additional income tax should be paid with the amended income tax return.

—  Deborah Walker , CPA, MBA, is national director, Compensation and Benefits, with Cherry Bekaert LLP in Washington, D.C.;  Amber R. Salotto , J.D., is a partner in the U.S. National Tax practice of Andersen in Washington, D.C.;  Ligeia Donis , J.D., is a partner at Vialto Partners in Washington, D.C.; and  Karen Field , J.D., is senior director with RSM US LLP in Washington, D.C. All are members of the AICPA Employee Benefits Tax Technical Resource Panel. To comment on this article or to suggest an idea for another article, contact Paul Bonner at  [email protected] .

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Handling Gifts and Bequests of LLC Interests

  • Taxation of Estates & Trusts

T he gift of an LLC interest generally does not result in the recognition of gain or loss by the donor or the donee. A gift is subject to gift tax unless the gift qualifies for the annual gift tax exclusion (Sec. 2503(b)) or reduces the donor’s applicable unified credit amount (Sec. 2505(a)).

However, practitioners should note that if management of the LLC has unfettered discretion to make or withhold distributions, any gift of an interest in the LLC may be treated as a gift of a future interest and thus not qualify for the annual gift tax exclusion (TAM 9751003). In Hackl , 335 F3d 664 (7th Cir. 2003), the court found that where the donor/donee has no distribution right and no right of withdrawal, the gift of an LLC interest is a gift of a future interest not qualifying for the annual gift tax exclusion.

This outcome can be avoided by giving the manager/managing member the authority to accumulate the funds as he or she may deem appropriate based on his or her reasonable business judgment. This problem may also be avoided by requiring cash distributions to pay the taxes created by operations or by providing a right of first refusal on sale of the interest.

If a gift tax is imposed, it is calculated on the fair market value (FMV) of the gifted property less the amount of debt from which the donor is relieved (no debt relief occurs if the interest gifted is in an LLC taxed as a corporation). In the context of a gift of an LLC interest, the FMV involved is that of the donor’s interest in LLC property, and the debt involved is the donor’s share of LLC liabilities. If the debt relief exceeds the donor’s basis in his or her LLC interest, the transfer of the interest is treated in part as a gift and in part as a sale. The debt relief is treated as an amount realized in a deemed sale transaction and the donor must recognize gain (Regs. Sec. 1.1001-2(a)). Gain recognition usually occurs when the member has a negative tax basis capital account. Some of this gain may be ordinary, de-pending on whether the hot asset rules of Sec. 751 apply. (“Hot assets” include partnership unrealized receivables and substantially appreciated inventory (Sec. 751(b)).) Any capital gain on the deemed sale may be short term or long term under the applicable rules.

Example: J is a member in ABC LLC, which is classified as a partnership for federal taxes. His tax basis capital account is $(100,000), and his share of the LLC’s liabilities is $150,000. The FMV of his interest in LLC assets is $200,000. J asks his practitioner about the tax consequences of gifting his LLC interest to his son, R .

According to the analysis in the exhibit on p. 396, J will recognize a gain on the transfer.

A member acquiring an interest by gift generally has a basis equal to the donor’s basis plus, in some instances, a portion of the gift tax paid (Secs. 742 and 1015). The increase is equal to the gift tax paid on the net appreciation of the transferred interest, but the basis may not exceed the interest’s FMV (Sec. 1015(d)(6); Regs. Sec. 1.1015-5(c)). Net appreciation is the amount by which the FMV of the transferred interest immediately before the gift exceeds the donor’s basis. Accordingly, the donee increases the basis by the following amount:

If the donor recognizes gain on the deemed sale transaction in a transfer treated in part as a gift and in part as a sale, as in the above example, the amount of the gain is added to the donor’s basis in his or her interest for purposes of determining the donee’s basis. The donee then has a basis equal to the amount realized (which in the example is the amount of debt relief) in the deemed sale (Regs. Sec. 1.10154(a)(2)). However, if the FMV of an interest is less than the member’s basis at the time of gift, for purposes of determining the donee’s loss on a subsequent disposition, the donee’s basis in the interest is the FMV of the LLC interest at the time of the gift (Sec. 1015(a)).

Observation: There are some unanswered questions about how to value a single-member LLC interest for gift tax purposes. For example, can a discount be taken for the legal restrictions on the transfer of an interest when the form is ignored for federal tax purposes? While no cases have yet arisen in valuing a single-member LLC, the IRS has been very consistent in treating the entity as a separate legal entity, thereby strengthening the argument for claiming a discount upon transferring an interest in a single-member LLC. The authors believe that any discount available would be less than that available in a multimember LLC.

If the donor member recognizes a gain on the deemed sale of an interest in an LLC classified as a partnership and the LLC has made a Sec. 754 election, the LLC should adjust the basis of its assets to reflect the gain.

Any transfer of an interest in an LLC classified as a partnership to a family member is subject to the family partnership rules of Sec. 704(e). Because LLCs can be used to shift income and property appreciation from higher-bracket, older-generation taxpayers to lower-bracket children and grandchildren, these rules are designed to enforce two principles. One is that income produced by capital should be taxed to the true owner of that capital. The other is that income derived from services should be taxed to the person performing the services. If these principles are circumvented, the IRS may reallocate income between members of an LLC or may even determine that one or more of the LLC’s members are not members at all, at least for income tax purposes.

Warning: Gifts of LLC interests to family members are frequently valued at a reduced amount because of discounts for lack of marketability or minority discounts. The IRS is mounting a significant attack on the use of such discounts, including changing how the penalty for estate and gift tax valuation understatements is determined (Sec. 6662). Practitioners should be aware of these attacks when structuring the gift of an LLC interest.

The substitution of an assignee member with full rights to participate in management generally requires the unanimous consent of the nontransferring members under state law. Consequently, an individual receiving a gift of an LLC interest generally has no right to participate in the LLC’s management until such consent is obtained.

Bequests of LLC Interests

A transfer of a deceased member’s interest by bequest does not result in the recognition of income or loss by the beneficiary or the decedent’s estate. The FMV of the decedent’s LLC interest is includible in the decedent’s gross estate and is subject to estate tax. The beneficiary member has a basis in the LLC interest equal to the FMV of the interest at the decedent’s date of death or the alternate valuation date, if elected by the executor (Sec. 1014(a)).

Observation: The Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), includes modified carryover basis rules that will apply to property received from a decedent dying after December 31, 2009 (Sec. 1022). The basis of the property in the hands of the person acquiring the property at the date of the decedent’s death will be the lesser of the decedent’s adjusted basis or the FMV on the decedent’s date of death. The executor can increase the basis of the trans-ferred property by $1.3 million (but cannot increase the basis of property in excess of its FMV). A spousal property basis increase of $3 million is also available, allowing the basis of property transferred to surviving spouses to be increased by as much as $4.3 million. Consequently, a basis step-up will not always be available and no reduction under this rule would be necessary. The provisions of EGTRRA, including the carryover basis provisions, are scheduled to sunset on December 31, 2010.

The LLC can adjust the basis of its assets to reflect the step-up of the LLC interest’s basis to FMV (if any step-up is available) if a Sec. 754 election is made or is in effect. This adjustment is only for the benefit of the beneficiary member. The election permits an increase in the beneficiary’s basis in LLC property as if the member had acquired a direct interest in the LLC’s assets for FMV on the date of the decedent’s death (or alternate valuation date). The adjustment is based on the FMV used for the decedent’s estate tax return.

For transfers of interests (including transfers upon the death of a member), a basis adjustment under Sec. 743 is required if the LLC has a substantial built-in loss immediately after the transfer (unless the LLC is an electing investment partnership or LLC or a securitization partnership or LLC). An LLC has a substantial built-in loss if the LLC’s adjusted basis in LLC property exceeds the FMV of the property by more than $250,000 (Secs. 743(a) and (d)).

A member’s death may dissolve the LLC under applicable state law (unless the articles of organization or operating agreement provide otherwise). However, most states with a dissolution provision allow the LLC to continue if the remaining members unanimously consent (in some states the requirement is for less than unanimous consent) to continue the LLC within 90 days of the termination of the deceased member’s interest (or if the members can continue according to other provisions in the operating agreement). To prevent one or more members from holding the LLC “hostage,” the members should consider adopting a provision allowing continuation with less than unanimous consent if allowed under the applicable statute.

This case study has been adapted from PPC’s Guide to Limited Liability Companies , 13th Edition, by Michael E. Mares, Sara S. McMurrian, Stephen E. Pascarella II, Gregory A. Porcaro, Virginia R. Bergman, William R. Bischoff, and Linda A. Markwood, published by Thomson Tax & Accounting, Ft. Worth, TX, 2007 ((800) 323-8724; ppc.thomson.com ).

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is assignment of partnership interest taxable

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is assignment of partnership interest taxable

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Tax Time Guide 2024: What to know before completing a tax return

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IR-2024-45, Feb. 21, 2024

WASHINGTON — During the busiest time of the tax filing season, the Internal Revenue Service kicked off its 2024 Tax Time Guide series to help remind taxpayers of key items they’ll need to file a 2023 tax return.

As part of its four-part, weekly Tax Time Guide series, the IRS continues to provide new and updated resources to help taxpayers file an accurate tax return. Taxpayers can count on IRS.gov for updated resources and tools along with a special free help page available around the clock. Taxpayers are also encouraged to read Publication 17, Your Federal Income Tax (For Individuals) for additional guidance.

Essentials to filing an accurate tax return

The deadline this tax season for filing Form 1040, U.S. Individual Income Tax Return , or 1040-SR, U.S. Tax Return for Seniors , is April 15, 2024. However, those who live in Maine or Massachusetts will have until April 17, 2024, to file due to official holidays observed in those states.

Taxpayers are advised to wait until they receive all their proper tax documents before filing their tax returns. Filing without all the necessary documents could lead to mistakes and potential delays.

It’s important for taxpayers to carefully review their documents for any inaccuracies or missing information. If any issues are found, taxpayers should contact the payer immediately to request a correction or confirm that the payer has their current mailing or email address on file.

Creating an IRS Online Account can provide taxpayers with secure access to information about their federal tax account, including payment history, tax records and other important information.

Having organized tax records can make the process of preparing a complete and accurate tax return easier and may also help taxpayers identify any overlooked deductions or credits .

Taxpayers who have an Individual Taxpayer Identification Number or ITIN may need to renew it if it has expired and is required for a U.S. federal tax return. If an expiring or expired ITIN is not renewed, the IRS can still accept the tax return, but it may result in processing delays or delays in credits owed.

Changes to credits and deductions for tax year 2023

Standard deduction amount increased. For 2023, the standard deduction amount has been increased for all filers. The amounts are:

  • Single or married filing separately — $13,850.
  • Head of household — $20,800.
  • Married filing jointly or qualifying surviving spouse — $27,700.

Additional child tax credit amount increased. The maximum additional child tax credit amount has increased to $1,600 for each qualifying child.

Child tax credit enhancements. Many changes to the Child tax credit (CTC) that had been implemented by the American Rescue Plan Act of 2021 have expired.

However, the IRS continues to closely monitor legislation being considered by Congress affecting the Child Tax Credit. The IRS reminds taxpayers eligible for the Child Tax Credit that they should not wait to file their 2023 tax return this filing season. If Congress changes the CTC guidelines, the IRS will automatically make adjustments for those who have already filed so no additional action will be needed by those eligible taxpayers.

Under current law, for tax year 2023, the following currently apply:

  • The enhanced credit allowed for qualifying children under age 6 and children under age 18 has expired. For 2023, the initial amount of the CTC is $2,000 for each qualifying child. The credit amount begins to phase out where AGI income exceeds $200,000 ($400,000 in the case of a joint return). The amount of the CTC that can be claimed as a refundable credit is limited as it was in 2020 except that the maximum ACTC amount for each qualifying child increased to $1,500.
  • The increased age allowance for a qualifying child has expired. A child must be under age 17 at the end of 2023 to be a qualifying child.

Changes to the Earned Income Tax Credit (EITC). The enhancements for taxpayers without a qualifying child implemented by the American Rescue Plan Act of 2021 will not apply for tax year 2023. To claim the EITC without a qualifying child in 2023, taxpayers must be at least age 25 but under age 65 at the end of 2023. If a taxpayer is married filing a joint return, one spouse must be at least age 25 but under age 65 at the end of 2023.

Taxpayers may find more information on Child tax credits in the Instructions for Schedule 8812 (Form 1040) .

New Clean Vehicle Credit. The credit for new qualified plug-in electric drive motor vehicles has changed. This credit is now known as the Clean Vehicle Credit. The maximum amount of the credit and some of the requirements to claim the credit have changed. The credit is reported on Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit , and on Form 1040, Schedule 3.

More information on these and other credit and deduction changes for tax year 2023 may be found in the Publication 17, Your Federal Income Tax (For Individuals) , taxpayer guide.

1099-K reporting requirements have not changed for tax year 2023

Following feedback from taxpayers, tax professionals and payment processors, and to reduce taxpayer confusion, the IRS recently released Notice 2023-74 announcing a delay of the new $600 reporting threshold for tax year 2023 on Form 1099-K, Payment Card and Third-Party Network Transactions . The previous reporting thresholds will remain in place for 2023.

The IRS has published a fact sheet with further information to assist taxpayers concerning changes to 1099-K reporting requirements for tax year 2023.

Form 1099-K reporting requirements

Taxpayers who take direct payment by credit, debit or gift cards for selling goods or providing services by customers or clients should get a Form 1099-K from their payment processor or payment settlement entity no matter how many payments they got or how much they were for.

If they used a payment app or online marketplace and received over $20,000 from over 200 transactions,

the payment app or online marketplace is required to send a Form 1099-K. However, they can send a Form 1099-K with lower amounts. Whether or not the taxpayer receives a Form 1099-K, they must still report any income on their tax return.

What’s taxable? It’s the profit from these activities that’s taxable income. The Form 1099-K shows the gross or total amount of payments received. Taxpayers can use it and other records to figure out the actual taxes they owe on any profits. Remember that all income, no matter the amount, is taxable unless the tax law says it isn’t – even if taxpayers don’t get a Form 1099-K.

What’s not taxable? Taxpayers shouldn’t receive a Form 1099-K for personal payments, including money received as a gift and for repayment of shared expenses. That money isn’t taxable. To prevent getting an inaccurate Form 1099-K, note those payments as “personal,” if possible.

Good recordkeeping is key. Be sure to keep good records because it helps when it’s time to file a tax return. It’s a good idea to keep business and personal transactions separate to make it easier to figure out what a taxpayer owes.

For details on what to do if a taxpayer gets a Form 1099-K in error or the information on their form is incorrect, visit IRS.gov/1099k  or find frequently asked questions at Form 1099-K FAQs .

Direct File pilot program provides a new option this year for some

The IRS launched the Direct File pilot program during the 2024 tax season. The pilot will give eligible taxpayers an option to prepare and electronically file their 2023 tax returns, for free, directly with the IRS.

The Direct File pilot program will be offered to eligible taxpayers in 12 pilot states who have relatively simple tax returns reporting only certain types of income and claiming limited credits and deductions. The 12 states currently participating in the Direct File pilot program are Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington state and Wyoming. Taxpayers can check their eligibility at directfile.irs.gov .

The Direct File pilot is currently in the internal testing phase and will be more widely available in mid-March. Taxpayers can get the latest news about the pilot at Direct File pilot news and sign up to be notified when Direct File is open to new users.

Finally, for comprehensive information on all these and other changes for tax year 2023, taxpayers and tax professionals are encouraged to read the Publication 17, Your Federal Income Tax (For Individuals) , taxpayer guide, as well as visit other topics of taxpayer interest on IRS.gov.

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  1. Free Assignment of Partnership Form

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  6. Interest Test B Ed Psychology Test file

COMMENTS

  1. Tax Issues to Consider When a Partnership Interest is Transferred

    The majority interest taxable year - this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%. Example - Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a ...

  2. Reporting on the transfer of partnership interests: PwC

    Section 1446 (f), added to the Code by the 2017 tax reform legislation, provides rules for withholding on the transfer or disposition of a partnership interest. Proposed Regulations were issued in May 2019, which laid the framework for guidance on withholding and reporting obligations under Section 1446 (f) (the Proposed Regulations).

  3. Publication 541 (03/2022), Partnerships

    An applicable partnership interest is an interest in a partnership that is transferred to or held by a taxpayer, directly or indirectly, in connection with the performance of substantial services by the taxpayer or any other related person, in an applicable trade or business. See Section 1061 Reporting Instructions for more information.

  4. Tax Treatment of Liquidations of Partnership Interests

    If the purchase price for the partnership interest will be paid to the selling partner in more than one taxable year, the gain or loss is recognized by the selling partner over the period in which the payments are made under the installment method. The installment method, however, is not available for gain attributable to hot assets.

  5. IRS Issues Partnership Interest Transfer Regulations

    The US Department of the Treasury and Internal Revenue Service (IRS) recently issued final regulations under section 1446 (f), a provision enacted as part of the Tax Cuts and Jobs Act of 2017...

  6. Special Issues Related to Distributions of Partnership Interests by

    Sec. 761 (e) provides that any distri-bution of an interest in a partnership that is not otherwise treated as a sale or ex change, as discussed above, will still be treated as a sale or exchange for purposes of Secs. 708 and 743.

  7. Termination of a Partnership Interest

    The sale of 50% or more of the partnership's capital and profits interests within a 12- month period terminates the partnership under Sec. 708 (b) (1) (B).

  8. PDF Publication 541 (Rev. March 2022)

    a partnership interest. A purchaser of a part-nership interest, which may include the partner-ship itself, may have to withhold tax on the amount realized by a foreign partner on the sale for that partnership interest if the partnership is engaged in a trade or business in the United States. See section 1446(f) for more informa-tion.

  9. PDF IRS practice unit: Sale of a partnership interest

    IRS practice unit: Sale of a partnership interest. The IRS Large Business and International (LB&I) division publicly released a "practice unit"—part of a series of IRS examiner "job aides" and training materials intended to describe for IRS agents leading practices about tax concepts in general and specific types of transactions.

  10. eCFR :: 26 CFR Part 1

    ( a) The sale or exchange of an interest in a partnership shall, except to the extent section 751 (a) applies, be treated as the sale or exchange of a capital asset, resulting in capital gain or loss measured by the difference between the amount realized and the adjusted basis of the partnership interest, as determined under section 705.

  11. Assignment Of Partnership Interest: Definition & Sample

    A partnership is a type of business structure in which two or more people or entities own and operate a business. When one owner sells their stake in the partnership to a third party, an assignment of partnership interest records the transaction to the new partner. The assignment of partnership interest involves two parties: the assignor or the ...

  12. Taxing the Transfer of Debts Between Debtors and Creditors

    The partnership does not recognize gain or loss (other than the COD income) as a result of this transaction. 23 The value of the interest generally is determined by the liquidation value of the interest received. 24 If the creditor receives a profits interest, the liquidation value is zero, and therefore the partnership recognizes COD income ...

  13. PDF Sale of a Partnership Interest

    The aggregate rule comes into play and the look-through concept is applied where the partner may have to characterize part of the gain or loss on the sale of the interest as subject to different tax rates based on the types of assets owned by the partnership entity.

  14. Sale of Partnership Interest

    Next one, just that when they do the fair market value assignment as part of the sale, ... so the Schedule K-1 is going to get marked that there was sale of partnership interest in the main partnership tax return, there needs to be a Form 8308, when they emphasized and because since this is new in 2019, there were new requirements from the K-1, ...

  15. Selling LLC Interests: The Tax Consequences May Not Be What You Expected

    Tax practitioners refer to this as an "inside/outside" basis difference. Lilith has a high basis in her LLC interest (her "outside basis"), but her corresponding share of LLC assets has a low basis (her "inside" basis). For a variety of technical reasons, these types of differences can cause tax inefficiencies.

  16. Trusts Owning Partnership Interests

    The trust is worth $2 million, including $500,000 of marketable securities (with a total cost basis of $503,000) and a limited partnership interest worth $1.5 million. The securities generate $18,000 of dividend income and the partnership reports the trust's share of partnership taxable income of $200,000, but the partnership makes no ...

  17. IRS properly denied charitable deduction for partnership interest ...

    A federal district court has denied a tax refund to a couple who intended to give a 4% partnership interest to a foundation to establish a donor-advised fund (DAF). The court concluded that, in giving the 4% interest, the couple also assigned income to the foundation, on which they were taxable; this assignment of income meant that they hadn't ...

  18. PDF Liquidating Distribution of a Partner's Interest in a Partnership

    A current distribution reduces a partner's capital accounts and basis in his interest in the partnership ("outside basis") but does not terminate the interest. For current and liquidating distributions, a partner will generally not recognize gain. IRC 731(a)(1). However, gain may be recognized on the distribution of assets such as IRC 751 ...

  19. Court Rules on Gifting a Percentage of Partnership Interests Versus a

    [Mary Pat] desires to make a gift and to assign to [the trust] her right, title, and interest in a limited partner interest having a fair market value of TWO MILLION NINETY-SIX THOUSAND AND NO/100THS DOLLARS ($2,096,000.00) as of December 31, 2008 (the "Limited Partner Interest"), as determined by a qualified appraiser within ninety (90) days of...

  20. Tax Implications on Sale of a Partnership Interest

    Example 2 - Sale of partnership interest with partnership debt: Amy is a member of ABC, LLC and has a $23,000 basis in her interest. Amy's membership interest is 1/3 of the LLC. When Amy sells her 1/3 interest for $100,000 the partnership has a liability of $9,000. Amy's amount realized would be $103,000 ($100,000 + ($9,000 x 1/3).

  21. Gifts of Partnership Interests

    The gift of a partnership interest generally does not result in the recognition of gain or loss by the donor or the donee. A gift is, however, subject to gift tax unless the gift qualifies for the annual gift tax exclusion or reduces the donor's lifetime gift tax applicable exclusion amount. (Since the lifetime gift tax exclusion for 2016 is $5 ...

  22. The ERC: Practitioners' responsibilities to amend income tax returns

    Partnership income tax returns will need to be amended, or the Administrative Adjustment Request (AAR) procedure must be used. While many tax practitioners (and their clients) are familiar with this rule requiring amendment of income tax returns, uncertainty exists as to how it applies, including the timing of making an income tax return ...

  23. State tax considerations around the sale of a partnership interest

    Taxpayers who sell interests in multistate partnerships have plenty to consider from a state and local income tax standpoint. If 2021 was any indication (based on the sampling of developments provided above), there will likely be additional case law and administrative decisions addressing this area in the future.

  24. Qualified Business Income Deduction

    Generally, this includes, but is not limited to, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g., SEP, SIMPLE and qualified plan deductions). QBI does not include items such as: Items that are not properly includable in taxable income

  25. Handling Gifts and Bequests of LLC Interests

    Gift Tax. Editor: Albert B. Ellentuck, Esq. T he gift of an LLC interest generally does not result in the recognition of gain or loss by the donor or the donee. A gift is subject to gift tax unless the gift qualifies for the annual gift tax exclusion (Sec. 2503 (b)) or reduces the donor's applicable unified credit amount (Sec. 2505 (a)).

  26. Tax Time Guide 2024: What to know before completing a tax return

    Additional child tax credit amount increased. The maximum additional child tax credit amount has increased to $1,600 for each qualifying child. Child tax credit enhancements. Many changes to the Child tax credit (CTC) that had been implemented by the American Rescue Plan Act of 2021 have expired.