Rod owns a 65% interest in the RRR Partnership, a general partnership, which he sells to the two remaining partners - Roger and Regis. The three partners have agreed that Rod will receive $160,000 in cash from the sale. Rod's basis in the partnership interest before the sale is $125,000, which includes his $35,000 share of partnership recourse liabilities. The partnership has assets with a

Question

$310,000 FMV and a $210,000 adjusted basis. What issues should Rod, Roger, and Regis consider before this sale takes place?

What will be an ideal response?

Answer 1

Roger and Regis should consider the following:
• The sale as contemplated will terminate the partnership. Is termination of the partnership desirable for Roger and Regis?
• Will either individual have to recognize a gain? The recognition of gain is unlikely unless Roger and Regis have a small basis relative to the cash held by the partnership and deemed distributed in the liquidating distribution.
• What will be the basis for each of the assets? Under current Treasury Regulations, the termination will be deemed to result in the old partnership contributing the property directly to the new partnership so that no adjustment to asset bases is likely to occur.
• Will income be bunched into a single tax year if the partnership terminates? Termination of the partnership closes a tax year. If the partnership has the same tax year-end as Roger and Regis, no bunching of income will occur. If their tax years differ, however, some bunching will occur.
• When the partnership terminates, all elections are lost. Are there advantages or disadvantages from losing all existing elections? There are a few advantageous tax year-ends for old partnerships that were grandfathered when Congress enacted the rules about required partnership tax year-ends. The loss of this tax benefit would be a significant disadvantage.
• Would liquidation by the partnership be more advantageous than a sale to the other partners? Liquidation by the partnership cannot terminate the partnership.

Rod should consider:
• How much of his gain from the sale would be considered as a sale from his interest in Sec. 751 assets and, therefore, taxed as ordinary income? His sale will result in ordinary income to the extent the FMV of Sec. 751 assets exceeds the adjusted basis in those assets that Rod would have had if the assets had been distributed to Rod just before he sold his interest in the partnership.
• Will the sale cause a bunching of income from the partnership for Rod? Since the sale of the entire partnership interest closes the partnership tax year for the selling partner, the sale will cause bunching of income if Rod's tax year-end is different from RRR's tax year-end.
• Could the transaction be structured in such a way that a liquidation by the partnership would be more beneficial to Rod? Possibly. If Roger and Regis really do not want the partnership to terminate, they may be willing to pay Rod more in a liquidating distribution than they were willing to pay for an outright purchase.