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Partnerships — Disposition of Partnership Interests or Partnership Business; Partnership Termination (Portfolio 718)

Product Code: TPOR41
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Partnerships—Disposition of Partnership Interests or Partnership Business; Partnership Termination, written by Elliott Manning, Professor and Faculty Chair, Graduate Program in Taxation at the University of Miami School of Law, provides a detailed discussion of the tax consequences of dispositions of partnerships, including those arising from taxable sales and nonrecognition dispositions of all or part of a partner's partnership interest, from sales of interests by all partners as a means of disposing of the partnership business, from sales or nonrecognition dispositions of the partnership business or assets, from structural changes in the tax partnership, and from termination of the tax partnership, which is not synonymous with discontinuation of the partnership business.  

This Portfolio discusses the consequences for the transferor, the transferee, and the partnership (the continuing partners) from sales, including disguised sales, of partnership interests, including distinguishing sales from withdrawals; abandonment of the interest; nonrecognition transfers, including the special issues for the successor to a deceased partner; the possible termination of the partnership as a result of sales and exchanges of partnership interests; tax allocations for the year of sale; and suspended losses of transferor partners.   

This Portfolio also deals with taxable sales and other dispositions of the partnership business and assets, including mergers, incorporations, and changes in form. 

The discussion analyzes not only the relevant statutory and regulatory materials, but also the large body of case law, revenue rulings, and other IRS pronouncements, including technical advice memoranda and private letter rulings, that are all part of this complex body of tax law.  

Partnerships—Disposition of Partnership Interests or Partnership Business; Partnership Termination allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
  • Invaluable practice documents including tables, charts and lists
  • Plain-English guidance from world-class experts
  • Real-world and in-depth analysis that lets you explore various options
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
  • Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. Introduction

II. Disposition of Partnership Interests; Partnership Termination

Introductory Material

A. Disposition of Partnership Interests

1. Sale v. Withdrawal

2. Sale

a. Capital Accounts

b. § 704(c) (and Reverse § 704(c)) Adjustments

c. Gain or Loss

(1) Liabilities and Obligations

(a) Definition

(b) Transfer

(c) Sharing Partnership Liabilities

(i) Recourse Liability Shares

(ii) Nonrecourse Liability Shares

(iii) Liability Shares Follow the Losses

(2) Reducing Outside Basis for Unsatisfied Assumed Partner Obligations

(a) Definitions

(b) Exceptions

(c) Sale of Partnership Interest of § 1.752-7 Liability Partner before Satisfaction of § 1.752-7 Liability

(3) Basis of a Partnership Interest

(4) Holding Period of a Partnership Interest

(a) Tacking and Its Limits

(b) Split Holding Period

(5) Allocating Outside Basis on Sale of Part of a Partnership Interest

(6) Ordinary Income - § 751(a)

(7) Collectibles and Unrecaptured § 1250 Gain

(8) Deferred Payment Sale

(a) Eligibility

(b) Liabilities

(c) Disposition

(d) Seller's Gain for Contingent Payments

(e) Purchaser's Basis for Contingent Payments

d. Basis Consequences

(1) Effect on Inside Basis

(2) Adjusting Purchaser's Share of Inside Basis - § 754 and Substantial Built-In Loss

(a) Computing the Inside Basis Adjustment

(b) Effect of the Residual Method

(i) Application of the Residual Method

(ii) Shares of Partnership Assets

(c) Tiered Partnerships

e. Change of Tax Year

3. Disguised Sales of Partnership Interests

4. Abandonment, Forfeiture, or Worthlessness

5. Nonrecognition Dispositions

a. Substituted Basis and Other Attributes

b. Liabilities

c. Inside Basis Adjustment

d. Transfer to Controlled Corporation, or in Reorganization

e. Tiered Partnerships

(1) Transfer to Upper-Tier Partnership

(2) Distribution by Upper-Tier Partnership

(3) Mixing Bowl Transactions

(a) Contributed Property Distributed to Another Partner

(b) Other Property Distributed to Contributing Partner

f. Gratuitous Transfers

(1) Gifts

(2) Charitable Contributions

6. Anti-Abuse Regulations

B. Consequences of Disposition

1. Successor to a Deceased Partner

a. Section 754 Election

(1) Successor's Basis Adjustment under § 754

(2) Basis Adjustment Without § 754 Election - § 732(d)

b. Valuing Deceased Partner's Interest

(1) Buy-Sell Agreements

(2) Valuation Discounts and Premiums

c. Income in Respect of a Decedent

d. Suspended Losses

2. Partnership Termination

a. Sale or Exchange

b. Contributions, Redemptions, and Gratuitous Transfers

c. Effect of Termination

3. Partnership Income for Year of Disposition

a. Disposition of Entire Partnership Interest

b. Disposition of Part of Partnership Interest

c. Other Events Closing a Partnership Tax Year

4. Suspended Losses

a. Taxable Disposition

b. Nonrecognition Transfer

III. Disposition of the Partnership Business and Assets; Structural Changes

Introductory Material

A. Sale

1. Sale

a. Allocating Price - § 1060

(1) Amount Allocated

(2) Residual Method

(3) Amortization of Intangibles by Purchaser - § 197

b. Respecting Form

c. Deferred Payment Sale

2. Nonrecognition Dispositions

B. Structural Changes

1. Partnership Mergers

a. Transfer of Partnership Assets (Assets-Over)

b. Distribution and Contribution of Partnership Assets (Assets-Up)

c. Collateral Consequences

2. Incorporating the Going Partnership

a. Transfer of Partnership Assets (Assets-Over)

b. Distribution and Contribution of Partnership Assets (Assets-Up)

c. Transfer of Partnership Interests (Interests-Up)

d. Acquisitive § 351 Transaction

3. Partnership Divisions

a. Two Forms of Division

b. Collateral Consequences

4. Recapitalization

5. Changing the Legal Form of a Tax Partnership

a. Change in State Law Form

b. Partnership to Disregarded Entity

c. Unincorporated Entity to Corporation

Working Papers

Table of Worksheets

Worksheet 1 Disguised Sale Disclosure Statement for Liquidating Distribution (Former Prop. Regs. § § 1.707-7(k) and -8(b)(1))

Worksheet 2 Election to Adjust Basis of Partnership Property Under § 754 (Regs. § 1.754-1(b))

Worksheet 3 Request for Revocation of § 754 Election to Adjust Basis of Partnership Property (Regs. § 1.754-1(c))

Worksheet 4 Preamble to REG-149519-03, Former Proposed Regulations on § 707 Regarding Disguised Sales, 69 Fed. Reg. 68838 (11/26/04) Withdrawn, 74 Fed. Reg. 3508 (1/21/09)

Worksheet 5 Preamble to T.D. 9059, Regulations on Coordination of Sections 755 and 1060; Allocation of Basis Adjustments Among Partnership Assets and Application of the Residual Method to Certain Partnership Transactions, 68 Fed. Reg. 4293 (6/9/03)

Worksheet 6 Preamble to REG-107872-99, Proposed Regulations on Coordination of Sections 755 and 1060 Relating to Allocation of Basis Adjustments Among Partnership Assets, 65 Fed. Reg. 17829 (4/5/00)

Worksheet 7 Preamble to T.D. 8847, Adjustments Following Sales of Partnership Interests, 64 Fed. Reg. 69903 (12/15/99)

Worksheet 8 Preamble to REG-209682-94, Proposed Regulations on Adjustments Following Sales of Partnership Interests 63 Fed. Reg. 4408 (1/29/98)

Worksheet 9 Preamble to T.D. 8717, 62 Fed. Reg. 25498 (5/9/97) Partnership Termination

Worksheet 10 Preamble to T.D. 8925, Regulations on Partnership Mergers and Divisions, 66 Fed. Reg. 715 (1/4/01)

Worksheet 11 Preamble to REG-111119-99, Proposed Regulations on Partnership Mergers and Divisions, 65 Fed. Reg. 1572 (1/11/00)

Worksheet 12 Preamble to REG-106736-00, Proposed Regulations on Assumption of Partner Liabilities, 68 Fed. Reg. 37434 (6/24/03)

Worksheet 13 Preamble to T.D. 9207, 70 Fed. Reg. 30335 (5/26/05) Assumption of Partner Liabilities

Worksheet 14 Checklist of Principal Tax Consequences of Disposition of Partnership Interests; or of Partnership Business; or of Partnership Termination

Worksheet 15 Sample Transfer Restrictions and Buy-Sell Provisions for an LLC Operating Agreement

Worksheet 16 Sample Tax Related Terms of a Purchase Agreement for an Interest in an Entity Taxed as a Partnership

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Text and Treatises:

Periodicals:

1979

1981

1983

1988

1992

1995

1996

1997

1998

1999

2000

2001

2002

2004

2005

Elliott Manning
Elliott Manning, AB (with honors) Columbia College (1955), JD m.c.l., Harvard Law School (1958). Author of Tax Management Portfolios 710 T.M., Partnerships — Conceptual Overview; and 711 T.M., Partnerships — Formation and Contributions of Property or Services. Author of Choosing the Business Entity (Little Brown 1995); and Corporate Buy-Sell Agreements (Little Brown 1995).