Corporate attorney Kathleen O'Brien discusses possible issues in the termination of partnerships under the new Tax Cuts and Jobs Act.
Prior to the enactment of the Tax Cuts and Jobs Act (the “Act”) signed into law in December 2017, partnerships could experience a technical termination if fifty percent (50%) or more of the total interests in partnership capital and profits were sold or exchanged within a 12-month period (I.R.C. 708(b)(1)(B)). A technical termination resulted in a deemed contribution of all of the partnership’s assets and liabilities to a new partnership in exchange for interests in the new partnership, followed by a deemed distribution of the interests in the new partnership to the purchasing partners and the other remaining partners in proportion to their respective interests in the terminated partnership. This led to major headaches for unsuspecting partnership owners and their accountants. The results of a technical termination included:
1. The partnership's taxable year closed on the date of the sale or exchange. A partnership return was due on the 15th day of the 3rd month after the termination period for the old partnership, and another was due for the new partnership at the end of its fiscal year.
2. Partnership-level elections ceased to apply, including the (a) the method used to compute depreciation, (b) the election to expense certain assets under IRC Section 179, and (c) the IRC § 754 election to adjust the basis of partnership assets upon the transfer of a partnership interest or upon certain distributions from the partnership.
3. Partnership depreciation recovery periods restarted for tangible assets.
Under the Act, the technical termination rule for partnerships has been repealed with tax years beginning after Dec. 31, 2017. Thus, a partnership is treated as continuing even if more than 50% of the total capital and profit interest of partnership were sold or exchanged, and new elections are not required or permitted. For most partnership owners, this repeal should come as welcome news as it simplifies the tax planning required when sales and exchanges of partnership interests occur, and eliminates the potential for penalties for the unwary.
For more information on terminating partnerships or the Tax Cut and Jobs Act, please contact our Corporate Department.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.