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Technical Compensation Case Study

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Under the rules found in section 708, a partnership may terminate for federal tax purposes but continue legally. To constitute as a technical termination, an exchange of 50% or more of the interests in capital gains and profits must occur within 12 months. Once terminated, the partnerships’ assets and liabilities are viewed as having transferred to the new partnership in exchange for an interest in it. Immediately after, the ceased partnership is regarded as having dealt its newly acquired interests to the purchasing partner and the remaining partners. Say for example, if Jack and Jill each contribute 20,000 to form a partnership and a few years later Jack decides to sell his entire 50% stake to Jenny for 30,000, Jack and Jill are now seen…show more content…
The new partnership on the other hand retains the old EIN and files an initial return for the period beginning the day after termination. For the old partner, the tax year closes on the termination date whereas the new partnership’s tax year may differ depending on the tax year of the majority partner. Once formed, the new partnership is permitted to adopt new accounting methods without IRS consent. (Reg. sec. 1.704-3(a)(2)) Although a partnerships’ basis does not change after a technical termination, certain circumstances are excluded. In the case of depreciation, the Step-in Shoes rule Section168(i)(7) requires that the remaining tax basis of depreciable property be recovered over a new depreciable life using new methods. Additionally, qualified property placed in service during the year of termination is treated as originally placed in service by the new partnership on the contribution date, therefore any allowable depreciation bonus is claimed by the new partnership and not the old one. Particularly, if Jack and Jill are partners and jack sells his 50% share to jenny, then Jenny and Jill claim the bonus depreciation, not jack and Jill. Because of this, the previous partner must consider the loss of such
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