All but the general partnership can also have continuity of life, centralized management and free transferability of interest, subject only to the usual practical problems of transferring interests in closely held businesses. Basis of Property Received in Liquidation of a Partner's Interest 1. Even the general partnership can achieve most of these characteristics by a carefully drafted partnership agreement. Nevertheless, Subchapter K has not been amended to recognize these changes.
As with all other aspects of partnership taxation, the dual nature of a partnership for tax purposes — as at times an aggregation of its partners, and at times an entity — complicates the discussion, particularly because no one, including the author, has been able to articulate a comprehensive statement of when the aggregate, and when the entity, aspect should predominate.
Further complication arises because the “tax” partnership includes not only entities organized as general partnerships or limited partnerships (“LP”) under state law, but also the newer forms of limited liability partnerships (“LLP”), initially primarily for professionals, and the increasingly popular limited liability company (“LLC”). Adjustment to Partnership's Basis in Assets Under 734(b) 1.
The newer forms, particularly the LLC, have many more entity characteristics, particularly when full advantage of the freedom to contract that is part of the latest revisions of the governing statutes in most commercial states is taken into account, so that it is hard to distinguish them from corporations.
All but the traditional general partnership have limited liability, and a general partnership can, in most states, achieve limited liability by a simple filing to become an LLP, but, particularly for professionals that limited liability protects against vicarious liability but not against liability for one's own malpractice, including, of course malpractice in giving advice related to partnership tax matters. Distribution to Contributing Partner - Section 737 C. Certain Liquidating Distributions to Corporate Partners 2. Basis Allocations in a Series of Liquidating Distributions 4.
§§301.7701-2 and -3, recognize partnership as the default tax classification for all domestic entities that are not organized as corporations or joint stock companies, or engaged in certain regulated businesses like banking and insurance.
A number of problems have emerged, particularly for LLCs treated as disregarded entities, including a controversial decision by the IRS to treat the disregarded entity as the one responsible for payroll taxes for its employees, and questions about the status of recourse liabilities of a disregarded entity, particularly one that owns a partnership interest. This Portfolio 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, unfortunately complex, body of tax law. 716-2nd, Partnerships—Current and Liquidating Distributions; Death or Retirement of a Partner, provides a detailed discussion of the tax consequences of distributions by partnerships to partners, including those arising from distributions of a partner's share of the results of partnership operations, and other distributions by the partnership that do not result in termination of the distributee's interest in the partnership even though accompanied by a change in the distributee's and remaining partners' shares of capital or profits and losses, whether in money or property—all called current distributions—and distributions of money or property on the withdrawal of a partner whether on death or withdrawal—called liquidating distributions. 716-2nd, Partnerships — Current and Liquidating Distributions; Death or Retirement of a Partner, provides a detailed discussion of the tax consequences of distributions by partnerships to partners, including those arising from distributions of a partner's share of the results of partnership operations, and other distributions by the partnership that do not result in termination of the distributee's interest in the partnership even though accompanied by a change in the distributee's and remaining partners' shares of capital or profits and losses, whether in money or property — all called current distributions — and distributions of money or property on the withdrawal of a partner whether on death or withdrawal — called liquidating distributions. Liquidating distributions may be accompanied by other retirement payments that do not represent consideration for the withdrawing partner's interest in partnership property, and may be deferred compensation, or other claims against past or future partnership income. Distribution of Property Subject to a 743(b) Basis Adjustment D. When the withdrawal is a result of death, there may be other collateral income and transfer tax consequences. Allocation of Section 734(b) Adjustment Among Partnership Assets a. Distributions, usually liquidating distributions, are important components of major partnership restructurings, including divisions, mergers, incorporations, and changes in legal form. Transfers After December 14, 1999 (1) Allocations Between Asset Classes (2) Allocations Within Asset Classes (3) Increases (4) Decreases (5) Special Rule for Stock of Corporate Partners: 755(c) (6) Requirement that Difference Between Value and Basis Be Reduced b. Timing of Basis Adjustments Caused by Liquidation of Partner's Interest 4.