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05-Dec-2019 18:21

(If Eis the only continuing partnership, simply reverse Dand E in all transfers in this paragraph.) (e) If A is not treated as a continuation of A but two ormore of B, C, D and E are treated as continuationsof A, then the divided partnership is that resultingpartnership, among those that are treated ascontinuations of A, which received the greatestvalue of assets (net of liabilities) in the division. Assets-up Transfers: (1) A distribution of assets to partners of the prior partnershipas part of a partnership division potentially implicatestaxation under the following provisions: 731(a)(1)(distributions of cash), 732(c) (distributions of marketablesecurities), 704(c)(1)(B) (distributions of contributedproperty), 707(a)(2)(B) (disguised sales), and 737(distributions of appreciated property to contributors ofappreciated property).Allparts of the division are then recharacterized astransfers from the divided partnership to theresulting partnerships as described in the twoimmediately preceding paragraphs. However, an assets-up transfer offersthe potential of pushing a high outside basis into anotherwise low basis asset. The partnership should try to ensure thatproperty contributed by a partner is distributed exclusivelyto that contributing partner in an assets- up transaction. Thesetaxing provisions would be avoided if the merger wereeffected via an assets-over transfer. (4) Multiple Continuing Partnerships: If more than one of theresulting partnerships is a continuation of the priorpartnership, then under Prop. 1.708-1(d)(3)(i) thedivided partnership - (a) Is the prior partnership (that is, the "divided"partnership is the partnership that actuallytransferred its assets in the division) if the priorpartnership continues in existence after the mergerand is treated as a continuation of itself; otherwise (b) Is that resulting partnership that is a continuation ofthe prior partnership which receives the greatestvalue of assets (net of liabilities) in the division. (Note: on these facts it cannot be the case that both PQ and RS are continuations of PQRS.) c. (2) Example 6: Partnership A distributes some of its assets inliquidation of the partnership interests of some but not allof its partners. Introduction: On January 11,2000, the Treasury Department issued proposedregulations under 708, relating to the tax consequences of partnership mergersand divisions. Ifpartnership AB distributes its assets pro rata to A and to B,distribution of B of property contributed by A will triggergain recognition to B under 737 as well as to A under704(c)(1)(B). (3) One Continuing Partnership: If the owners of only oneresulting partnership owned more than 50% of the capitaland profits in the prior partnership, then that singlecontinuing partnership is the "divided" partnership. Multiple Forms in a Single Division: The proposed regulationsseem to contemplate the possibility that some of the assets may betransferred in an assets-up transfer and other assets may betransferred in an assets-over transfer in the same, single division. But thetransaction will be recharacterized as an assets-overtransfer from PQRS to PQ is RS is the continuation of PQRS. This general rule will therefore apply to thefollowing circumstances: (1) transfers that areaccomplished under applicable jurisdictional law withoutan actual asset transfer; (2) actual assets-over transfers fromthe divided partnership to a resulting partnership (in thiscase form is respected); and (3) assets-over transfers whenthe post-division prior partnership is not a continuation ofthe pre-division prior partnership but some other resultingpartnership is a continuation (in which case the deemedtransferor will be changed).If none of the appreciation inthe partnerships assets is subject to 704(c), then merging XY into some other partnership in an assets-up transfer willincrease asset basis to apiece because the distributionof the assets out of XY steps- up asset basis under 732(b). Absent this rule the merger of a highly-leveragedpartnership could cause a taxable distribution under752(b) as a result of the deemed asset transfer. If PQRST distributessome of its assets pro rate to its partners who then contribute thoseassets to newly-formed partnership PQRST-Prime, then PQRST isthe "prior" partnership, both PQRST and PQRST-Prime are"resulting" partnerships, and both PQRST and PQRST-Prime arecontinuations of PQRST. The "Divided" Partnership (deemed transferor) (1) General Rule: The proposed regulations call thepartnership that is treated as transferring assets in thedivision the "divided" partnership. However, they do provide that the "prior" partnership istreated as the transferor partnership and they furtherprovide that all assets-over transfers and all assets-uptransfers will be taxed in accordance with their forms. Thatis, prior partnership A has divided into resultingpartnerships A, B, C, D and E, using assets-up transfers toform B and C and assets-over transfers to form D and E.(3) Distribution of Marketable Securities and Cash: Distributions of cash or of marketable securities can betaxable to the extent such distributions exceed thedistributee partners outside basis. Theseprovisions can apply to distributions forming an assets-uptransfer as part of a partnership merger. Assets-Over Transfers: An assets-over transfer as part of a mergershould be tax- free to all parties. Thus, distribution of that interest in theresulting partnership by the terminating partnershippotentially could trigger taxation under 704(c)(1)(B). As a resultof this rule, a partner in a merging partnership willrecognize gain on the transaction under 752(b) only if thenet 752 distribution exceeds the partners outside basis inthe resulting partnership immediately after the "assetsover"transaction. Exiting Partners: (1) Election to Treat Exit as Prior to Merger: It may be thecase that not all of the partners in the merging partnershipscontinue to have an interest in the enterprise after themerger or consolidation. (2) Consequences of the Election: If such an election is madein the merger on consolidation documents, the exitingpartner will be taxed pursuant to 741 (applicable totransfers of partnership interests) rather than pursuant to731 (applicable to partnership distributions). Note that the "prior" partnership maynot be treated as the transferor of assets under the proposedregulations; that partnership is called the "divided"partnership. (2) The "Resulting" Partnerships: The partnerships thatsurvive the division are called "resulting" partnerships inthe proposed regulations, see Prop. 1.708-1(d)(3)(iv);if the prior partnership continues in existence after thedivision, then it is one of the resulting partnerships as well. The "Continued" Partnerships: any resulting partnership whosemembers owned more than 50% of the capital and profits of theprior partnership will be treated as a continuation of the priorpartnership. (a) If none of the resulting partnerships is treated as acontinuation of A, then all of the transfers will betaxed in accordance with their forms.The assets received by Eare treated as having been transferred in an assets-overtransfer from D.

In the context of amerger, this resulting partnership will be, under state law, one ofthe merging partnerships. In addition, if the transaction is structuredas a distribution from one of the merging partnerships to itspartners and then over to the resulting partnership, gain could betriggered to the distributee partners. In suchcircumstances the resulting partnership is treated as thecontinuation of that merging partnership whose partners own morethan 50% of the capital and profits in the resulting partnership andthat transferred the greatest value of assets (net of liabilities) to theresulting partnership. Forexample, A and B might transfer their interests in the ABpartnership to partnership CD in exchange for interests in CD. (b) Example 3: Partnership ABC owns Blackacre withadjusted basis of and fair market value of 0as well as Whiteacre with adjusted basis and fairmarket value of 0. This isespecially likely if more than 2 partnerships merge or consolidate. Rather, for tax purposes the resulting partnership istreated as newly-formed. Thus, the actual assets-over transfer from ABto CD is ignored. Deemed Transfers (1) The Transferor Partnership Terminates (a) In the AB/CD merger above, no actual asset transferis made by partnership CD. Whilethere is no actual transfer of the assets of Z, because Z is not a continuation, it is treated as terminating. (2) Statutory Mergers and Consolidations: When two or morepartnerships merge or consolidate, the resulting partnershipis treated as a continuation of that merging partnershipwhose partners own more than 50% of the capital andprofits in the resulting partnership. However, if the former members of one of theconsolidating partnerships own more than 50% of thecapital and profits of the resulting partnership, theconsolidating partnership will be treated as a continuationof the partnership formerly owned by the new majorityowners. If neither the former partners of Anor the former partners of own more than 50% ofthe capital and profits of post-merger B, then A and B are each treated as if they transferred their assetsto newly-formed New-B in an assets-over transfer,followed by the liquidation of A and B. No Continuing Partnership: it may also be the case that thepartners of no merging partnership end up owning more than 50%of the capital and profits in the resulting partnership. Accordingly, the transaction is recast as a merger of CD into AB(which is then renamed CD), so that no asset transfer of any kind ismade of Blackacre. (b) Consider the merger of equal value partnerships Xand Y into Z such that the former partners of X, of Y and of Z each end up owning one-third of thecapital and profits of the merger partnership. This new partnership is alsotreated as the recipient of the assets transferred by Xand Y (whether transferred by an assets-overtransfer or an assets-up transfer). In the context of a consolidation, this resultingpartnership will be under state law, a newly-formedpartnership. (a) Example 1: Partnership A merges into partnership B under Delaware state law without an actualtransfer of assets. If the resultingpartnership is treated as the continuation of one of the mergingpartnerships, it will file a return for its full taxable year and mustindicate on its return for the year of merger or consolidation that itis the continuation of the partnership treated as continuing. Partnership AB transfers Blackacre to partnership CD which owns Whiteacre with current fair market value of ,000.

partnership liquidating distributions property-42

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For example,suppose A and B each own 50% of the AB partnership whichitself owns Blackacre with current fair market value of ,000.

The assets received by D and Eare treated as having been transferred from B inassets-over transactions.