Controlled Partnership Transactions

Previous articles posted from The McGuire Law Firm have discussed controlled entities and certain related party issues.  The article below has been prepared by a tax attorney at The McGuire Law Firm to discuss controlled partnership transactions.

A controlled partnership is a partnership of which 50% (fifty percent) or more of the capital interest or profits interest is directly or indirectly owned by or for such person.  A gain that is recognized in a controlled partnership transaction may be ordinary income.  The gain can be ordinary if the gain is the result of a sale or exchange of property that in the hands of the party receiving the property is a noncapital asset such as accounts receivable, inventory or depreciable or real property used in a trade or business.  A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities:

–          A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership

–          Two partnerships, if the same person directly or indirectly own more than 50% of the capital interests or profits interest in both partnership

How is ownership determined?  Under most situations, stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.  However, one should note that for a partnership interest that is owned by or for a C corporation, the above rule should only apply to those shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.

An individual will be considered to own the stock or partnership interest directly or indirectly owned by or for his or her family.  So what constitutes family?  Family would include only sisters, brothers, half-sisters, half-brothers, a spouse, ancestors and lineal descendants.  In applying these rules, stock or a partnership interests that are constructively owned by a person via ownership in an entity is treated as actually owned by that person.  However, stock or a partnership interest that is constructively owned by an individual through a family member is not treated as owned by the individual for reapplying this rule to make another family member the constructive owner of tat stock or partnership interest.  No “double-dipping” so to speak in terms of this type of constructive ownership.

You can discuss your tax and business transaction matters with a tax attorney or business attorney at The McGuire Law Firm.  The McGuire Law Firm offers a free consultation to all potential clients.  Contact a tax attorney in Denver by contacting The McGuire Law Firm.

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