Are you considering selling your partnership? If so, are you wondering what the tax implications and issues of such sale and disposition will be? The article below has been drafted by a Denver tax attorney at The McGuire Law Firm and discusses the tax matters and issues regarding the sale of an entire partnership business.
The sale of an entire partnership or all of the partnership assets will result in a single tax on the disposition. This is because a partnership is a pass through entity and thus the tax consequences and implications will pass through to the partners and will also result in adjustments to the partner’s outside basis.
When your partnership is sold, the partnership recognizes gain or loss on the individual assets determined by the character of the asset and the holding period of the partnership’s asset. This gain or loss is determined without reference to the partner’s outside basis or the partner’s holding period of their partnership interest. It is important to note that the partnership will not (or does not) terminate until the proceeds are distributed to the partners. Gain or loss that is recognized by the partnership on the disposition is taxed to the partners and will create an adjustment to the partner’s outside basis in the partnership. Because gain or loss is recognized at the partnership level, a partnership could sell a long term capital asset and a new partner, would realize long term capital gain.
Example: John, Jim and Jeff have equal one-third share of all profits and losses of J Cubed LLC. J Cubed LLC has no partnership liabilities (remember a liability could be treated as an amount realized) and there are no 704(c) allocation. The LLC balance sheet states:
Book Value Gain (loss)
Capital Assets $90,000 $60,000 ($30,000)
Unrealized AR $0 $60,000 $60,000
Total $90,000 $120,000 $30,000
John Capital $30,000 $40,000 $10,000
Jeff Capital $30,000 $40,000 $10,000
Jim Capital $30,000 $40,000 $10,000
Total $90,000 $120,000 $30,000
J Cubed LLC sells its assets to SK LLC for $120,000. John, Jeff and Jim will each be taxed on 1/3 of the capital loss ($30,000) and the ordinary income on the Section 751 property of $60,000. This will increase each of their capital accounts by $10,000 to $40,000. J Cubed will distribute the $120,000 to John, Jeff and Jim in accordance with their capital accounts and thus each will receive $40,000. Because the partner’s outside basis is the same as their capital accounts, they will not realize or recognize any gain (or loss).
The partnership and purchaser must allocate the purchase price among the assets purchased. This allocation will determine the purchaser’s basis in the assets purchased and the partnership’s pass through capital gain, ordinary income, and/or loss, in addition to whether such loss would be full deductible (or subject to certain capital loss limits or other limits), what portions if any would be eligible for the installment method, and what portions (if any) would be eligible for non-recognition.
The amounts the parties will allocate to the assets are not, and likely will not be identical. The purchaser can include the amount of money or consideration paid in addition to the costs of the acquisition and the partnership that has sold the assets can reduce the amount realized by the transaction costs and transfer costs etc. This will result in an increased amount paid for the purchaser and a decrease of the amount realized for the partnership. The parties are required to file Form 8594 with the Internal Revenue Service, which will state the portion of the purchase price that has been allocated to goodwill or going concern or 197 intangibles.
Based off of the example above, if J Cubed LLC paid fees and transactions costs of $20,000 the net proceeds would be $100,000 and if SK LLC paid legal fees of $15,000, SK LLC’s purchase price would be $135,000.
A tax attorney or business attorney can assist you with the sale or purchase of a partnership or partnership assets and the tax & business related issues and implications of the transaction. Contact The McGuire Law Firm to speak with a Denver tax attorney or business attorney regarding your partnership, tax and transaction related questions and issues.