Short Year 1065 Returns for Terminated Partnerships: Avoiding Penalties For Failure to Report

Transcription

1 FOR LIVE PROGRAM ONLY Short Year 1065 Returns for Terminated Partnerships: Avoiding Penalties For Failure to Report WEDNESDAY, NOVEMBER 8, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Short Year 1065 Returns for Terminated Partnerships Nov. 8, 2017 Brian T. Lovett, CPA, JD, Partner WithumSmith+Brown, New Brunswick, N.J. Scott Bartolf, CPA, Senior Tax Manager WithumSmith+Brown, Red Bank, N.J.

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 Technical Terminations of Partnerships Presented By: Brian T. Lovett, CPA, CGMA, JD - blovett@ Scott M. Bartolf CPA, CGMA, MBA - sbartolf@

6 AGENDA 1. Identifying technical terminations under Section 708(b) 2. Recording deemed transfer of assets and partnership interests 3. Treatment of elections and accounting methods 4. Completing short-form 1065 returns 5. Penalties for noncompliance 6. Planning Ideas 7. Impact of proposed tax reform 6

7 Section 1: Identifying Technical Terminations under 708(b) Presented By: Scott M. Bartolf CPA, CGMA, MBA - sbartolf@

8 DEFINING TECHNICAL TERMINATIONS 708 Continuation of partnership (a) For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated. 8

9 DEFINING TECHNICAL TERMINATIONS 708 Continuation of partnership (b) Termination (1) General Rule For purposes of subsection (a), a partnership shall be considered as terminated only if (A) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or (B) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits. 9

10 SALE OR EXCHANGE REQUIREMENT Reg (b)(2) provides three examples of transactions which are not considered sales or exchanges: 1. A disposition of a partnership interest by gift, bequest or inheritance; 2. The liquidation of a partnership interest; and 3. The contribution of property to a partnership in exchange for an interest in that partnership. 10

11 EXAMPLE #1 Facts: Assume A and B own 60% and 40% of Partnership AB, respectively. Issue: If A gifts his entire 60% interest to C, would it result in a technical termination of Partnership AB? Would the result change if A passed away and his interest passed to C by way of inheritance? Result: Neither fact pattern would result in a technical termination under Reg (b)(2) 11

12 EXAMPLE #2 Facts: Assume A and B own 60% and 40% of Partnership AB, respectively. Issue: If a new partner C were to contribute cash to Partnership AB in exchange for a 60% interest in Partnership AB, would a technical termination result? Result: No, because this is an example of a contribution to the partnership in exchange for interest in the partnership under Reg (b)(2) 12

13 EXAMPLE #2 - VARIATION Facts: Assume A and B own 60% and 40% of Partnership AB, respectively. Issue: If a new partner C were to purchase a 36% interest from partner A and a 24% interest from partner B for a total 60% interest in Partnership AB, would a technical termination result? Result: Yes, because after defining technical terminations, Reg (b)(2) holds that such sale or exchange includes a sale or exchange to another member of the partnership 13

14 EXAMPLE #3 Facts: Assume A, B and C own 50%, 30% and 20% of Partnership ABC, respectively. Issue: If partner B were to sell his entire interest to new partner D, would a technical termination result? Result: No, because partner B only holds a 30% interest in the partnership, so 50% or more of the capital and profits have not been sold. 14

15 EVENTS THAT INADVERTENTLY TRIGGER 708(B) 1. Distribution of a partnership interest 2. Contribution of partnership interest to corporation in a 351 transaction. a. See Evans v. Commissioner 3. Transfer of partnership interest pursuant to reorganization of a corporate partner 4. Applies to all otherwise tax-free reorganizations under 361(a)(1) except F type re-organizations under 361(a)(1)(F) which are excluded because there is virtually no change in the identity of the shareholders and their interest or the assets involved. 5. Termination of lower-tier partnership upon the sale or exchange of an upper-tier partnership 15

16 TERMINATION OF LOWER-TIER PARTNERSHIP Reg (b)(2) provides that, if the sale or exchange of an interest in a partnership (upper-tier partnership) that holds an interest in another partnership (lower-tier partnership) results in a termination of the upper-tier partnership, the upper-tier partnership is treated as exchanging its entire interest in the capital and profits of the lowertier partnership. If the sale or exchange of an interest in an upper-tier partnership does not terminate the upper-tier partnership, the sale or exchange of an interest in the upper-tier partnership is not treated as a sale or exchange of a proportionate share of the uppertier partnership's interest in the capital and profits of the lower-tier partnership. 16

17 TERMINATION OF LOWER-TIER PARTNERSHIP - EXAMPLE Facts: A and B each own a 50% interest in the capital and profits of Partnership AB. Partnership AB owns a 60% interest in the capital and profits of Partnership CD. Issue: A sells her 50% interest in Partnership AB to Z Results: 1. Partnership AB terminates 2. Partnership AB is deemed to have exchanged its entire 60% interest in the capital and profits of Partnership CD (lower-tier entity), therefore, Partnership CD also had a technical termination 17

18 TERMINATION OF LOWER-TIER PARTNERSHIP - TAKEAWAYS Many times in the instance of a lower-tier partnership technically terminating as the result of actions of the upper-tier partnership, the lower-tier partnership and its advisors may not even be aware that the termination took place Practitioners must understand and be able to analyze ownership changes on multiple levels in the tiered partnership context. 18

19 REQUIREMENT: 50% OR MORE OF CAPITAL AND PROFITS (b)(2) expressly states that a 50% or more interest in partnership capital plus a 50% or more interest in partnership profits must be sold or exchanged within a 12 month period. Example: If a partner transfers a 60% interest in capital and a 30% interest in profits, a technical termination would not be triggered. 19

20 REQUIREMENT: 50% OR MORE OF CAPITAL AND PROFITS MUST BE TRANSFERRED WITHIN A 12-MONTH PERIOD (b)(2) expressly states that A partnership shall terminate when 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a period of 12 consecutive months. Note, the transfer of 50% or more can occur in one transaction or in a series of transactions within the 12-month period. Example: If partner A transfers a 40% interest in partnership capital and profits during January and another 20% interest during July of the same year, a technical termination has occurred. 20

21 EXAMPLE #4: 50% OR MORE OF CAPITAL AND PROFITS Facts: Assume A, B and C own interests in Partnership capital of 50%, 30% and 20% of Partnership ABC, respectively and interests in Partnership ABC profits of 40%, 30% and 30%, respectively. Issue: If partner A were to sell his entire interest in partnership capital and profits to new partner D, would a technical termination result? Result: No, because although partner A holds a 50% interest in partnership capital, he only holds a 40% interest in partnership profits so 50% or more of the capital and profits has not been sold. 21

22 EXAMPLE #4 - VARIATION : 50% OR MORE OF CAPITAL AND PROFITS Issue: Would the answer to the previous example change if partner B sold a 10% interest in Partnership profits to partner D in addition to the transaction between partner A and D? Result: Yes, a technical termination would result since 50% or more of the capital and profits has now been sold (Capital: 50% sold from A to D, Profits: 40% sold from A to D, 10% sold from B to D). 22

23 EXAMPLE #5: TRANSFER MUST OCCUR WITHIN A 12-MONTH PERIOD Facts: Assume A, B and C own interests in Partnership capital and profits of 50%, 30% and 20% of Partnership ABC, respectively. Also assume A sells a 30% interest in ABC to new partner D on January 15, Further, assume C sells her 20% interest in ABC to new partner E on December 31, Issue: Has a technical termination occurred? Result: Yes, a technical termination would result since 50% or more of the capital and profits has been sold within a period of 12 consecutive months. 23

24 EXAMPLE #5 - VARIATION: TRANSFER MUST OCCUR WITHIN A 12-MONTH PERIOD Facts: Assume the same facts as example #5 except that C sells her 20% interest in ABC to new partner E on January 5, Issue: Has a technical termination occurred? Result: Yes, a technical termination would result since 50% or more of the capital and profits has been sold within a period of 12 consecutive months (1/15/17 1/15/18). 24

25 EXAMPLE #5 - VARIATION: TRANSFER MUST OCCUR WITHIN A 12-MONTH PERIOD Facts: Assume the same facts as example #5 except that C sells her 20% interest in ABC to new partner E on January 20, Issue: Has a technical termination occurred? Result: No, a technical termination would not result since 50% or more of the capital and profits has not been sold within a period of 12 consecutive months (only 30% interest has been sold during the period of 12 consecutive months beginning 1/15/17 and ending 1/15/18). 25

26 DETERMINING PERCENTAGE TRANSFERRED Sometimes it is a straightforward determination (i.e. A and B each own 50% capital and profits, A sells entire interest to C) Often times partnership agreements are convoluted and involve preferred returns, special allocations of operating profits, capital transactions, or interests in profits only. Practitioners may need to look to Reg (e)(1)(v) to define capital interest interest in assets of partnership which would be distributable to partner upon withdrawal or liquidation at FMV 26

27 DOES SALE OF SAME INTEREST TWICE IN 12-MONTH PERIOD TRIGGER (B)(2)? Answer: No, sale of same interest twice in 12- month period does not result in a technical termination. Example: Partners A, B and C are equal partners in Partnership ABC. A sells his entire 33% interest to new partner D. Six months later, D sells his 33% interest that he acquired six months prior, to E. A technical termination does not result since it was the same 33% interest being transferred in both cases. 27

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29 Section 2: Recording Deemed Transfer of Assets and Partnership Interests Presented By: Brian T. Lovett, CPA, CGMA, JD - blovett@

30 IMPACT ON THE SELLING PARTNER Selling partner is transferring an interest in the partnership, a capital asset, in exchange for consideration Recognizes capital gain or loss based on the difference between consideration received and the tax basis of the partner s interest their partnership interest ( 1001(a)) 751 would require the recognition of ordinary income if the partnership has any hot assets 30

31 IMPACT ON THE PARTNERSHIP Once it is determined that a technical termination took place, it is important to properly record the impact of the transaction The Treasury Regulations under 708 will be the guide Reg (b)(4) provides the guidance 31

32 IMPACT ON THE PARTNERSHIP Prior to 1997, the technical termination of a partnership was deemed to be a distribution of assets/liabilities to the partners followed by a contribution of these assets/liabilities to a new partnership ( assets up transaction) In some cases, this would have the unfortunate result of gain recognition and potential recapture of certain credits 32

33 PRE-1997 EXAMPLE Assume an operating partnership, Partnership YZ, where Y and Z are equal partners. Y decides to sell to A when the Partnership has the following balance sheet: Account Basis FMV Cash 1,000 1,000 Marketable Securities 1,000 10,000 TOTAL ASSETS 2,000 11,000 Capital Partner Y 1,000 5,500 Capital Partner Z 1,000 5,500 TOTAL EQUITY 2,000 11,000 33

34 PRE-1997 EXAMPLE In a deemed assets up transaction, Y and Z would each be deemed to receive $500 of cash and $5,000 of marketable securities (treated like cash) Each partner has a tax basis of $1,000, so would be deemed to have received distributions in liquidation of $4,500 more than the tax basis To selling partner Y, this would have no impact, be the interest would be sold to A presumably for $5,500, which would generate a tax gain of $4,500 To remaining partner Z, they would recognize phantom taxable income of $4,500 34

35 RECORDING THE TECHNICAL TERMINATION Regulations were rewritten to provide for an assets over transaction Terminated partnership is deemed to contribute all assets and liabilities to a new partnership in exchange for an interest in the new partnership ( 721) Terminated partnership distributes interests in new partnership to the purchasing partner and other remaining partners ( 731) 35

36 RECORDING THE TECHNICAL TERMINATION After the distribution: Distribution is made in liquidation of the terminated partnership, so that partnership ceases to exist Interests in the new partnership are held by the purchasing partner and the remaining partners either for the continuation of the business or for winding up 36

37 CURRENT REGULATIONS EXAMPLE Assume an operating partnership, Partnership YZ, where Y and Z are equal partners. Y decides to sell to A when the Partnership has the following balance sheet: Account Basis FMV Cash 1,000 1,000 Marketable Securities 1,000 10,000 TOTAL ASSETS 2,000 11,000 Capital Partner Y 1,000 5,500 Capital Partner Z 1,000 5,500 TOTAL EQUITY 2,000 11,000 37

38 CURRENT REGULATIONS EXAMPLE Under the revised regulations, the transaction is treated as assets over Partnership YZ drops the assets into new Partnership YZ and the basis in those assets carries over Old Partnership YZ distributes the interests in new Partnership YZ to Z and A in liquidation of old Partnership YZ 38

39 BASIS IN PARTNERSHIP INTEREST AFTER TECHNICAL TERMINATION The deemed contributions and distributions required under Reg (b)(1)(iv) are disregarded for purposes of determining the capital accounts of the partners (Reg (b)(2)(iv)(l)) Capital accounts and the basis in the partners interest in the partnership carry over to the new partnership No current income tax impact 39

40 BASIS IN PARTNERSHIP ASSETS AFTER TECHNICAL TERMINATION Reg (b)(4) provides that the tax basis of any property contributed to the new partnership due to the termination of the old partnership will be the carried over basis from the terminated partnership Under 1223(2), the holding period for any assets received from the terminated partnership includes the holding period of the terminated partnership 40

41 BASIS IN PARTNERSHIP ASSETS AFTER TECHNICAL TERMINATION While adjusted basis in assets carries over, the step in the shoes rules of 168(i)(7) specifically exclude technical termination As a result, the new partnership is required to place the asset back into service using MACRS This has the practical effect of lengthening the time it takes to fully depreciate the assets This is the most punitive aspect of technical termination 41

42 BASIS AND DEPRECIATION EXAMPLE A and B are equal partners in Partnership AB. Partnership AB acquired nonresidential real property on Jan. 1, 2002 for $10,000,000. Assume on December 31, 2016, A sells her entire interest in Partnership AB to C. What is the basis at the date of the technical termination? What is the annual depreciation deduction before and after technical termination? 42

43 BASIS AND DEPRECIATION EXAMPLE From acquisition, annual depreciation would be $256,410 Depreciation would have been claimed for 15 years Total depreciation claimed of $3,846,150 ($256,410 x 15) Adjusted basis at the date of technical termination is $6,153,850 ($10,000,000 - $3,846,150) 43

44 BASIS AND DEPRECIATION EXAMPLE After technical termination, the building is placed into service at $6,153,850, however the depreciation starts all over again Annual depreciation deduction after technical termination is $157,791 ($6,153,850 / 39) 44

45 Section 3: Treatment of Elections and Accounting Methods Presented By: Scott M. Bartolf, CPA, MBA, CGMA - sbartolf@

46 TAX ELECTIONS Tax elections will not carry over from the terminated partnership to the new partnership, therefore new elections must be made. Includes any elections under the tangible property regulations (i.e. de minimis, small taxpayer safeharbor, partial disposition). Includes any 754 election in effect at date of termination 46

47 TAX ELECTIONS 754 ELECTION Important Note: 754 election which was made by the terminating partnership allows 743 basis adjustment to new partners However, if new partnership desires to keep 754 election in place for future basis adjustments, a new election must be made. Even though prior 754 election terminates, prior basis adjustments carry over. 47

48 ACCOUNTING METHODS New partnership selects own accounting methods This can be seen as benefit Example: old partnership inadvertently adopted accrual method of accounting, new partnership may use cash method as long as no other restrictions are present ( 448. etc.) 48

49 ACCELERATED 481(A) ADJUSTMENTS Taxpayer-unfavorable automatic accounting method changes are generally taken into account over a four-tax-year period. When a technical termination occurs, there will generally be two tax years within a single calendar year. Balance of prior unfavorable 481(a) adjustment will be taken into account in one calendar year.

50 ACCELERATED 481(A) ADJUSTMENTS Example: Assume Partnership ABC has reached the average gross receipts threshold which requires the company to adopt the UNICAP provisions of 263(A). As a result of this accounting method change, ABC has an unfavorable 481(A) adjustment to taxable income of $500,000 in 2015 which it is entitled to spread over four tax years. On 6/3/17, the partnership technically terminates: Calendar Year No Tech Term Tech Term , , , , , , ,000 0 Total 500, ,000

51 EFFECT ON AMORTIZATION Unlike depreciation, amortization is not restarted after a technical termination. Reg (g)(2)(iv) nonrecognition provisions apply to technical terminations Amortization continued by new partnership over remaining 15-year amortization period of terminating partnership.

52 EFFECT ON START-UP AND ORGANIZATIONAL COSTS Similar to amortization treatment under 197 Amortization of start-up expenses and organizational expenses continues over period adopted by terminating partnership.

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54 Section 4: Completing the Short-Year Form 1065 Presented By: Brian T. Lovett, CPA, CGMA, JD - blovett@

55 SHORT-YEAR FINAL RETURN After a technical termination, the partnership tax year closes for all partners (Reg (c)(1)) The short-year final return is due to the IRS by the 15 th day of the third month after the month in which the partnership terminates MARK THIS DATE we will discuss penalties later, but they can be expensive!! 55

56 SHORT-YEAR FINAL RETURN Be sure to use the technical termination check box on page one of Form 1065 Must also check final return For remaining partners, this will be the first of two K-1s they will receive for the tax year Balance sheet should zero out and net basis should be reported as a withdrawal or distribution on the final K-1 56

57 SHORT-YEAR FINAL RETURN Potential footnotes to add to Sch. K-1 for new and continuing partners: On March 15, 20XX, the old <PARTNERSHIP NAME> partnership terminated for income tax purposes only. As a result of the termination, you received an interest in the new <PARTNERSHIP NAME> partnership. The new partnership began on March 16, 20XX, and it retains the same name and tax ID number. As a result of the termination, you will receive two Schedules K-1. The first Schedule K-1 covers the old partnership's short tax year from January 1, 20XX, through March 15, 20XX. The second Schedule K-1 covers the new partnership's short tax year from March 16, 20XX, through December 31, 20XX. This is the first Schedule K-1. Please consult your tax advisor regarding the tax consequences of this transaction. 57

58 SHORT-YEAR FINAL RETURN Potential footnotes to add to Sch. K-1 for new and continuing partners: Schedule K-1, Item K (Partner's share of liabilities at year end): The amounts shown represent your share of partnership liabilities on the date of the partnership's technical termination on March 15, 20XX. Please consult your tax advisor regarding the proper treatment of the termination transaction. Schedule K-1, Item L (Partner's capital account analysis): The amount shown on the withdrawals & distributions line of your capital account analysis represents the net tax basis of your share of the partnership's assets and liabilities on the date of the partnership's technical termination on March 15, 20XX. Please consult your tax advisor regarding the proper treatment of the termination transaction. 58

59 SHORT-YEAR INITIAL RETURN The first day of the new partnership s tax year is the day after the date of termination of the old partnership New partnership will still use the same EIN as the old terminated partnership Free to select its own year end as provided in 706(b)(1)(B) 59

60 ASSETS ON SHORT YEAR INITIAL RETURN Basis of assets and depreciation As mentioned, the basis in the assets of the terminating partnership will carry over Holding period will also carry over However, depreciation must be restarted using the current MACRS life 60

61 IMPACT ON 704(C) BUILT IN GAIN Upon contribution of built-in gain property to a partnership, 704(c) requires that the built-in gain be tracked Income/deductions from the property need to be specially allocated to take into account the difference between basis and FMV Seven year period for recognition of precontribution gain Under Reg (a)(3)(i), property remains 704(c) property to the extent it was before termination 61

62 Section 5: Penalties for Noncompliance Presented By: Scott M. Bartolf, CPA, MBA, CGMA - sbartolf@

63 PENALTIES As discussed earlier, when a technical termination occurs, the tax year of the partnership closes (Reg (c)(1)) Due to the tax year closing, a return is required to be filed for the short year ( 443(a)(2)) If taxpayer/advisor is not aware of technical termination, extensions and due dates may be missed 63

64 PENALTIES Three significant monetary penalties: 1. Late filing penalty (per partner per month) 2. Failure to complete and provide Schedule K-1 to each partner (per K-1) 3. International forms penalties, if applicable Potential for non-monetary penalties as well 64

65 PENALTIES 6698 Failure to File Partnership Return (a) In addition to the penalty imposed by section 7203, if any partnership required to file a return under section 6031 for any taxable year fails to file such return at the time prescribed therefor (determined with regard to any extension of time for filing) such partnership shall be liable for a penalty determined under subsection (b) for each month (or fraction thereof) during which such failure continues (but not to exceed 12 months), unless it is shown that such failure is due to reasonable cause. (b) Amount per month Product of $195, multiplied by the number of persons who were partners in the partnership during any part of the taxable year 65

66 PENALTIES 6721 Failure to File Correct Information Returns (a) Imposition of penalty (1) In general In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $250 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $3,000,

67 PENALTIES - EXAMPLE Facts: Assume Partnership A has 25 partners and files its tax returns on a calendar year basis. On 6/5/16, the founding partner sells his remaining 30% interest in the partnership capital and profits to several new partners. On 12/31/16, the partnership files its 2016 partnership return reflecting the new ownership. On 1/31/17, four other original partners each sell their 5% interests in capital and profits to new partners. The Partnership sends the documents needed to prepare the 2017 tax return, including the ownership changes, to its accountant on 3/1/2018. Issues: (1) Has a technical termination occurred? (2) Will the partnership be subject to penalties and if so, in what amount? 67

68 PENALTIES - EXAMPLE Result #1: Date of Transfer Percent of Capital and Profits 6/5/ % 1/31/2017 5% 1/31/2017 5% 1/31/2017 5% 1/31/2017 5% Total 50% 68

69 PENALTIES - EXAMPLE Result #2: Yes, technical termination 1/31/17 short year return due 4/15/17, no extension filed. Late Filing Penalty ( 6698) $195 $250 Total Penalties: $59,875 Failure to File Timely Information Returns ( 6721) 25 partners 25 Schedule K-1s 11 months late - Total: $53,625 Total: $6,250 69

70 PENALTIES Significant additional penalties can arise for late filing or failure to file required international forms including: 5471, 8938, 8865, 8804 Nonmonetary penalties can also be significant missed elections Consider FTA Program for late filing penalties 70

71 FIRST TIME ABATEMENT SAMPLE LETTER Dear Sir or Madam: We respectfully request that the failure-to-file penalty be abated based on the IRS s First Time Abate administrative waiver procedures, as discussed in IRM , First Time Abate (FTA). Taxpayer meets first-time penalty abatement criteria: According to IRM , the IRS s Reasonable Cause Assistant provides an option for penalty relief for failure-to-file, failure-to-pay, and failure-to-deposit penalties if the taxpayer meets certain criteria. The taxpayer meets all of the first-time penalty abatement criteria as stated below: Filing compliance: Must have filed (or filed a valid extension for) all required returns and can t have an outstanding request for a return from the IRS. Payment compliance: Must have paid, or arranged to pay all tax due (can be in an installment agreement as long as the payments are current). Clean penalty history: Has no prior penalties for the preceding three years. We understand that this type of penalty abatement is a onetime consideration. If you have any questions, please call me at (XXX) XXX-XXXX. Thank you for your consideration. 71

72 PENALTIES Educate clients Communication with clients during year Proper safeguards in place to set and meet filing deadlines for short year returns 72

73 Section 6: Planning Ideas Presented By: Brian T. Lovett, CPA, CGMA, JD - blovett@

74 DILUTION If it is desirable avoid technical termination, dilution is one strategy that could be helpful If the selling partner were diluted below the necessary threshold prior to the interest sale This would allow the interest sale without resulting in a technical termination 74

75 DILUTION EXAMPLE A and B are equal partners in Partnership AB, which holds significant nonresidential real estate. B desires to sell his entire interest to C. If sold outright, Partnership AB would technically terminate and depreciation would be negatively impacted In order to avoid technical termination, A could contribute cash to Partnership AB in exchange for newly issued partnership units This would dilute B down below 50% of capital and profits of Partnership AB 75

76 DILUTION EXAMPLE After this dilution, B would sell his entire interest to C. Since the sale wouldn t comprise 50% of the capital and profits of Partnership AB, no technical termination would occur After the purchase of interests from B, C would then contribute additional cash to the partnership in exchange for new units which would bring C up to 50% 76

77 PARTIAL LIQUIDATION OF THE INTEREST As mentioned previously, liquidation of a partnership interest is specifically excluded from the definition of sale or exchange As a result, it would be possible to partially liquidate a partner s interest in order to avoid technically terminating a partnership 77

78 PARTIAL LIQUIDATION EXAMPLE Assume Partnership ABC, where A owns 70%, B and C own 15% each A desires to leave the partnership and transfer her entire interest to B and C Outright sale would result in technical termination Partnership ABC could agree to redeem 30% of A s interest, with B and C buying the remaining 40% 78

79 DEFERRAL OF PURCHASE TRANSACTIONS If a selling partner were willing to dispose of his entire interest in a series of transactions scheduled to occur more than 12 months apart, the transactions will not trigger a technical termination Supported by numerous PLRs, including PLR

80 Section 7: Impact of Proposed Tax Reform Presented By: Scott M. Bartolf, CPA, MBA, CGMA - sbartolf@

81 Thank You Presented By: Scott M. Bartolf, CPA, MBA, CGMA - sbartolf@ Brian T. Lovett, CPA, CGMA, JD blovett@