RECENT DEVELOPMENTS IN PARTNERSHIP TAXATION. Blake D. Rubin, Jon G. Finkelstein and Josh Scala. Arnold & Porter LLP, Washington, D.C.

Transcription

1 RECENT DEVELOPMENTS IN PARTNERSHIP TAXATION Blake D. Rubin, Jon G. Finkelstein and Josh Scala Arnold & Porter LLP, Washington, D.C. January 7, 2005 Page I. Introduction...1 II. Top Twelve Recent Developments in Partnership Taxation...1 A. #1 Repeal of the Partnership Equity for Debt Exception to Cancellation of Indebtedness Income: American Jobs Creation Act of 2004 ( Jobs Act ) (October 22, 2004)...1 B. #2 Allocations with Respect to Built-In Loss Property Limited to Contributing Partner: Jobs Act (October 22, 2004)...2 C. #3 Mandatory Adjustments to Basis of Partnership Property: Jobs Act (October 22, 2004)...3 D. #4 Proposed Regulations on the Treatment of Disregarded Entities for Purposes of Characterizing and Allocating Liabilities Under Section 752 (August 12, 2004)...4 E. #5 Proposed Regulations Regarding Disguised Sales of Partnership Interests (November 26, 2004)...6 F. #6 New Regulations Regarding Partnership Capital Account Revaluation In Connection With Admission of a Service Partner...14 G. #7 Application of Anti-Mixing Bowl Rules After Assets Over Partnership Merger: Revenue Ruling , I.R.B H. #8 - Two Member Limited Liability Company Treated as Disregarded Entity for Federal Income Tax Purposes: Rev. Rul , I.R.B I. #9 Allocations of Excess Nonrecourse Liabilities: Tech. Adv. Mem (April 30, 2004)...18 Copyright 2005 Blake D. Rubin, Jon G. Finkelstein and Josh Scala. All rights reserved.

2 J. #10 Gracia v. Commissioner, TC Memo ; Mirarchi v. Commissioner, TC Memo ; Price v. Commissioner, TC Memo ; Estate of Martinez v. Commissioner, TC Memo (June 22, 2004)...21 K. #11 Temporary and Proposed Regulations Regarding Partnership Non-Tax Basis Liabilities (June 23, 2003)...22 L. # 12 Proposed Regulations Regarding Treatment of Installment Obligations Under Partnership Anti-Mixing Bowl Rules (November 21, 2003)...39 III. Partnership Audits and Procedural Matters...41 A. Duane Hudspath v. Commissioner, T.C. Memo (March 18, 2004)...41 IV. Partnership Accounting...42 A. Private Letter Ruling (November 26, 2003)...42 B. Private Letter Ruling (December 10, 2003)...43 C. Life Care Communities of America v. Commissioner, T.C. Memo (January 5, 2004)...43 D. Revenue Ruling ; I.R.B. 1 (January 29, 2004)...45 E. Private Letter Ruling (March 18, 2004)...45 F. Temporary and Proposed Regulations Regarding Partnership Expense Allocations for Foreign Taxes (April 21, 2004)...46 G. IPO II, a Partnership v. Commissioner, 122 T.C. 295 (April 23, 2004)...47 H. Proposed Regulations on Application of Section 1045 to Partnerships (July 14, 2004)...48 I. Final Regulations On Partnership Transactions Involving Contracts That Use the Long-Term Contract Method of Accounting (July 15, 2004)...51 J. Private Letter Ruling (July 27, 2004)...55 K. Mas One Limited Partnership v. United States, 2004 WL (6 th Cir.) (November 19, 2004)...56 V. Like-Kind Exchanges...58 ii

3 A. Private Letter Ruling (June 14, 2004)...58 B. Revenue Procedure ; I.R.B. 1 (July 20, 2004)...59 C. Revenue Ruling ; I.R.B. 1 (July 20, 2004)...59 VI. Restructurings...60 A. Private Letter Ruling (December 10, 2003)...60 B. Revenue Ruling ; I.R.B. 1 (May 25, 2004)...61 C. Technical Advice Memorandum (July 13, 2004)...61 VII. Tax Shelters...62 A. Notice (April 1, 2004)...62 B. TIFD III-E Inc. v. United States, USTC 50,401 (November 1, 2004)...62 VIII. Partnerships With Tax-Exempt Entities...66 A. Revenue Ruling , IRB B. Private Letter Ruling (June 9, 2004)...67 C. Private Letter Ruling (August 31, 2004)...68 IX. S Corporations...69 A. Private Letter Ruling (September 30, 2003)...69 B. Private Letter Ruling (October 15, 2003)...71 C. Revenue Ruling , I.R.B. 1 (January 23, 2004)...71 D. Technical Advice Memorandum (January 23, 2004)...76 E. Gary Luiz v. Commissioner, T.C. Memo (January 29, 2004)...77 F. Donald G. Oren v. Commissioner, USTC 50,165 (February 12, 2004)...78 G. Revenue Procedure , I.R.B. 489 (February 13, 2004)...79 H. Notice , I.R.B. 1 (April 1, 2004)...79 iii

4 I. Proposed Regulations Regarding Adjustments to Net Unrealized Built-In Gain in S Corporation Acquisitions (June 25, 2004)...81 J. Revenue Procedure , I.R.B. 1 (July 19, 2004)...83 K. Temporary and Proposed Regulations Simplifying S Corporation and Association Elections (July 19, 2004)...84 L. Jobs Act Provisions Affecting S Corporations (October 22, 2004)...84 X. Real Estate Investment Trusts...86 A. Private Letter Ruling (October 1, 2003)...86 B. Private Letter Ruling (October 29, 2003)...86 C. Private Letter Ruling (October 29, 2003)...87 D. Private Letter Ruling (December 17, 2003)...87 E. Private Letter Ruling (January 16, 2004)...88 F. Private Letter Ruling (March 25, 2004)...89 G. Revenue Ruling ; I.R.B. 550 (March 5, 2004)...90 H. Jobs Act Provisions Affecting REITs (October 22, 2004)...91 iv

5 RECENT DEVELOPMENTS IN PARTNERSHIP TAXATION Blake D. Rubin, Jon G. Finkelstein and Josh Scala Arnold & Porter LLP, Washington, D.C. January 7, 2005 I. Introduction This outline discusses the principal developments over approximately the last 12 months affecting the taxation of partnerships. Section II of this outline contains a Top Twelve list of the twelve most important recent developments in the taxation of partnerships, based on their perceived practical importance in structuring business transactions involving partnerships. After the Top Twelve list, the balance of the outline is arranged topically, with each section covering a specific area of partnership taxation in which Congress has legislated, the Treasury Department or the Internal Revenue Service (the Service ) have promulgated regulations or rulings, or courts have interpreted existing law. In addition, key developments relating to the taxation of real estate, S corporations and REITs are noted. II. Top Twelve Recent Developments in Partnership Taxation A. #1 Repeal of the Partnership Equity for Debt Exception to Cancellation of Indebtedness Income: Jobs Act (October 22, 2004) 1. In General. a. Recognized Income. The Jobs Act amended section 108(e)(8) to provide that a debtor partnership that satisfies an indebtedness by transferring a capital or profits interest in the partnership to a creditor will recognize cancellation of indebtedness income from such a transfer. In determining the amount of income, the partnership shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the interest transferred. b. Recourse or Nonrecourse Debt. Determination of a partnership s cancellation of indebtedness income is Copyright 2004 Blake D. Rubin, Jon G. Finkelstein and Josh Scala. All rights reserved. 1