Nothing from Something: Partnership Continuations under Section 708(a)

Transcription

1 Nothing from Something: Partnership ontinuations under Section 708(a) Phillip Gall, Ernst & Young LLP Moderator: Rachel antor, Kirkland & Ellis LLP Panelist: Glenn Dance, IRS Office of hief ounsel University of hicago 2016 Federal Tax onference November 12, 2016

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst and Young Global Limited, each of which is a separate legal entity. Ernst and Young LLP is a client-serving member firm of Ernst and Young Global Limited operating in the US. This presentation is 2016 Ernst and Young LLP. ll rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst and Young LLP. ny reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst and Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst and Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer's facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Introduction to Partnership ontinuations Statutory language Section 708(a): For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated. Section 708(b)(1): For purposes of subsection (a), a partnership shall be considered as terminated only if () () 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 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 pproach to partnership continuations 1. Identify the partnership continuation within a transaction 2. nalyze the transaction consistent with the continuation conclusion 3. onsider the impact on the continuing partners, if any History Page 3

4 Identifying Partnership ontinuations There is no termination under Section 708(b)(1)() if: ny partner in the original partnership continues ny part of the original partnership's business, financial operation or venture In a partnership Page 4

5 IRS Published Guidance Rev. Rul D E 20% 20% 20% 20% 20% $ $ $ Old ll ssets New onversion rulings (Rev. Ruls , 95-37, 95-55) Page 5

6 Relationship to Partnership Mergers D D LL1 Merger LL2 LL2 LL2 would be a continuation of both LL1 and LL2 under general continuation rule. Special rule Section 708(b)(2)(): In the case of the merger or consolidation of two or more partnerships, the resulting partnership shall, for purposes of this section, be considered the continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the resulting partnership. Page 6

7 Relationship to Partnership Divisions 2 2 LL2 Interests LL2 Interests LL1 LL1 LL2 1 ssets LL2 LL1 and LL2 would both be continuations of LL1 under general continuation rule. Special rule Section 708(b)(2)(): In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting partnership the members of which had an interest of 50 percent or less in the capital and profits of the prior partnership) shall, for purposes of this section, be considered a continuation of the prior partnership. Page 7

8 Transactional nalysis Drop-Down ontinuation: Example 1 efore fter Old LL New LL Old LL and contribute their Old LL interests to New LL, a newly formed entity, in exchange for all the interests in New LL. Page 8

9 Transactional nalysis Drop-Down ontinuation: Example 2 efore fter X X Y LL Y LL Partnership Partnership Y contributes its interests in Partnership to the LL. Page 9

10 Transactional nalysis Drop-Down ontinuation: Example 3 efore fter 40% LL Opo LL Opo LL LL LL and Opo LL conduct operating businesses. and contribute their interests in LL to Opo LL, in exchange for 60% of the interests in Opo LL. Page 10

11 Transactional nalysis Drop-Down ontinuation: Example 4 efore fter 60% LL Opo LL Opo LL LL ssume the same facts as in Example 3, except that and have only a 40% interest in Opo LL after the contribution. Page 11

12 Transactional nalysis Drop-Down ontinuation: Example 5 efore fter ash ash ash 40% LL Opo LL Opo LL LL ssume the same facts as in Example 3, except Opo LL is newly formed and holds only cash that contributed to effect the transaction and and receive the cash and 60% of the interests in Opo LL. Page 12

13 Transactional nalysis Partnership ontinuation In a ubble?: Example 8 efore Interim fter ash ash Old LL New LL ash uyer uyer Old LL Interest Old LL Old LL and contribute their Old LL interests to New LL. Immediately thereafter, New LL sells the Old LL interests for cash and liquidates, distributing the cash to and. Page 13

14 Transactional nalysis Technical Termination Paradox: Example 9 efore fter ash ash ash 60% LL Opo LL Opo LL LL and contribute their interests in LL to Opo LL in exchange for the cash contributed to effect the transaction and 40% of the interests in Opo LL. Page 14

15 Transactional nalysis What s Old is New: Example 16 efore Interim fter X Y X Y X Y Old LL New LL New LL Z Z ssets Old LL Old LL X and Y contribute their Old LL interests to New LL for all the interests in New LL. Immediately following that transaction and as part of the overall plan, Z contributes assets to Old LL. Page 15

16 Transactional nalysis What Is It?: Example 20 Example 20 efore fter D 45% 5% D UTP1 Merger UTP2 45% UTP2 5% 90% 10% LTP LTP and are equal members of UTP 1. and D are equal members of UTP 2. The only assets owned by UTP 1 and UTP 2 are 90% and 10% interests in LTP, respectively. UTP 1 merges into UTP 2 under state law. s a result, and each own 45% of UTP 2 and and D each own 5%, and LTP becomes a disregarded entity of UTP 2. Page 16

17 Impact of ontinuation on a Partnership and its ontinuing Partners Incidental consequences from changing the legal entity EIN Debt allocation under Section 752 pplication of Section 1402(a)(13) Treatment under check-the-box regulations Treatment under Treas. Reg Realization event vs. tax nothing Page 17

18 Realization Event vs. Tax Nothing: The Stakes usiness purpose Insolvent partnership Section 721(b) Section 704(c) and the anti-mixing-bowl rules Notice Disguised sale rules Holding periods Page 18

19 The ase for Nonrealization Progression of the law Does Section 708(a) trump realization? Different legal entities Different economic interests Section 721 lite approach onclusion Page 19

20 EY ssurance Tax Transactions dvisory bout EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst and Young Global Limited, each of which is a separate legal entity. Ernst and Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst and Young LLP is a client-serving member firm of Ernst and Young Global Limited operating in the US Ernst and Young LLP. ll Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com