Partnership tax years that begin on or after Aug. 3, 2015

Transcription

1 147 T.D. 9728; Regs , -4, -5 (Aug. 3, 2015) Final Regulations On Varying Interest Rules Partnership tax years that begin on or after Aug. 3, 2015

2 A Variation Sale of Partnership Interest Death of Partner Contribution in exchange for partnership interest Distribution in exchange for partnership interest

3 Reg Two Methods of Income/Loss Allocation Interim Closing Method is the most accurate and most costly.

4 Proration Method is desirable for its simplicity (like S corps) Choice of method can dramatically change the tax consequences to say a seller and buyer in the year of sale.

5 Can use different methods for different variations during the tax year. Service PSP Exception A service partnership--a partnership in which capital is not a material income producing factor--can use any reasonable method, provided that the allocations are valid under section 704(b).

6 How to Elect 1) Interim Closing. Absent an agreement of the partners to use the proration method, the partnership shall use the interim closing method. (Reg (a)(3)(iii))

7 2) Proration Method. The proration method must be elected by agreement of the partners. With the interim closing method, the partnership may use the: semi-monthly or monthly convention by agreement of the partners.

8 PSP Agreement Per Reg (f) the term agreement of the partners means either an agreement of all the partners to select the method, convention, or extraordinary item in a dated, written statement maintained with the partnership's books and records, including, for example, a selection that is included in the partnership agreement, or a selection of the method, convention, or extraordinary item made by a person authorized to make that selection, including under a grant of general authority provided for by either state law or in the partnership agreement, if that person's selection is in a dated, written statement maintained with the partnership's books and records.

9 In either case, the dated written agreement must be maintained with the partnership's books and records by the due date, including extension, of the partnership's tax return. MGM Growth PSP Agreement April 25, 2016 If any Partner s Percentage Interest varies during a taxable year within the meaning of Regulations Section (a)(1), then for purposes of making such allocations, a method, convention or additional extraordinary item, each as permitted under Regulations Section , shall be selected by agreement of all the Partners which selection shall be set forth in a dated, written statement maintained with the Partnership s books and records. [continue on next slide] 18

10 A selection shall be considered made by agreement of all the Partners for purposes hereof and within the meaning of Regulations Section (f) if the General Partner provides notice of its intended selection to the Limited Partners within a reasonable amount of time prior to the date on which the Partnership s tax return for the relevant taxable year is due and a majority of the Limited Partners and each Limited Partner impacted by such election consent to the selection, such consent not to be unreasonably withheld. 19 Advising the impacted limited partners would require knowledge of the tax consequences of proration vs. interim closing.

11 Under the MGM agreement and the regs., if the limited partners do not consent to proration, the interim closing method must be used. (tie-breaker) Suggested Modification The partnership will use the interim closing method with the monthly convention unless, following notification, a majority of the partners consent to the proration method.

12 Proration Election Sample Language (Pre-Final Regs.) First Wind Holdings Inc. -- Proration Other Allocation Rules. All items of income, gain, loss, deduction and credit allocable to Membership Interests that have been transferred shall be allocated between the transferor and the transferee based on the portion of the calendar year during which each was recognized as the owner of such Membership Interests, without regard to the results of Company operations during any particular portion of that calendar year and without regard to whether cash distributions were made to the transferor or the transferee during that calendar year; provided, however, that this allocation must be made in accordance with a method permissible under Code Section 706.

13 Suggested Modification Clarify that the selection [of the proration method] shall be set forth in a dated, written statement maintained with the Partnership s books and records. Interim Closing Language Pre-Final Regs.

14 Evolent Health LLC (Dated 6/4/2015) Section Other Allocation Rules. All items of income, gain, loss, deduction and credit allocable to common units that have been transferred shall be allocated between the transferor and the transferee based on an interim closing of the Company s books (as though the Company s taxable year had ended). Evolent Health LLC (Dated 6/4/2015) Section Other Allocation Unnecessary from Rules. All items of income, gain, loss, deduction a tax standpoint credit allocable to common because units it that is have the been transferred shall be allocated default, but a between the transferor and the transferee good idea based for on an nontax the Company s reasons books (as interim closing of though the Company s taxable year had ended).

15 Suggested Modification Should also mention the convention (semi-monthly or monthly) and clarify that the selection shall be set forth in a dated, written statement maintained with the Partnership s books and records. Reg (a)(4) Ex. Modified At the beginning of 2016, PRS, a calendar year partnership, has three equal partners, A, B, and C. o On April 16, 2016, A sells 50% of its interest (1/6 th ) in PRS to new partner D. o On August 6, 2016, B sells 50% of its interest (1/6 th ) in PRS to new partner E.

16 Entire 2016 Year (In Thousands) 42 Net Ordinary Income 3 Net Cap. Gain No extraordinary items The partners of PRS: agree to apply the proration method to the April 16, 2016, variation accepts the interim closing method for the August 6, 2016, variation.

17 With Interim Closing E s 1/6 on K-1: <5.5> Net Ord. Loss <.5> Net Cap Loss With Proration (rounded): 2.5 Net Ord. Inc..2 Cap. Gain PRS agrees to use the proration method for the variation on April 16, 2016 Date: January 30, 2017

18 For variations using the interim closing method, the partnership agrees to use the semi-monthly convention. Date: January 30, 2017 PRS determines the deemed date of the Aug. 6 variation for which interim closing is applied: July 31

19 July 31 is the only interim closing. Two Segments: 1/1/2016 to 7/31/2016 8/1/2016 to 12/31/2016 Interim Closing Books Closed Year End

20 Amounts in each segment (in thousands): 1/1/2016 to 7/31/ Net Income 6 Net Cap.Gain 8/1/2016 to 12/31/2016 <33> Net Loss <3> Cap. Loss Eighth: Two Proration Periods(A sold 1/6 to D April 16): 1/1/2016 to 7/31/2016 1/1 to 4/ Days 4/17 to 7/ Days 75 Ord. Inc. 6 Net Cap. Gain

21 Ninth: Prorate 1/1 to 4/ Days of Net Inc. 3 Net Cap. Gain 4/17 to 7/ Days of Net Inc. 3 Net Cap. Gain 1/1/2016 to 7/31/2016 Tenth: Each Ptr s Share First Proration Period: 1/1 to 4/ Days of Net Inc. 3 Net Cap. Gain In Thousands A, B, and C prorate 1/3 each: 12.5 Net Ordinary Inc. 1 Net Capital Gain.

22 Second Proration Period: 4/17 to 7/ Days of Net Inc. 3 Net Cap Gain Same for B, and C: 1/3 each. A and D are 1/6 each: 6.25 Net Ordinary Inc..5 Net Capital Gain Second Segment (B sold to E ): 8/1/2016 to 12/31/2016 <33> Net Ord. Loss <3> Cap. Loss C 1/3: <11> Net ord. loss <1> Cap loss. A,B, D, and E each 1/6: <5.5> Net Ord. Loss <.5> Cap Loss

23 C s 1/3 interest did not change all year. Impact of segments and proration periods on C? None How would E be impacted if PRS agreed to proration for the Aug. 6 variation?

24 One Segment: 1/1/2016 to 12/31/ Net Ordinary Income 3 Net Cap. Gain Three Proration Periods: 1/1/2016 to 12/31/2016 1/1 to 4/ Days of O.I.9 C.G. 4/7 to 8/6 112 Days of O.I.9 C.G. 8/7 to 12/ Days of O.I 1.2 C.G.

25 For B s Sale to E Aug. 6: 1/1/2016 to 12/31/ O.I.9 C.G. 13 O.I.9 C.G. 8/7 to 12/ Days of O.I 1.2 C.G. E s K-1: 2.8 Net Ord. Inc. (17 x 1/6).2 Net Cap. Gain (1.2 x 1/6) With Interim Closing E s 1/6 on K-1: <5.5> Net Ord. Loss <.5> Net Cap Loss With Proration (rounded): 2.5 Net Ord. Inc..2 Cap. Gain

26 What if B donated the 1/6 interest to E (or still a sale and B&E are family members)? Sec. 704(e)(2) What if the partnership has section 704(c) built-in gain? Section 704(c) trumps these allocation rules

27 What about Section 704(b)? It also trumps these allocation rules, but Section 179?

28 For purposes of determining allocations to segments, any special limitation or requirement relating to the timing or amount of income, gain, loss, deduction, or credit applicable to the entire partnership taxable year will be applied based upon the partnership's satisfaction of the limitation or requirement as of the end of the partnership's taxable year. For example, the expenses related to the election to expense a section 179 asset must first be calculated (and limited if applicable) based on the partnership's full taxable year, and

29 then the effect of any limitation must be apportioned among the segments in accordance with the interim closing method or the proration method using any reasonable method. (Reg (a)(3)(vii)) Installment sale gain appears to fall into this category

30 147 Extraordinary Items (similar to interim closing but without conventions) Include: Disposition or abandonment of capital asset or 1231 asset not in ordinary course of T or B. Disposition or abandonment of substantially all inventory in one transaction.

31 Any item from a change in accounting method initiated by the filing of the appropriate form after a variation occurs. (3115?) COD income with exceptions. Settlement or judgment from tort or similar liability. Any additional item if the partners agree. Any item which the IRS determines would, if ratably allocated, result in a substantial distortion of income

32 Any item identified as an additional class in the Internal Revenue Bulletin. Example (not in text)

33 Return to the original PRS example. What if PRS receives a taxable tort settlement for $100,000 on Aug. 3, 2016 and B wants E to recognize as much as possible? (B sold 1/6 th to E Aug. 6) Segments With Interim Closing and Semi-Monthly Convention? 1/1/2016 to 7/31/ Net Inc. 6 Net Cap Gain 8/1/2016 to 12/31/ Tort O.I. <33> Net Loss <3> Cap. Loss

34 The tort settlement is an extraordinary item and it must be attributed to Aug. 3, at the time of day it arose B (not E) is a partner on that day Neither proration nor interim closing can be applied to an extraordinary item.

35 B is allocated 1/3 of the $100,000 extraordinary item. None to E who was not yet a partner on Aug. 3. Reg. Example 5 A and B each own a 15 percent interest in PRS, a partnership that is not a publicly traded partnership and for which capital is a material income-producing factor.

36 On April 25, 2016: 9:00 AM: A sells to D 3:00 PM: PRS incurs extraordinary item 5:00 PM: B sells to E PRS must allocate the extraordinary item in accordance with the partners' interests at 3:00 p.m. on April 25, 2016.

37 Extraordinary Item Small Item Exception Less than 5% and Less than $10 million (individual item and aggregate tests) Reg (c)(2) (Aug. 3, 2015) Final Regs. On Tax Year Closure for Deceased Partner (1997 Act Change) 157

38 Reg (c)(2) first sentence: A partnership taxable year shall close with respect to a partner who sells or exchanges his entire interest in the partnership, with respect to a partner whose entire interest in the partnership is liquidated, and with respect to a partner who dies. Final Reg. Example H is a partner of a partnership having a taxable year ending December 31. Both H and his wife W are on a calendar year and file joint returns. H dies on March 31, 2015.

39 The partnership tax year closes with respect to H on 3/31/2015 H s Final Form 1040: Partnership Income 1/1/2015 3/31/2015

40 Reg (c)(2) final sentence: The sale or exchange of a partnership interest does not, for the purpose of this rule, include any transfer of a partnership interest which occurs at death as a result of inheritance or any testamentary disposition. The partnership interest, is distributed to W as legatee on November 30, 2015.

41 W s 2015 Form 1040 distributive share of partnership income is for: 4/1/ /31/2015 Nothing is allocated to the estate