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Sale of partnership interest

 
 
Greg Barton
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      12-04-2006, 10:57 PM
I have a partnehip that has a partner with a negative inside
basis. The partner would like to sell his interest and have
the buyer assume the neagtive basis. Can this be done
wihtout tax consequences?

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Dick Adams
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      12-06-2006, 02:09 AM
Greg Barton wrote:

> I have a partnehip that has a partner with a negative inside
> basis. The partner would like to sell his interest and have
> the buyer assume the negative basis. Can this be done
> wihtout tax consequences?


I don't understand negative equity! How was this conjured?

I do understand a partner having an accounts receivable to
the partnership and zero basis for internal reporting
purposes. But I don't know if that flies for tax purposes?

Dick

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Josh
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      12-06-2006, 02:28 AM
I looked into your issue a little more. I am still convinced
that a negative partnership basis can't exist. In addition
to section 733 of the IRC, sections 704(d), 465, & 469 all
work together to make a negative basis unlikely. These
additional code sections suspend partnership losses that
might otherwise create a negative basis for a partner.

A loss can only take the partner's basis down to zero and
not below. The loss can be carried forward for use in future
years when activities occur that increase the partner's
basis (e.g. profits, contributions of property to the
partnership, etc). Unfortunately unused losses can never
pass through to a successor partner. Furthermore,
retroactive allocations of full share of profits or losses
when admitting a new partner can not occur (section 706(d)).

Hope that helps,
Josh

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Josh
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      12-06-2006, 02:28 AM
Greg Barton wrote:

> I have a partnehip that has a partner with a negative inside
> basis. The partner would like to sell his interest and have
> the buyer assume the negative basis. Can this be done
> wihtout tax consequences?


I am interested in how a partner can have a negative basis
in his or her partnership interest. How did the partner end
up with such a basis? Section 733 of the internal revenue
code prohibits a negative basis from occuring, at least to
my understanding.

Could you mean that the partnership's inside basis of an
asset is negative? That can only happen very limited and
rare cirmumstances.

Sorry I don't have a solution for you...maybe someone else
on here can help him out? But I am interested in how the
negative basis came to be.

Thanks,
Josh


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Harlan Lunsford
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      12-07-2006, 01:30 PM
Dick Adams wrote:
> Greg Barton wrote:


>> I have a partnehip that has a partner with a negative inside
>> basis. The partner would like to sell his interest and have
>> the buyer assume the negative basis. Can this be done
>> wihtout tax consequences?


> I don't understand negative equity! How was this conjured?


I remember this from Accounting 201 I think. I was in a
partnership some years ago and each she had a negative
equity. IOW, the sum of capital accounts was (example)
1,000. My balance was 2,000 and her's was -1,000. Which
only meant that she owed me. Actually it wasn't that high,
and I remember receiving a tape recorder plus cash for her
negative interest before she left town. This of course was
a non taxable event.

> I do understand a partner having an accounts receivable to
> the partnership and zero basis for internal reporting
> purposes. But I don't know if that flies for tax purposes?


Say the partner with a negative balance of 1,000 like my
previous partner above had thought that our fledgling tax
business was worth much more, she might have wanted to sell
for 3,000, whereupon if I had agreed, I would have paid her
2000 and she would have had a capital gain.

Actually she could not have sold to an outsider since a
parnership is legally dissolved when a partner withdraws.
Do I remember that right, Stu?

ChEAr$,
Harlan

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Shyster1040
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      12-08-2006, 07:26 AM
Question: when you say "negative inside basis" do you mean
one of the following: (a) the partner has a negative capital
account, or (b) the partner's share of the partnership's
basis in the partnership assets is negative?

Answer (a) is quite possible; answer (b) is generally not
possible - the Service does not like negative basis and, in
general, it cannot be accomplished (e.g., Code Section
704(d), which disallows and rolls over (my term) a partner's
distributive share of partnership losses, achieves this
result by ensuring that a partner can never have a negative
outside basis). The term "inside basis" generally refers to
the partnership's tax basis in the assets it holds and,
where necessary for tax calculations, a partner will have a
share of that inside basis.

To attempt an answer to what I think your question was,
namely that the partner in question has a negative capital
account, that can be transferred. A person who purchases a
partnership interest from an existing partner generally
inherits that part of the capital account that relates to
the interest transferred, without adjustment. This can, of
course, cause some nasty tax consequences, particularly
since the person acquiring such a partnership will often
have to have at least some responsibility to make up that
deficit in order for the partnership allocations to have
substantial economic effect and be respected for tax
purposes.

The other item to consider is whether or not the partnership
holds assets with an inside tax basis that is less than book
basis; if so, you might want to consider the propriety of
requesting that the partnership make a 752 election to give
the incoming partner a basis step-up; otherwise they'll get
tax disparities.

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Stuart A. Bronstein
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      12-08-2006, 07:26 AM
Harlan Lunsford <(E-Mail Removed)> wrote:

> Actually she could not have sold to an outsider since a
> parnership is legally dissolved when a partner withdraws.
> Do I remember that right, Stu?


The partnership dissolves, but that doesn't mean the
business has to liquidate. The law in fruit-and-nutland
says that if someone sells his partnership interest the
buyer doesn't become a partner (without the agreement of the
other partners) but does have the right to income that the
transferor partner had.

Stu

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Harlan Lunsford
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      12-08-2006, 08:23 PM
Stuart A. Bronstein wrote:
> Harlan Lunsford <(E-Mail Removed)> wrote:


>> Actually she could not have sold to an outsider since a
>> parnership is legally dissolved when a partner withdraws.
>> Do I remember that right, Stu?


> The partnership dissolves, but that doesn't mean the
> business has to liquidate. The law in fruit-and-nutland
> says that if someone sells his partnership interest the
> buyer doesn't become a partner (without the agreement of the
> other partners) but does have the right to income that the
> transferor partner had.


Question. You say that the new fellow will have a right to
income? That would imply that the business would continue in
some form and buyer would get a share of profits from then
on.

Or did you mean a right to share of assets?

ChEAr$,
Harlan

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Stuart A. Bronstein
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      12-11-2006, 01:26 AM
Harlan Lunsford <(E-Mail Removed)> wrote:
> Stuart A. Bronstein wrote:
>> Harlan Lunsford <(E-Mail Removed)> wrote:


>>> Actually she could not have sold to an outsider since a
>>> parnership is legally dissolved when a partner withdraws.
>>> Do I remember that right, Stu?


>> The partnership dissolves, but that doesn't mean the
>> business has to liquidate. The law in fruit-and-nutland
>> says that if someone sells his partnership interest the
>> buyer doesn't become a partner (without the agreement of the
>> other partners) but does have the right to income that the
>> transferor partner had.


> Question. You say that the new fellow will have a right to
> income? That would imply that the business would continue in
> some form and buyer would get a share of profits from then
> on.
>
> Or did you mean a right to share of assets?


A little of both or either. It really depends on the
specific circumstances. If the business continues the
assignee becomes entitled to his assignor's share of the
profits, and his share of the assets on liquidation.

Whether or not the assignee has a right to have the business
liquidated depends on local law. But he could well have the
right to do so.

Stu

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