Sale of partnership interest

Discussion in 'Tax' started by Greg Barton, Dec 4, 2006.

  1. Greg Barton

    Greg Barton Guest

    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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    Greg Barton, Dec 4, 2006
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  2. Greg Barton

    Dick Adams Guest

    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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    Dick Adams, Dec 6, 2006
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  3. Greg Barton

    Josh Guest

    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, Dec 6, 2006
    #3
  4. Greg Barton

    Josh Guest

    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


    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Josh, Dec 6, 2006
    #4
  5. 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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    Harlan Lunsford, Dec 7, 2006
    #5
  6. Greg Barton

    Shyster1040 Guest

    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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    Shyster1040, Dec 8, 2006
    #6
  7. Harlan Lunsford <> 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

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
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    << to this newsgroup as well as our anti-spamming policy >>
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    Stuart A. Bronstein, Dec 8, 2006
    #7
  8. Stuart A. Bronstein wrote:
    > Harlan Lunsford <> 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

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Harlan Lunsford, Dec 8, 2006
    #8
  9. Harlan Lunsford <> wrote:
    > Stuart A. Bronstein wrote:
    >> Harlan Lunsford <> 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

    << ======================================================= >>
    << The foregoing was not intended or written to be used, >>
    << nor can it used, for the purpose of avoiding penalties >>
    << that may be imposed upon the taxpayer. >>
    << >>
    << The Charter and the Guidelines for submitting posts >>
    << to this newsgroup as well as our anti-spamming policy >>
    << are at www.asktax.org. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    Stuart A. Bronstein, Dec 11, 2006
    #9
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