1977, April, Pg. 636. Tax Tips.

6 Colo.Law. 636

Colorado Lawyer

1977.

1977, April, Pg. 636.

Tax Tips

636Vol. 6, No. 4, Pg. 636Tax TipsSale and Purchase of Partnership Interests---Part One

Editor's note: This "Tax Tip" will be presented in two parts. The first part will discuss the tax consequences to the seller of a partnership interest, specifically the amount and character of his gain. Part two will discuss the tax consequences to the buyer, specifically his basis in the acquired partnership interest.Transfers of partnership interests have always been fairly common transactions and the occurrence has probably increased in the wake of the creation of tax shelter partnerships in the recent past. The tax consequences to these partnership interest transfers is at times complex, and it is incumbent upon the practitioner to be aware of the tax consequences upon advising his client.

Amount of Gain or Loss to SellerThe amount of the gain or loss on the sale or other disposition of a partnership interest is computed by measuring the difference between the amount realized by the selling partner for his interest and the adjusted basis of the selling partner in his partnership interest.(fn1) The amount realized includes the sum of any money received plus the fair market value of property (other than money received).(fn2) In addition, the amount realized also includes the amount of any liability the obligation of the repayment from which the selling partner is relieved.(fn3)

The adjusted basis of the partner in his partnership interest is initially determined under one of two methods. If the selling partner was an original investor in the partnership, his basis in his partnership interest is originally determined as being the amount of any money contributed and the adjusted basis of any property contributed to the partnership increased by the amount of gain recognized to the contributing partner on such transfer,(fn4) and further increased by any increase in such partner's share of the liabilities of the partnership or an increase in the partner's individual liability,(fn5) or decreased by any decrease in the partner's share of partnership liabilities or any decrease in the partner's individual liabilities.(fn6) Further, a selling partner can develop his basis in the partnership by virtue of his cost in the purchase of such interest.(fn7) The basis as thus acquired is further adjusted for distributive share computations and distributions from the partnership.(fn8)

Character of Gain or Loss to SellerThe amount of the gain having been determined, it is then necessary to ascertain the character of the gain to the selling partner. Generally, the sale of a partnership interest is treated as a sale or exchange of a capital asset.(fn9) Therefore, if the applicable holding period is met, the selling partner will generally recognize long term capital gain (or loss).(fn10)

At this point, it is necessary to ascertain whether or not the sale of the partnership interest will terminate the partnership for tax purposes. If, within a twelve month period, there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits, the partnership will terminate for tax purposes.(fn11) A major consequence to such termination is the loss of "first user" status for the purpose of utilizing the accelerated forms of depreciation.(fn12)

The above consequences appear simple enough. However, Section 741 of the Internal Revenue Code of 1954, as amended,(fn13) provides that this capital asset treatment is...

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