Consolidated group ownership of partnership.

• Author: Pellervo, Patricia W.
• Position: Taxation

It is not uncommon for members of a consolidated group to own all of the interests in a partnership. If one of the partners later becomes the partnership's sole owner, unanticipated tax consequences may result under Rev. Rul. 99-6.

Matching and Acceleration Rules

Under the consolidated return intercompany transaction rules of Regs. Sec. 1.1502-13, when one member of a consolidated group (S) sells an asset to another member (B) for an amount in excess of S's adjusted basis in the property, taxation of S's intercompany gain ordinarily is deferred under complex matching and acceleration rules intended to treat S and B as if they were divisions of a single entity for certain purposes (including the timing of income inclusion). Under the matching rule of Regs. Sec. 1.1502-13(c), S's intercompany gain will be taken into account based on B's subsequent treatment (such as depreciation or disposition gain) of the transferred property. Under the acceleration rule of Regs. Sec. 1.1502-13(d), S's intercompany gain must be taken into account when it becomes impossible to treat S and B as divisions of a single entity, such as when either member leaves the consolidated group.

If the asset that S sells to B is a partnership interest and the partnership remains in existence (i.e., another partner owns an interest in the partnership, so that the partnership does not terminate under Sec. 708(b)(1)(A)), S's gain on the sale of the partnership interest is deferred under Kegs. Sec. 1.1502-13 and B's basis in its partnership interest acquired from S is its cost under Sec. 1012. If the partnership subsequently liquidates, distributing its assets to B and the other partners, B's basis in the distributed assets will be determined by reference to its basis in the partnership interest under Sec. 732. As a result, under the Regs. Sec. 1.1502-13(j)(1) "successor asset" rule, S's intercompany gain would not be included in income immediately, but instead would attach to the distributed assets for future inclusion in income under the matching and acceleration rules.

The results are not changed if S's sale of the partnership interest to B results in a technical termination of the partnership under Sec. 708(b)(1)(B). Under Regs. Sec. 1.708-1 (b)(1)(iv), the terminated partnership is deemed to contribute all of its assets to a new partnership and, immediately thereafter, the terminated partnership distributes interests in the new partnership to the partners. S's gain would...