Restructuring multiple partnerships to preserve maximum depreciation.

• Author: Kipper, Richard N.

Limited partnership A, consisting of a particular group of investors, owns a 75% capital and profits interest in general partnership AB. Limited partnership B, consisting of a similar, but different, group of investors, owns the other 25% interest in AB's capital and profits. This ownership structure existed for more than five years. Other than a nominal amount of cash, A's and B's only assets were their respective partnership interests in AB.

AB, which at one time had owned substantial healthcare operating businesses, sold off most of those businesses and is left with the direct or indirect ownership of four medical office buildings, each subject to a triple net lease. Three of these buildings are owned outright by AB and the fourth is owned by limited partnership ABC, in which AB owns a 70% interest in ABC's capital and profits. The building owned by ABC, which was placed in service on Jan. 1, 1986, has a remaining depreciable basis of $10 million and an original depreciable basis of $19 million, and is being depreciated straight line over 19 years.

After the sale of its healthcare operations, the need for the multiple partnership structure no longer exists and it has been proposed that B merge into A. AB would thereby terminate under Sec. 708(b)(1)(a) and only A would remain.

On AB's termination, the basis of its assets to A and B would be computed under Sec. 732(b). This basis would equal the sum of A's and B's adjusted bases for their respective partnership interests in AB and would be allocated among the assets under Sec. 732(c).

Since A would have a combined adjusted basis for its AB interests at the moment of AB's termination'; the original Sec. 704(c) adjustments created from AB's original formation, including any additional book/tax disparities created by the merger of B into A, continue to be allocated among the assets received from AB and flowed through to A's individual investor/partners. (Regs. Sec. 1.704-3(a)(9) prescribes the tax treatment for Sec. 704(c) adjustments in tiered partnership transactions involving contributions of partnership interests.) An analysis of the above merger transaction indicated that there would be no immediate tax consequences from the transaction; initially, each investor/partner of premerger partnerships A and B would be essentially in the same position in surviving partnership A.

However, as a result of AB's termination, AB distributed all its properties to A, including its interest in ABC...