Technical terminations: tangible personal property depreciation issues.

• Author: Afeman, Lynn
• Position: Partnerships

Technical terminations of partnerships under Sec. 708 (b) (1) (B) and its regulations create numerous issues as to the proper tax treatment of depreciable tangible property owned by the terminating partnership, particularly when changing its accounting method for such property. Under Regs. Sec. 1.708-1(b)(1)(iv), the new partnership retains the terminating partnership's basis in depreciable property. However, depreciation on such property "starts over" for the new partnership (i.e., it has to be depreciated by the new partnership as if acquired from a third party for the amount of the carryover basis).

Technical Termination

Sec. 708(b)(1)(B) provides that a partnership is considered terminated if, within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. Regs. Sec. 1.708-1(b)(4) provides that, if a partnership is terminated by a sale or exchange of an interest, the following are deemed to occur:

1. The terminated partnership transfers all of its assets and liabilities to a new partnership in exchange for an interest therein.

2. Immediately thereafter, the terminated partnership distributes an interest in the new partnership to the purchasing partner and the other remaining partners in liquidation of the terminated partnership, either for the continuation of the new partnership's business or its dissolution and winding up.

Deemed Asset Transfer

Sec. 168(i)(7) generally provides that, for transactions covered by Sec. 332,351,361,721 or 731, or for transactions between consolidated group members, the transferee will be treated as the transferor for purposes of computing the depreciation deduction, to the extent of any carryover basis. However, this does not apply in the case of a partnership termination under Sec. 708 (b)(1)(B).Thus, depreciable tangible property transferred from a terminating partnership to a new partnership as part of a technical termination under Sec. 708(b)(1)(B) must be depreciated as if it were acquired from a third party. The property's basis will be the same in the new partnership as it was in the terminating partnership. This basis must be depreciated over the full recovery period applicable to the class of property to which the transferred property belongs in the new partnership's hands, using the applicable depreciation method and convention.

Disposition of property: For a terminating partnership, the transfer is considered a disposition of the...