Partnership Terminations: Mastering Section 708

Description

The tax treatment of a partnership termination is often challenging, especially when the termination is involuntary, whether due to insolvency or other cessation of operations, or to a “technical termination” arising from sales of 50% or more of the total partnership interests. Tax advisers responsible for preparing partnership tax returns need to have a practical understanding of the rules for reporting these involuntary terminations.

A partnership that undergoes a technical termination is deemed to have transferred its assets and liabilities from the “old” or terminated partnership to a deemed new partnership in exchange for an interest in that new partnership. The Treasury regulations governing Section 708 require technically terminated partnerships to file two separate short-year tax returns; the date of the technical termination and deemed transaction is the closing date of the legacy partnership and the opening date of the tax year for the new entity.

Section 708 technical terminations do provide partnerships the opportunity of deciding whether to continue certain irrevocable elections in the new entity. The new partnership may make a Section 754 election, or not, even if the prior partnership had made the election.

Listen as our experienced panel provides practical guidance on structuring partnership agreements and monitoring operations to avoid the costly consequence of a partnership technical termination.