Short Year 1065 Returns for Terminated Partnerships: Avoiding Penalties For Failure to Report

Description

The Section 708(b) “technical termination” is a peculiarity of partnership tax law that leads to unexpected tax penalties. The sale of greater than 50% of the partnership’s assets or profits within a 12-month period, among other circumstances, can terminate the partnership for tax purposes though the entity is actively conducting business.

When a technical termination occurs, the partnership is deemed to have closed its tax books. The Code considers the partnership’s assets to be contributed on a tax-free basis to a successor partnership or LLC and deems ownership interests in the successor partnership distributed to the remaining members of the terminated partnership.

A partnership subject to a technical termination must file two “short-year” Form 1065 income tax returns: One for the period up to the termination event and a second for the successor partnership after the termination. Failure to comply leads to penalties for failure to timely file the initial short-year return and for issuing inaccurate K-1s to the partners.

Tax advisers must know when a technical termination occurs, make sure capital accounts are accurately carried over to the successor partnership, and review the status of existing elections to accurately file the short-year returns.

Listen as our experienced panel provides a practical guide to preparing “short-year” partnership income tax returns for terminated partnerships.