Tax consequences of liquidating a partnership
Further complication arises because the “tax” partnership includes not only entities organized as general partnerships or limited partnerships (“LP”) under state law, but also the newer forms of limited liability partnerships (“LLP”), initially primarily for professionals, and the increasingly popular limited liability company (“LLC”). Distributee's Transferred Basis in Distributed Property a. Character and Holding Period of Distributed Property a. The newer forms, particularly the LLC, have many more entity characteristics, particularly when full advantage of the freedom to contract that is part of the latest revisions of the governing statutes in most commercial states is taken into account, so that it is hard to distinguish them from corporations. S corporations typically are more expensive to organize and require greater attention to the maintenance of corporate formalities than is required with partnerships.However, the corporate form usually provides owners with a greater degree of insulation from business liabilities than does the partnership form.However, in many cases, achieving valuation discounts for gift or estate tax purposes was a major motivation.
All but the general partnership can also have continuity of life, centralized management and free transferability of interest, subject only to the usual practical problems of transferring interests in closely held businesses. Distributions, usually liquidating distributions, are important components of major partnership restructurings, including divisions, mergers, incorporations, and changes in legal form. Partnership's Inside Basis Adjustment under § 734(b) 2. Tiered Partnerships (1) Adjusting Through the Tiers (2) Distribution of Lower-Tier Partnership Interest b. Other Property Distributed to Contributing Partner-§ 737 F. As with all other aspects of partnership taxation, the dual nature of a partnership for tax purposes—as at times an aggregation of its partners, and at times an entity—complicates the discussion, particularly because no one, including the author, has been able to articulate a comprehensive statement of when the aggregate, and when the entity, aspect should predominate. Distributee's Basis, Holding Period and Character 1. Inside Basis Reduction for Corporation Distributed to Controlling Corporate Partner 2. Basis Adjustment Without § 754 Election: Current Distributions-§ 732(d) D. While in some instances it might make sense to liquidate the entity, in many, perhaps most cases, other options might warrant consideration.This article will outline the general issues and considerations, and present several options that do not receive enough consideration.