Page 346 - TaxAdviser_2022

is treated as distributing certain
Regs. Sec. 1.708-1(d)(4) introduces four assets to some or all of its partners
in partial or complete liquidation of
definitions specific to partnership divisions: (1) the partners’ interests in the prior
divided partnership, (2) recipient partnership, partnership. Immediately thereafter,
(3) prior partnership, and (4) resulting the partners are treated as contribut-
ing the distributed assets to a
partnership. resulting partnership in exchange for
interests in the resulting partnership.

Partnership division checklist —
tax concepts, while the prior partner- partnership, the divided partnership nonrecognition exceptions
ship and a resulting partnership are the will be treated as contributing Under either the assets-over or
legal entities under applicable law. certain assets and liabilities to a assets-up form, every partnership
Any resulting partnership is con- recipient partnership in exchange for division contains a contribution into
sidered a continuation of the prior interests in the recipient partnership. a partnership and a distribution out
partnership if the members of the Immediately thereafter, the divided of a partnership. While partnership
resulting partnership had an interest partnership is treated as distributing contributions and distributions gener-
of more than 50% in the capital and the interests in the recipient partner- ally are nonrecognition transactions,
profits of the prior partnership. Any ship to some or all of its partners in numerous exceptions could result in a
other resulting partnership will not be partial or complete liquidation of taxable transaction.
considered a continuation of the prior the partners’ interests in the divided Below is a checklist to help consider
partnership but will be considered a partnership. the U.S. federal income tax conse-
new partnership. ■ If none of the resulting partnerships quences of some of these exceptions.
If the resulting partnership that, is a continuation of the prior Secs. 721(b) and 721(c): Contri-
in form, transferred the assets and li- partnership, the prior partnership butions into a partnership are not tax-
abilities in connection with the division is treated as contributing all of its deferred if the investment company or
is a continuation of the prior partner- assets and liabilities to new resulting related foreign partner exceptions apply.
ship, then such resulting partnership partnerships in exchange for inter- ■ Is a recipient or resulting partnership
will be treated as the divided partner- ests in the resulting partnerships. an “investment company” under Secs.
ship. Contrast this treatment with the Immediately thereafter, the prior 721(b) and 351?
partnership merger rules, in which the partnership is treated as liquidating ■ Does a recipient or resulting partner-
regulations determine which entity is by distributing the interests in the ship have any related foreign partners
the surviving partnership based on rela- new resulting partnerships to the under Sec. 721(c)?
tive value (Regs. Sec. 1.708-1(c)(1)). prior partnership’s partners. Sec. 751(b) — disproportionate
Assets-up form: distributions: Distributions that result
Form of a division ■ If the partnership distributing in a shift in any partner’s share of “hot”
Regs. Sec. 1.708-1(d)(3) provides two assets is a continuation of the prior or “cold” assets are treated as a sale or
choices of form: assets-over and assets- partnership, the divided partnership exchange of the property between the
up. The assets-over form is the default will be treated as distributing certain distributee and the partnership.
method if no form of a division is assets to some or all of its partners ■ Are any of the distributions from the
specified. The assets-over form is more in partial or complete liquidation of divided or prior partnership made
common because the assets-up form re- the partners’ interests in the divided disproportionately to the partner’s
quires the partners to be treated, under partnership. Immediately thereafter, interests?
the laws of the applicable jurisdiction, the partners are treated as contribut- If disproportionate distributions are
as the owner of the assets (i.e., it re- ing the distributed assets to a made, consider whether Prop. Regs.
quires the legal transfer and retitling recipient partnership in exchange for Sec. 1.751-1(b) may help address
of assets). interests in the recipient partnership. this concern.
Assets-over form: ■ If none of the resulting partnerships Secs. 731(a) and 752(b) —
■ If at least one resulting partnership is a continuation of the prior deemed distributions from liability
is a continuation of the prior partnership, the prior partnership shifts: The decrease in a partner’s

www.thetaxadviser.com July 2022 15