Tax Issues in Sale of Partnership & LLC Interests ...

1 Tax Issues in Sale of Partnership & LLC Interests : Structuring the Purchase Agreement Best Practices for Drafting and Negotiating Tax Provisions Today s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, NOVEMBER 20, 2013 Presenting a live 110-minute teleconference with interactive Q&A Christopher McLoon, Partner, Verrill Dana, Portland, Maine Timothy J. Leska, Pepper Hamilton, Philadelphia Chad R. Resner, Senior Manager, KPMG, Washington, The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information.

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5 Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon. FOR LIVE EVENT ONLY Tax Issues in Sale of Partnership & LLC Interests : Structuring the Purchase Agreement Timothy J. Leska Pepper Hamilton, Philadelphia Christopher McLoon Verrill Dana, Portland, Maine I. Introduction of Tax implications for buyer and seller A. Tax Classification of Partnerships and LLCs entities within meaning of to achieve certain goals differ depending upon classification of target. consider pre-closing structure alternatives. B. Seller s gain or loss of a Partnership interest results in capital gain or loss, except for hot assets.

6 Holding period generally determined by holding period of interest . of gain/loss on sale of assets depends upon particular assets being sold; holding period determined by particular assets. Remember sale of a disregarded LLC is a sale of assets. price allocation important, and should be included in agreement. of Partnership Interests : 736(a) v. 736(b) Differences between purchase across the top and redemption from the Partnership Partnership interest not eligible for 1031 like-kind exchange. Disregarded entities? Same Partnership ? 6 I. Introduction of Tax implications for buyer and seller (cont.) C.

7 Buyer s basis buyer s basis is cost, including assumed liabilities. of assets results in basis in assets. of Partnership interest results in basis in the interest itself; absent 754 election (or built-in loss situation), however, the step-up in basis in the Partnership interest is not matched by a basis step-up in the assets held by the Partnership . : A owns a 40% interest in AB Partnership with a value of $4 and a basis of $1. AB owns a single investment property ( X ) with a value of $10 and a basis of $ C acquires A s interest for $4. C s basis in 40% interest is $4. Without 754 election, AB s basis in X remains $ If X subsequently sold for $10 ( no post-C purchase appreciation), AB recognizes $ of gain, of which $3 is allocated to C.

8 C would receive an offsetting loss on liquidation, but timing issue . With 754 election, AB s basis in X becomes $ On sale of X for $10, C recognizes no further gain. 7 D. Installment reporting for selling partner on sale of a Partnership interest generally eligible for installment reporting. of hot assets. answer if structured as redemption? E. Income/Loss Allocation Issues 706(c) and (d) are controlling provisions. of buyer and seller must be allocated items for the year. Pro ration Close of the books (optional and mandatory) agreement provisions. 8 I. Introduction of Tax implications for buyer and seller (cont.)

9 Slide Intentionally Left Blank II. Structuring the Sale Assets Sales Partnership level determination Gain or loss depends on allocation of amount realized Character determined with reference to each asset Timing Installment Sale Depends on assets sold Partner allocations Section 704(b) 10 II. Structuring the Sale Assets Sales Acquiring Company Basis credit for assets based on Section 1012 Allocation of purchase price to assets affects cost recovery timing Intangibles 15 year recovery 11 II. Structuring the Sale (cont.) Sales the Transaction Sale of interest in a tax Partnership v. sale of interest in disregarded entity Sale of 100% Interests /units v.

10 Sale of less than 100% on purchase agreement (general) Income taxes v. non-income taxes Tax return preparation 706 allocation Issues , including tax distributions. side concerns Capital gain v. ordinary income 751(a) exchange tables concerns Basis step-up Input on tax-matters of underlying Partnership going forward on purchase agreement (tax specific) Purchase price allocation Tax treatment Elections Post-closing risk allocation concerns Impact on tax returns (termination?) Impact on method of account (sec. 448) 12 II. Structuring the Sale (cont.) Sales (cont.) Example: A is a one-third partner in ABC LLC, a tax Partnership .