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THE AMERICAN LAW INSTITUTE
Continuing Legal Education
Limited Liability Entities
2015 Update
March 26, 2015
Video Presentation
Selected Recent Developments in Partnership Tax
By
John R. Maxfield
Holland & Hart LLP
Denver, Colorado
Adam M. Cohen
Holland & Hart LLP
Greenwood Village, Colorado
Portions of this Outline were prepared by John R. Maxfield for the Denver Tax Institute on July 31, 2014
and/or the Colorado Bar Association-Tax Section on October 8, 2014. Other portions of this Outline were
prepared by John Maxfield, Adam Cohen and Chris Walton for other presentations or were published by
Adam M. Cohen in the certain editions of the Journal of Passthrough Entities.
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2015 ALI-CLE LIMITED LIABILITY ENTITY ANNUAL UPDATE
SELECTED RECENT DEVELOPMENTS
IN PARTNERSHIP TAX
MARCH 26, 2015
John R. Maxfield
Holland & Hart LLP
555 Seventeenth Street, Suite 3200
Denver, Colorado 80202
303-295-8341
[email protected]
Adam M. Cohen
Holland & Hart LLP
6380 S. Fiddlers Green Circle, Suite 500
Greenwood Village, Colorado 80111
303-295-8372
[email protected]
This presentation contains general information only and Holland & Hart LLP is not, by means of
this presentation, rendering accounting, business, financial, investment, legal, tax, or other
professional advice or services. This presentation is not a substitute for such professional advice
or services, nor should it be used as a basis for any decision or action that may affect your
business. Before making any decision or taking any action that may affect your business, you
should consult a qualified professional advisor. Holland & Hart LLP shall not be responsible for
any loss sustained by any person who relies on this presentation.
Portions of this Outline were prepared by John R. Maxfield for the Denver Tax Institute on July 31, 2014 and/or the Colorado
Bar Association-Tax Section on October 8, 2014. Other portions of this Outline were prepared by John Maxfield, Adam Cohen
and Chris Walton for other presentations or were published by Adam M. Cohen in the certain editions of the Journal of
Passthrough Entities.
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TABLE OF CONTENTS
Page
I.
HOT ASSET DISTRIBUTION DEVELOPMENTS ......................................................... 1
II.
LOSSES AND DEDUCTIONS .......................................................................................... 3
A.
Deductibility of Law Firm Business Expense: McGlaughlin v.
Comm’r, No. 12-60657 (March, 2014) Fifth Cir. (unpublished per
curiam) .................................................................................................................... 7
III.
ALLOCATION DEVELOPMENTS .................................................................................. 9
A.
Reformation of Partnership Agreements to Correct Allocation
Provisions ............................................................................................................... 9
B.
Targeted Allocations ............................................................................................. 11
C.
Removal of De Minimis Partner Exception from the “Substantiality”
Provisions of the Treasury Regulations ................................................................ 16
D.
Management Fee Waivers..................................................................................... 16
IV.
PARTNERS IN TAX CREDIT (OR OTHER) PARTNERSHIPS................................... 24
A.
Historic Boardwalk Hall, LLC v. Comm’r, 694 F.3d 425 (3rd Cir.
2012) ..................................................................................................................... 24
B.
FAA 20124002F Finds Historic Rehabilitation Partnership to be a
Sham...................................................................................................................... 26
C.
IRS Safe Harbor for Historic Rehabilitation Partnerships................................... 28
D.
CCA 201323015 (Feb. 21, 2013) - Collaboration is Tax Partnership ................. 28
E.
Carrino v. Commissioner – Recognition of Partners ........................................... 31
V.
PARTNERSHIP DEBT ALLOCATION DEVELOPMENTS AND
DISGUISED SALE DEVELOPMENTS .......................................................................... 32
A.
Proposed Modifications to I.R.C. §707 Disguised Sales under the
I.R.C. §752 Partnership Debt Allocation Rules. ................................................... 32
B.
Proposed Regs Regarding Allocation of Partnership Debt among
Related Partners. .................................................................................................. 43
C.
CCA 201324013 Holds Purported Leveraged Partnership Is Disguised
Sale........................................................................................................................ 46
D.
ILM 201308028 Addresses At-Risk and Guarantee of LLC Debt ........................ 48
E.
American Housing Foundation -- Partner Guarantee of Partnership
Debt Ignored as Fraudulent Conveyance ............................................................. 52
F.
Rev. Proc. 2014-20 – Safe Harbor for “Secured By” .......................................... 52
VI.
PARTNERSHIP COMPLIANCE WITH FORM 1099 REPORTING ............................ 55
VII.
PARTNERSHIP MERGERS ............................................................................................ 56
A.
CCA 201315026 .................................................................................................... 57
B.
FAA 20132101F .................................................................................................... 57
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VIII.
UNVESTED PROFITS INTERESTS VS. UNVESTED CAPITAL
INTERESTS AND DEEMED VS. ACTUAL §83(B) ELECTIONS ............................... 58
IX.
DISTRIBUTION FROM PRIVATE FOUNDATION’S FOUNDER’S
ESTATE TO, AND RETENTION BY, PRIVATE FOUNDATION OF NONVOTING LLC UNITS DON’T CONSTITUTE INDIRECT ACTS OF SELFDEALING AND THEREFORE DON’T VIOLATE 4941 .............................................. 59
X.
FINAL PARTNERSHIP TECHNICAL TERMINATION REGULATIONS. ................ 61
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SELECTED RECENT DEVELOPMENTS IN PARTNERSHIP TAX
I.
HOT ASSET DISTRIBUTION DEVELOPMENTS
On November 3, 2014, the IRS proposed new regulations under I.R.C. §751(b). The
regulations adopt a new method of determining a partner’s share of “hot assets,” of determining
if a distribution of partnership property triggers income or gain to the partners and of calculating
the tax consequences of a distribution that does trigger income or gain to the partners.
The new method for determining a partner’s share of “hot assets” requires a hypothetical
sale of the all of the assets of the partnership for fair market value immediately before and after
the distribution. In determining the fair market value of each assets, I.R.C. §7701(g) must be
taken into account. If a partnership has a “carryover basis adjustment” (i.e., a negative basis
adjustment that cannot be allocated to any asset because the adjustment exceeds the transferee’s
share of basis of all depreciated assets in a particular class or a basis adjustment to a class of
property that cannot be made because the partnership owns no property in that class), the
partnership pretends to have a notional asset with a fair market value of zero. The results of that
hypothetical sale are then allocated to the partners, taking into account remedial allocations
under Treas. Reg. §1.704-3(d) and basis adjustments under I.R.C. §743.
The proposed regulations add a new mandatory revaluation of capital accounts in
connection with any non-de minimis distribution by a partnership that owns “hot assets.” This
addition is largely in reliance on the 1984 amendments to I.R.C. §704(c). The revaluation,
looking to reverse §704(c) requirements, ensures that the foregoing hypothetical sale approach
continues to track the ordinary income from the “hot assets” to the partners who had an interest
in those assets before the distribution.
The partnership must compare the net amount of income or loss from “hot assets” that
each partner would have immediately before the distribution with the net amount of income or
loss from “hot assets” immediately after the distribution. If a partner’s share of unrealized gain
from “hot assets” decreases, a partner’s share of unrealized loss from “hot assets” increases or a
partner switches from having a share of unrealized gain to a share of unrealized loss, the
distribution gives rise to a “§751(b) amount” and the partnership must determine the tax
consequences of the distribution under I.R.C. §751(b).
Because the government was worried that the new approach would allow deferral of
ordinary income upon the receipt of a distribution in certain circumstances, a new anti-abuse rule
was added. The rule requires that I.R.C. §751(b) be applied consistent with its purpose of
preventing a partner from converting its rights to ordinary income into capital gain. The antiabuse rule specifically identifies that use of I.R.C. §704(c) to defer ordinary income while
monetizing most of the value of the partnership interest as being potentially abusive. The rule
specifies that the IRS may recast a transaction to ensure the purpose of I.R.C. §751(b) is not
avoided based on all the facts and circumstances.
The anti-abuse rule also creates a number of circumstances that are presumed to be
inconsistent with the purpose of I.R.C. §751(b). The first such circumstance is where there is a
recapitalization of the partnership and a partner reduces his share of net unrealized ordinary
income from “hot assets.” The second set of circumstances all require that the distribution not
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