Type: Coursework
Subject: Taxation
Subject area: Business
Education Level: Maters Program
Length: 2 pages
Referencing style: APA
Preferred English: US English
Spacing Option: Double
Liquidating a Partnership
Name
Affiliation
Course Code
Supervisor
Date
Consequences if one of the partners dies.
When it comes to tax consequences, the death of a partner is going to have several tax implications for the partnership, in this case, carol, Amy and Bob. In this case, if carol dies, it is important to look at the tax consequences for the carol’s heirs, her estate, and final income tax return. One of the major task will be determining the tax year impact, for the partner whose entire interest in the termination would be terminated for any reason that includes sale, exchange, death or liquidation (Avdeev, 2018). In the event that carol was a minority partner in the partnership. Then the distributive share of partnership of income allocable to carol interest through the date of date would be calculated for the entire year. For example if it was $80,000 then for the whole year it would be $120,000. This means that her death will cause the partnership year to close with respect to the interest she would have made. This means that for an $80,000 of income will be included on her final income tax return, meaning that the remaining $40,000 of the income reported by the successor in regard to the partnership interest (Avdeev, 2018). In this regard the 480,000 allocable to carol, is also going to constitute the income reported by her final return (“critical review of the structure of deemed dividend taxation ― focusing on liquidating distribution ―,” 2018).
Another aspect is allocation of the distributive shares of partnership income loss, in the event this happens, then a carols distributive share of partnership loss or income will be reported on the final tax return. This will also include the distributive share for the portion of the year in which the partners interest was owned by the decedent’s successor in regard to the interest that is going to be reported where the successor in the same manner like in the case other forms of transfer of partnership interests (“critical review of the structure of deemed dividend taxation ― focusing on liquidating distribution ―,” 2018).
The determination of income in respect of a decedent (also known as “IRD”) can have substantial ramifications with regard to estate taxes and income taxes for the estate of the decedent as well as the successor in interest. IRD stands for “income received by the decedent that was not subject to income tax prior to the decedent’s death (“critical review of the structure of deemed dividend taxation ― focusing on liquidating distribution ―,” 2018). In general, IRD refers to money that was earned by the decedent but was not subject to income tax before the decedent’s death (Sec. 691). To be more exact, IRD encompasses all of the following forms of income from partnerships: Income that was earned by the partnership but was not recognized for tax purposes as of the date of the partner’s death because of the company’s current accounting methods (such as extended payment sale income and cash-method receivables), regardless of whether it was earned in the year that the partner died (Woodhall, 454 F.226 (9th Cir. 1972); George Edward Quick Trust,444 F.226(8th Cir. 1971).
Payments made under Section 736(a) are counted as income for a successor in interest to a partner who has passed away (Sec. 753). To satisfy the requirements of subsection (b) of section 743 of the Internal Revenue Code, the partnership must either already have an election under section 754 in force or must make the election for the year that includes the date of death of the deceased partner (Gordon, 2018). If the partnership has a considerable built-in loss immediately after the transfer of a partnership interest, then the transferred partnership interest must have its basis adjusted (Avdeev, 2018). This applies even if the transfer occurs due to the death of a partner (unless the partnership is an electing partnership or a securitization partnership). If a partnership’s adjusted base in partnership deed exceeds the FMV of that property by more than $250,000 (Sections 743(a) and (d)), the partnership has a significant loss that is already built into its financial statements.
References
Avdeev, V. (2018). Case note: Federal income tax consequences of liquidating an affiliated subsidiary into its parent. Asian Journal of Business and Management, 6(4). https://doi.org/10.24203/ajbm.v6i4.5420
A critical review of the structure of deemed dividend taxation ― focusing on liquidating distribution ―. (2018). TAX and LAW, 11(1), 155-202. https://doi.org/10.15821/tal.2018.11.1.005
Gordon, J. (2018). Rejecting the ‘Liquidating fiduciary’ exception. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3119182