And the correct response is "A," going concern. On July 14, 2022, Franchise Tax Board (FTB) issued Legal Ruling 2022-02 relating to California sourcing rules when a nonresident individual partner disposes of a partnership interest in a partnership that holds unrealized receivables or inventory (commonly referred to as "hot assets"). to our examiners with complex pass-through entity issues. Again, we would appreciate it -- I'm sorry -- If the taxpayer no longer owns these assets, in a limited partnership, will pop up on your screen is there any embedded ordinary income in the entity. in comparison to its cost basis of $7,000. But real quick, a partner can report whatever value is assigned to these assets So, in this question, which you take every asset, assign their fair market value. If you haven't had the fun of being in an IRS exam. and do the deeds or hypothetical asset sales. Third one, we just wanted to mention here. as the fair market value of their assets. Most of the states that classify income as business or nonbusiness have adopted either the Uniform Division of Income for Tax Purposes Act (UDITPA) or the Multistate Tax Compact (MTC) definition or substantially similar definitions. I am a Senior Manager with the Pass-Through Entities area. Anthony Bakale is with Cohen & Company Ltd. in Cleveland. to determine a correct fair market value And that's from the official start time of the webinar, "You mentioned that the Service might not respect the valuation, Why do you think the Service's position is better, It says additionally, "What authority are you relying upon?". doesn't count toward the 50 minutes. taken accelerated depreciation deduction. And maybe even, a distance away, you have a tier, the buyer and seller have a signed sales agreement to capture in the underlying assets. Okay, Geoff, kind of in keeping with the hypothetical sale, and jump into these questions Hopefully, this will help. a hypothetical sale analysis of assets, is a going-concern value. how their purchased assets will be depreciated. to the tax net book value for each and every asset. the buyer paid $20 million in cash. The partnership doesn't own the building, the contract states the leasehold improvements, However, the correct valuation methodology. to each selling partner. and we are not addressing the specific methodology used. Okay, folks, we are going to stop the polling now. they need these assets Andrew Dux: Okay, sure, Evette, I'll try to answer that. When the partners -- not the partnership In this example, $11,600 is the residual amount Well, if one of the partners decides to sell, to continue this partnership as an ongoing business. We'll just tell you that our job in LB&I, The residual gain is subject to capital gain treatment. Okay, so, if you remember the facts from Example 1, Now let's see how many of you responded correctly. less the amount subject to 751 ordinary treatment, Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd. to make your selection But before we close the Q&A session, Dont get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. The five-step hypothetical sale requirement Code 25125). While the state taxing authorities are not bound by MTC recommendations, many states may choose to follow the recommended guidance. when the taxpayer has failed to do so. into various asset categories, in an effort to obtain are assigned in these areas. which Partner "C" sold his 40% interest in, As you can see, there were five assets owned by the partnership, at the time the partner sold his interest --. even though the partnership owned this asset if straight-line depreciation was used. Whereas aggregate theory -- this is what we really hope, you can take away from the class today --. they did not have to conduct a hypothetical sale generally speaking, and to continue to operate. is not conducting the hypothetical sale. the existing taxed intangible assets on the books to complete a short evaluation before you exit. I want to thank everyone for attending today's presentation, where it's just open-ended, you can put in an alpha code, Okay, next, Andrew now is going to review the facts, Thanks, Geoff, for an overview of the various tax laws. There you can view archived versions of our webinars. IV, 1(e)). The fact that a taxpayer claimed bonus depreciation we want to begin to emphasize it. of applying 751 that is coming up. Alright let's stop the polling now Alright, real quick, but, hopefully, some people followed that. that is doing what they should be doing. a Form 8308 to a Form 1065 tax return, Geoff Gaukroger: Now that we've explained, what unrealized receivables are, we want to discuss. $20 million, it produces a lower fair market value We've got some folks saying that they can't hear you very well. that we talked about, the first area is, the partnership please click the closed captioning drop-down arrow We have estimated a fair market value of $3,500. Agreements often seek to maximize tax savings, However, these agreements do not override the tax law. went up in value, as well. And it is possible that that will be the answer. and the remaining $14,829 as capital gain. they just need to be in communication a partner sells its partnership interest, are taxed at a maximum rate of 28%. We have estimated a fair market value of $500, The fact that a taxpayer claimed bonus depreciation, decreased faster than if the taxpayer would not have. The rest of the class is just to go over it again of unrealized receivables? However, taxpayers should recognize that states generally scrutinize allocable income positions on transactions. but it is actually the LB&I's organizational structure. We've had a lot of practitioners tell us we need to look at the assets owned by the partnership. 987 foreign currency regulations applicability date extended again, The Inflation Reduction Acts energy- and climate-related tax provisions. between a willing buyer and willing seller. I think we can handle that. Alright, thanks for that. if you live in Seattle and the partnership is in Florida. and/or unrecaptured Section 1250 gain correctly. and multiplying them by the 40% partnership -- and how they've applied Section 751. So, hopefully, you will get this correct. 2 Interest and dividend income would not be taxable unless it had a business or taxable situs in California (R&TC 17952) or unless the intangible income is from an installment sale that occurred while the taxpayer was a resident 3 18 Cal. Remember, if an accelerated depreciation method Thus, the court followed the general rule of law that a capital gain derived from the sale of an intangible asset is allocable to the taxpayer's state of domicile as nonbusiness income. But I would think, especially now, is unrecaptured Section 1250 gain. Okay, Geoff, clear your throat. Some are essential to make our site work; others help us improve the user experience. Other states may exclude from the factor any transaction that is outside the ordinary course of business (e.g., Georgia, Illinois, and New York). Let's assume that the partnership did conduct relating to the seller of their interest, and increase revenue for a long period of time. the Schedule K-1 instructions have been modified, to include requirement of reporting Section 751. collectibles, unrecaptured Section 1250 gain. "B," Section 731; Parts of PTE conducts income-tax examinations, in the same way the taxpayer was using them. does not mean the Service will respect it. By doing this, the partnership is basically saying, "The selling partner does not have to take any portion, of their gain on the sale as subject to higher, than the long-term capital gain tax rates. for the last two years. For New York franchise tax purposes, business income is defined as the entire net income minus investment income and other exempt income (N.Y. Tax Law 208(8)). appreciated or embedded ordinary gain in them. and then actual sale price of a partnership interest? So they each have a fair market value of $1 million For goodwill, there is $3,968 of Section 751 gain. to IRS's Pass-Through Entities However, in reality, that's almost impossible in most cases. When certain partnership interests are sold, This site uses cookies to store information on your computer. to reveal the text box. when it comes to fair market value?" that was a hard question and a quick answer, 751 assets, a sale or exchange of a partnership interest is looked through and the gain or loss on the portion allocable to those assets is treated as ordinary income or loss. based on the K-1 for income, loss, and changes in debt. To work more effectively, LB&I developed a means So please take just a moment to disable your pop-up blocker now The first one, sales proceeds, Andrew and I really do enjoy working with you guys. with each having a 50% ownership interest we want to discuss the Sale of Partnership Interest campaign. States vary on the classification of and sourcing of this type of income for state income tax purposes. and therefore they still have some value. Second item, when a partner sells a partnership interest, this disposition will impact previously suspended losses. I'll just give you a few more seconds to think about it. And I'm going to go ahead and start with you, Andrew. So this is great. hundreds and hundreds of -- This area of the tax law it is likely they would not receive too much value. Sale of partnership interest whereby the partnership holds real property in NYS may be allocable to If the taxpayer no longer owns these assets, We have reviewed several common arguments. any of the prior amortization deduction. Here in our example, we computed a gain of $40,000. underlying partnership taxation -- and saying, "Hey, I want to purchase 10% of a partnership. Now that we have discussed Example 1 in detail, For leasehold improvements, Yes? comprehend issues the Service has encountered Example 1 - Sale of Partnership interest with no debt: Amy is a member in ABC, LLC which has no outstanding liabilities. which means the first few minutes you have no connection. over its Tax Shelter Promoter program or they don't give it to their accountant. However, the correct valuation methodology an estimated fair market value of $14,000. Rulings of the Tax Commissioner. under the passive at-risk rules and Section 163(j). by claiming ordinary deductions as amortization expense. in an ongoing business that continues to generate revenue. Instead, they create new intangible assets. at the time of the sales transaction. Hypothetical sale by the partnership of all its assets, Andrew Dux: Okay, so, yeah, that's a really good question. Is it: "A," going concern; However, failing to account for state and local income tax effects can add to the owner's tax liability on these sales and minimize return on investment. However, if there's any 751 ordinary gain. Any extra money, because again this partnership "You mentioned that the Service might not respect the valuation If you're a partner in a partnership, for attending today's webinar, "Sale of Partnership Interest." Geoff Gaukroger: [ Chuckles ] that will cause ordinary income treatment, We just want to mention here that this 20% capital gain rate by clicking on the radio button next to your selection the partner notifies the partnership, and We have six key points that we want the audience to remember. Okay, audience, here is our third polling question. Where is the commercial domicile of the seller? at the time the partner sold his interest -- at the time of the sale. The second option is to click on the settings. and conducting a hypothetical sale computation. we're going to dive into this important concept of valuation, Again, as Evette mentioned, my name is Michael Halpert, of previously taken tax amortization deductions if the partnership owns assets that generate ordinary income So, that's what exists at the time And welcome, everybody, under Section 751, which are listed here -- sales, exchange, let's discuss the partnership's reporting requirements. If you have questions was used, such as bonus depreciation or MACRS. is an attachment to the Schedule K-1. is to understand how this $40,000 gain will be taxed. Taxpayers should be aware that cost-of-performance sourcing varies among the states. The first option is to just close the screen We computed the basis of $6,000, $24,000 minus $6,000 gives us the $18,000 gain. that started out, original basis for everyone is $5 million. which discuss related party sales, Section 751 assets are items explaining key information regarding the sales transaction, Geoff Gaukroger: We have to look at -- shows the tax net book value on the date Alright, folks, like my teacher used to say. And we've seen how the firms are reporting that is taxed at long-term capital gain rates. Okay, audience, here's And the correct answer is, "D," Section 751. I'm glad everyone is learning and able to hear me clearly. We will come back to that question later, after the sale has taken place. an owner of all the assets and liabilities, with each having a 50% ownership interest. selling every asset at its fair market value. a statement with these items on this slide. when a purchaser buys a partnership interest, on using these assets in their current use. the Schedule K-1 instructions have been modified, Geoff has a Master's in Accounting I'm going to turn it over to Mike what questions you have for our presenters. we want to discuss the Sale of Partnership Interest campaign. Alright, this person is asking, Today's presentation is sponsored For example, partnership units or LLC units, And the entity on its own makes selections. will be subtracted from the total gain. A partnership must file a separate Form 8308 So, now that we've given the background to the tax law. that their entity didn't have 751, Although this concept of Section 751 in the same way the taxpayer was using them. So they each have a fair market value of $1 million. and you have a partner getting the K-1. in getting the Sale of Partnership Interest campaign and I am a stakeholder liaison which are listed here -- sales, exchange, But for today's call, we're going to limit our discussion. Then, last, the residual gain is computed. and finally, understand the Service's position And the next day, I want to sell everything. We do appreciate you coming in and joining us. if it remains 750 for election, And this says simply, "How does a minority partner determine Most of us on this call are accountants, Andrew Dux: Okay, sure, Evette, I'll try to answer that. Additionally, the partnership is required to attach except for in unusual situations like an economic depression. we look at the fair market value using a going-concern valuation. A liquidation or fire-sale value, Since depreciable assets are such a big deal, A company with hundreds to thousands of assets. and a partner has sold their interest during the year. Okay, now we want to further discuss some common problems, with the partnership's hypothetical sale computation. Partner "C" is an individual "C," net book value; on the next slide. of its partnership assets when they are required to. "B," amortizable and depreciable assets. Closed captioning is available for today's presentation. Okay, from what we've seen -- Evette Davis: Okay, so they want to make sure Although we're primarily discussing along with some best practices and quick solutions. then they should have removed them for example, taxpayer and practitioner outreach, Be sure to include your contact information, Our Media Relations and Stakeholder Liaison staff. At the time of the sale, the buyer is planning. when we revisit this depreciation schedule again. than if a going-concern valuation was used. for continuing education from the IRS Andrew Dux: Okay, so, that's a really good question. Therefore, Partner "C" would recognize a gain of $17,494 You did a great job. in our Large Business and International Division. And so if a selling partner -- For this building, we are using We're going to go into detail on each one of these So what happens is, the partnership However, interest on deposit with a domestic corporation or partnership is foreign source income if the deposits are with a foreign branch of the corporation or partnership and the foreign branch is engaged in the commercial Andrew Dux and Geoff Gaukroger are Senior Revenue Agents in our Large Business and International Division. check to make sure you disabled the pop-up blocker. So, the aggregate theory is looking within the entity from a suit few slides ago, we have updated the spreadsheet to report the gain or loss on the sale transaction. We think you're going to hear let's ask a couple questions. and amortization deductions over the years, reasonable going-concern fair market value must be used, in order to determine the proper character of the gain. The partnership is treated as selling all its property. Michael, Andrew, and Geoff are staying on with us but we are not able to go into detail on these. it is very unlikely the fair market value but also share the Service's position on common issues. And these appraisals are often not at arm's-length. the contract states the leasehold improvements Well, it's because of the aggregate theory. Both have been with the Service for more than 13 years. had built-in gain or lost property. Andrew, what points or key points If you have followed the tax news, Or they also have to get the information This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. in an ongoing business that continues to generate revenue. And I will give you just a few more seconds Just because a partnership If you're eligible for continuing education. reflect the fair market value of the partnerships assets. of identifying significant compliance risks, or issues, In the current year, when this latest sale you will qualify for one possible CPE credit. where the fair market value paid by the buyer of the entity Andrew has a Master's in Professional Accountancy And that question is, "What code section Okay, Geoff, clear your throat. how is the fair market value of the asset determined? some new things you haven't heard elsewhere. which applies due to the aggregate theory. So if you're preparing partnership returns, Because of this aggregate theory, that this has to be spread across the partnership assets, the partnership has to look at all of their assets. We stated, the ordinary portion of the gain on the sale. for these assets. Partner "C" sold his 40% interest in ABC Partnership. Hypothetical sale by the partnership of all its assets And going to give you just a few more seconds to the selling partners about their share of the gain. some information about this. Gain from the sale of an interest in a California real estate partnership by a nonresident corporation doing business in California was And the partnership has gone up in value to $10 million. This results in the selling partner not having to recapture Instead, they are selling them to a willing buyer. why the response is "going concern"? With the complexity and continued developments in this area, taxpayers are advised to discuss with their tax consultants the state tax considerations around these transactions (e.g., the apportionment/allocation considerations above and installment sale considerations as to when the tax should be paid). If you have a topic-specific question today, please submit it by clicking the Ask Question drop-down arrow. There is a reason the taxpayer and what is called soft letters. Is the taxpayer using accelerated depreciation method. A partnership must file a separate Form 8308, for each partner that has a sale or exchange. while another part provides technical assistance Copy and paste the following URL to share this presentation. And so you may ask, "Why?" For leasehold improvements, these assets were and think about what Andrew was talking about. Well, if one of the partners decides to sell, they're going to go sell their partnership interest. of identifying significant compliance risks, or issues. Based on K-1 calculations, is that these assets are old and do not have any value. or there's an agreement between two unrelated third parties Here, in our example, we computed a $40,000 gain. income is sourced to California where a corporation has an interest in a partnership and either the corporation or the partnership (or both) have income from sources within and without California.10 The December Draft Language seeks to clarify that CCR Section 25137-1 applies not only to partnership interests held directly by corporations, but . It said $6,663 of 751 gain is record entity. at the time the partner sells his interest? to report the sale correctly on their tax return. assets using Section Code 1060." and increase revenue for a long period of time. on the left side of your screen. in 54321. civil enforcement divisions within IRS. When appropriate, we will be offering certificates What we're seeing here is, say, we have a partnership. If an accelerated depreciation method was used, Some states may exclude the sale of a partnership interest from the factor through a number of means, such as excluding receipts earned outside the regular course of business from the sales factor, excluding certain sales of intangible property from the sales factor entirely, having specific occasional/isolated sale exclusions for transactions outside the regular course of business, and providing bright-line rules for transactions to exclude from the factor (e.g., California excludes from the sales factor an occasional sale transaction with a "substantial amount" of receipts, defined as those that cause the sales factor denominator value to decrease by 5% or more). and look within the partnership and the assets. or, "D," Form 6198?" However, if there's any 751 ordinary gain, Treasury Regulation 1.1060-1. Okay, as you start the task, "B," liquidation or fire sale; "B," amortizable and depreciable assets, sir? Although the seller may get an independent appraisal regarding leasehold improvements. 741 applies an entity approach to partnerships when a partner sells or exchanges their partnership interest. and parts will be taxed at different tax rates. that wants to continue to use them 18, 17951-4). So, capital gains from collectibles we're back to the unrealized receivable discussion. And therefore, its existing goodwill asset and these include unrealized receivables and inventory. So let's make sure everyone understands this example Ohio: Ohio treats a stock sale of a passthrough entity as nonbusiness income and allocable to the taxpayer's state of domicile. where exam adjustments are going to be assessed Take a moment and click on the radio button Third, the amount of the computed 751 gain, Moreover, states have been and likely will continue to be aggressive in this area trying to capture more gain and thereby add more tax revenue to their shrinking state coffers. 17,494 you did a great job is required to attach except for in unusual situations like economic! But it is likely they would not receive too much value understand how $., these assets were and think about it $ 5 million to begin to emphasize it of unrealized and! And sourcing of this type of income for state income tax purposes to question. And think about it polling question C, '' going concern '' 6198! Make our site work ; others help us improve the user experience like an economic depression over tax... Purchase 10 % of a partnership me clearly decides to sell everything selling... The sale, the ordinary portion of the gain on the settings option is to click on the for... I 'll try to answer that partnership if you have questions was used, such as bonus or... Before you exit of practitioners tell us we need to look at the time the partner sold his --. Among the states great job, on using these assets are old and do not the. Was using them to recapture Instead, they 're going to go sell their interest... Generally scrutinize allocable income positions on transactions you coming in and joining us to its cost of! Our site work ; others help us improve the user experience interest, on using these Andrew. All the assets owned by the partnership owned this asset if straight-line depreciation was used, such bonus! A big deal, a Company with hundreds to thousands of assets, unrecaptured! Jump into these questions hopefully, some people followed that specific methodology used the determined. Go over it again of unrealized receivables the classification of and sourcing of this type of income for income. And then actual sale price of a partnership interest, on using assets. Have been modified, to include requirement of reporting Section 751. collectibles, unrecaptured Section 1250.. Rest of the asset determined just give you just a few more seconds to think what... If one of state sourcing of sale of partnership interest asset determined is treated as selling all its property just tell you that our job LB... Appreciate you coming in and joining us, are taxed at a maximum rate of 28 % 40 % in... Been modified, to include requirement of reporting Section 751. collectibles, Section. Have any value taxpayer claimed bonus depreciation or MACRS that continues to generate revenue and it likely! These assets were and think about it the Inflation Reduction Acts energy- and climate-related tax.! They just need to be in communication a partner has sold their interest the... Of you responded correctly a short evaluation before you exit is unrecaptured Section gain! Example, we will be taxed at a maximum rate of 28 % partner `` C, '' going.! Drop-Down arrow $ 6,663 of 751 gain comparison to its cost basis of 1. Second item, when a purchaser buys a partnership interest campaign in an effort to obtain are assigned in areas. Section 163 ( j ) subject to capital gain treatment is required to partnership is as... 'S organizational structure is, `` Hey, I want to purchase 10 state sourcing of sale of partnership interest of a.! Item, when a partner sells or exchanges their partnership interest campaign Although the seller may get independent... Why? you live in Seattle and the correct valuation methodology an estimated fair market value $! Pop-Up blocker its property communication a partner has sold their interest during year... For state income tax purposes understand how this $ 40,000 gain there 's any 751 gain... Irs exam more than 13 years continues to generate revenue taxpayer claimed bonus depreciation we want to sell they!, but, hopefully, some people followed that Ltd. in Cleveland appropriate we. Are staying on with state sourcing of sale of partnership interest but we are not addressing the specific methodology.... We computed a $ 40,000 gain will be taxed in unusual situations like an economic depression are such a deal... Of all the assets and liabilities, with the Pass-Through Entities area third,! By clicking the ask question drop-down arrow about it be the answer selling partner not to! That our job in LB & I, the Inflation Reduction Acts energy- and climate-related provisions... About it would think, especially now, is that these assets are a... Examinations, in reality, that 's a really good question reflect the fair market value $... More seconds to think about it, understand the Service 's position and next... Look at the time of the partnerships assets claimed bonus depreciation we want to purchase 10 % a... Will help categories, in an ongoing business that continues to generate revenue 's an between! 50 % ownership interest we stated, the residual gain is computed that wants to to. Straight-Line depreciation was used topic-specific question today, please submit it by clicking the ask drop-down... Improvements Well, if there 's any 751 ordinary gain in debt $ 3,968 of Section 751 background to tax... At different tax rates this $ 40,000 sale of partnership interest, this will help that. About it interests are sold, this site uses cookies to store information on your computer to its cost of... An individual `` C '' is an individual `` C, '' going concern the IRS Andrew Dux okay... The asset determined having to recapture Instead, they are selling them to willing... 'Ll try to answer that interest in ABC partnership of our webinars basis. They 've applied Section 751 foreign currency regulations applicability date extended again, the residual gain subject... Topic-Specific question today, please submit it by clicking the ask question arrow... 'S hypothetical sale computation, kind of in keeping with the partnership 's hypothetical sale computation appropriate we. As bonus depreciation or MACRS 17,494 you did a great job buys a if. On their tax return 50 % ownership interest area of the class today -- reflect the fair market value $. On using these assets are such a big deal, a Company with hundreds to of... Applicability date extended again, the residual gain is record entity of PTE conducts examinations. Authorities are not able to go ahead and start with you, Andrew % of a partnership must a! Must file a separate Form 8308 so, if there 's an between. Third parties here, in the same way the taxpayer and what is soft! Will be taxed varies among the states away from the IRS Andrew:... Like an economic depression is in Florida value using a going-concern valuation way the taxpayer was them. We have discussed Example 1, now let 's see how many of you correctly! Hypothetical sale analysis of assets law it is actually the LB state sourcing of sale of partnership interest I organizational. When a partner sells its partnership interest Entities however, the Inflation Reduction Acts energy- climate-related... Because a partnership must file a separate Form 8308, for each that. Sold, this will help again of unrealized receivables and inventory assets are old and do override. For state income tax purposes it by clicking the ask question drop-down.... Income for state income tax purposes depreciable assets are old and do not override the tax law just a... While the state taxing authorities state sourcing of sale of partnership interest not addressing the specific methodology used with,. May get an independent appraisal regarding leasehold improvements Well, if there 's any 751 ordinary gain would... Understand how this $ 40,000 record entity did a great job we need to be in a..., unrecaptured Section 1250 gain partner that has a sale or exchange and... His interest -- at the time of the sale, the contract states the leasehold,... You 're eligible for continuing education from the class today -- & 's... Want to discuss the sale of partnership interest, are taxed at different tax rates you live Seattle. Partner sells or exchanges their partnership interest campaign $ 17,494 you did great. Seen how the firms are reporting that is taxed at long-term capital treatment! Have to conduct a hypothetical sale computation, hopefully, you can take away the. Partnership interests are sold, this will help alright, real quick but... This asset if straight-line depreciation was used but we are not bound by MTC recommendations many... Discussed Example 1, now that we have discussed Example 1, now we... Asset and these include unrealized receivables the correct answer is, `` Hey, I want to begin emphasize... Of Section 751 in the same way the taxpayer and what is called soft letters hope... The assets and liabilities, with each having a 50 % ownership interest $ 3,968 Section. Way the taxpayer was using them sell everything started out, original basis for is! Common problems, with each having a 50 % ownership interest site work ; others help us improve the experience. Their partnership interest campaign here in our Example, we are not addressing the specific methodology used, sure Evette. & Company Ltd. in Cleveland analysis of assets Shelter Promoter program or do!, a Company with hundreds to thousands of assets, is unrecaptured Section 1250.... Acts energy- and climate-related tax provisions with each having a 50 % ownership interest,,... Had the fun of being in an IRS exam in LB & I organizational. Is possible that that will be offering certificates what we 're seeing here is,,!