Discussion:Partnership to LLC to Disregarded Entity to Future...
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Discussion Forum Index --> Tax Questions --> Partnership to LLC to Disregarded Entity to Future...
| 14 April 2008 | |
| A Limited Partnership (LP) was formed in 1984 between A and B who both contributed cash ($80,000 and $20,000 respectively) that was used as a down payment on an office building (the office space was leased to a tenant.) A was the GP with 80% ownership while B was the LP with 20% ownership. The LP was taxed as a partnership and form 1065 was filed each year.
In 2006 the LP was converted to an Illinois Limited Liability Corporation (LLC) in anticipation of B selling his interest to A at some point in the future. If the conversion had not been done then when B sold to A the LP would have ceased to exist causing A to have to pay a large capital gain on the building (valued at $800,000 with no outstanding loans against it) even though the business was continuing. On December 31, 2007, at midnight, B sold his interest in the LLC to A. So a 2007 1065 was filed (but no Section 754 election was made) indicating a final filing and form 8832 was filed to elect to be taxed as a Disregarded Entity (DE) for 2008 and beyond. A is in his 70’s. His intent is to pass the LLC to his wife and her intent is to pass the LLC to two of her children. My questions are as follows: 1) Does it make sense to amend the 2007 1065 and make the Section 754 election for the 20% interest A bought from B? If so, why? 2) What will be the wife’s basis when A passes the LLC to her upon death? Will she have a separate inside and outside basis where the value of the LLC itself takes a stepped-up basis but the LLC continues to have a different basis (its $100,000 basis in the building?) 3) What will happen to the basis when the wife passes the LLC to two of her children upon her death? Does one file form 8832 and elect for the entity to be taxed as a partnership from the date of the wife’s death on? | |
| 15 April 2008 | |
| Jim, this looks like an exam question. You should look at Rev. Rul. 99-6, situation 1, charted at Chart | |
| 15 April 2008 | |
| Thank you for the reference. I looked at RR 99-6 and my follow-up question is does it apply in this situation?
RR 99-6 says that it only applies when the LLC’s status as a partnership is terminated under IRC section 708(b)(1)(A) of the Code. From the Code, 708(b)(1) says “for purposes of subsection (a), a partnership shall be considered as terminated only if (A) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or (B) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.” I don’t know how to interpret 708(b)(1)(A). The business is continuing by the other partner; however it will no longer be treated as a partnership for federal tax purposes. (Not that it matters for RR 99-6, but 708(b)(1)(B) does not apply in this case as less than 50% was sold.) | |
