Discussion:Tenants in Common or Partnership

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Discussion Forum Index --> Tax Questions --> Tenants in Common or Partnership


Dennis (talk|edits) said:

26 August 2007
Most of us have done this at one time or another. Couple of guys buy property as tenants in common and we file a 1065 because it seems like the thing to do at the time. But is it really a partnership?

A & B buy a mini mall in like 1979 holding individual interests as tenants in common and a handshake to operate. 60-40. A gets divorced along the way so when B dies in March '06 (Yes O best beloved, it lands on my desk already late) the split is 30-30-40. Husband 30% dies in September. Accountant has been filing 1065 since day one.

Property is appraised for $1.8 in March, $1.9 in September and, in a declining real estate market, goes to contract in February '07 for $2.1 (Sale closed in April).

Questions:

Is this a partnership before first death?
If so, would death terminate?(TIC agreements must be 100%)
Is §754 available for this animal?

Accountant (having not been paid by B since 1998) is uncooperative and either has not filed 2006 or executor lost the K-1. However, assuming he either has or will file.

Is inconsistent treatment available recognizing distributions and debt relief (mortgage principal payments) as income against stepped up depreciation as expense?

Required Reading: Rev. Rul. 75-374, Rev. Proc. 2002-22

JAD (talk|edits) said:

26 August 2007
Dennis,

17 people have read this thread and not responded. Perhaps the question or facts are not clear.

B is your client with a 40% interest? And he is dead. And it sounds like you are doing an income tax return, not an estate tax return?

B hasn't paid the prior accountant since 1998! Someone representing B is going to pay you, right? Or you have already collected a retainer?

Your question sounds like you want to offset distributions in excess of basis and debt relief against additional depreciation expense related to a hoped for 754 adjustment....is that correct?

Dennis (talk|edits) said:

26 August 2007
Question is simple, Jessica. Answer is not. (You didn't do the reading assignment, did you?) My engagement is to prepare the estate tax return and a formal accounting so the estate can be closed. Kind of includes the tax analysis. As always, my client is an attorney. (Executor told him she had an accountant and didn't come back until the heirs started fighting.)

Distribution is net cash flow. Cash received plus debt relief will be very close to book income in this case. Or at least close enough so that I don't have to recommend bringing suit to get access to the books. A 1041 was filed for 12/31/06. Nameless preparer did manage to spell the decedent's name correctly.

TheTinCook (talk|edits) said:

26 August 2007
Questions:

Is this a partnership before first death? Yes

Tenancy in common doesn't automatically give rise to a partnership for fed tax purposes if not in active conduct of a trade/business as in Rev Rul75-374. Further more, it doesn't sound like the operating agreement was restrictive enough to give rise automatically to a partnership as in Bergford v. Commissioner Rev. Proc. 2002-22. However, they decided to file as a partnership for fed tax purposes, which is fine because they default to this under Reg. 301.7701-3. TIC with no active T or B doesn't preclude you from being taxed a partnership for fed tax purposes. They could have opted out of subchapter K under Reg. 1.761-2(2) but didn't. (Isn't this Reg what allows TIC w/o an active business to not to be a partnership in the first place?)

So it sounds like a partnership for fed tax purposes to me. I have no idea if it is a partnership under local law.

If so, would death terminate?(TIC agreements must be 100%) No.

A partnership doesn't terminate unless 50% or more ownership changes in a year. This is for fed tax purposes.


Is §754 available for this animal?

It's not available if the partnership return is filed late. However, under Reg. 1.754-1, if they had made a Sec 754 election in a prior year, and had not revoked it, you can still apply Sec 754


Is inconsistent treatment available recognizing distributions and debt relief (mortgage principal payments) as income against stepped up depreciation as expense?

Still working on this one...estates are not one of my strong points yet.

I'm just glad no horses were involved (or are they?).

Dennis (talk|edits) said:

26 August 2007
Ok. So we have one vote that if entity is considered a partnership for Federal Tax purpose that is binding on tenant in common successors whether they like it or not. That vote commits you on inconsistent treatment not being available, so you don't have to think about it anymore. Bear in mind §754 is an election for partnership assets. (And that is the issue, because the assets are not held in the name of the partnership and there are 15 points in 2002-22.) As a TIC interest the step up is automatic.

TheTinCook (talk|edits) said:

26 August 2007
I guess my thinking made some sense then.

I take Rev Proc 2002-22 to be a way to determine if the TIC must be a partnership for tax purposes rather then if the TIC can be a partnership for tax purposes. Maybe I'm reading it wrong...

Funny you should mention the 15 points under section 6 of Rev Proc 2002-22. Check out point 3

03 No Treatment of Co-Ownership as an Entity . The co-ownership may not file a partnership or corporate tax return, conduct business under a common name, execute an agreement identifying any or all of the co-owners as partners, shareholders, or members of a business entity, or otherwise hold itself out as a partner-ship or other form of business entity (nor may the co-owners hold themselves out as partners, shareholders, or members of a business entity). The Service generally will not issue a ruling under this revenue procedure if the co-owners held interests in the Property through a partnership or corporation immediately prior to the formation of the co-ownership.

Partnership assests...

I think that since there is split ownership of the property by the TIC it is automatically partnership property. Like the 30-30-40 ownership of the minimall. However, if A owns the computer and B owns the desk in the office, I guess you could go either way. A lot would depend on how the asset was treated by the TIC/partnership. If it's on the partnership's depreciation schedule, I'd treat it as partnership property regardless of who owns it. (BTW I thought that the only asset was the mini-mall)

I would say that Sec 754 will be available for the minimall at least.

Dennis (talk|edits) said:

26 August 2007
What can I say? Your vote is recorded. Understand that what you are saying is that if a couple of people decide to treat their separately owned property as a partnership Federal regulations require that a successor of less than a 50% interest has no choice but to continue. Note by the way that 70$ of the interest changed during the year.

Part of the basic question here is with a joint tenancy, absent contractual language, can the successor just say I don't want to to this anymore. Is the election to be treated as a partnership (if that election ever existed anywhere but the mind of the accountant) binding only on the people who made it?

Two people filing a 1065 does not make a partnership. This is merely a situation in which there is not a nickel's worth of difference in tax liability between entity and individual reporting.

JAD (talk|edits) said:

26 August 2007
Dennis, I was going to do required reading after understanding more about the situation....having context would help me understand the reading. But estates are not my most confident area (you already knew that, right?).

TinCook commented that RP 2002-22 is a way to determine if the TIC must be a p/s. I was working in the realm of RP 2002-22 last year. The very experienced tax atty felt that it was essentially a format for a safe harbor for TIC treatment. We had an asset held in p/s that needed to be held TIC. The TIC agreement that she drafted was largely based upon RP 2002-22. That was her interpretation of the significance of that RP, at least in that situation.

If that's a reasonable position, then the filing of the partnership return is perhaps not fatal to taking the position that the interests are TIC. Certainly not helpful in an audit, but not fatal. I have received partnership K-1s reporting rental activity, where years later I learn that the partnership never legally held title to the property. This becomes evident when the preparer of the partnership return changes the reporting to accomodate someone's desire to report the activity directly on his Sch E.

I don't understand how the 1041 was filed for 2006 without the Sch K-1 from the partnership in question. Perhaps the ownership interest has already been distributed to the beneficiaries? In managing audit risk, can either the 2006 1065 be prepared in a way that is consistent with the position that you want to take, or not prepared at all, and everyone can report the activity on Sch E, or amendeded to be consistent with what you need?

Dennis (talk|edits) said:

26 August 2007
Tax attorney is correct. (No big surprise there) 2002-22 is the not to do list. Lots of reasons you don't want TIC to be treated as partnerships. My case would be one of them. It is important to keep control of income recognition and expense during administration.

Understand that I am looking at three different valuations and while I am confident that contract price within 12 months of death is the best I have no idea what the entity accountant is going to do (or has done). Depreciation is allowed or allowable.

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