what is an assignment of partnership interest

Assignment Of Partnership Interest

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What is an Assignment Of Partnership Interest?

Information about the partnership like the name of the business
The type of interest being transferred
The names and information of both the assignor and the assignee
Information about the remaining partners

Common Sections in Assignments Of Partnership Interest

Below is a list of common sections included in Assignments Of Partnership Interest. These sections are linked to the below sample agreement for you to explore.

Assignment Of Partnership Interest Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.37 15 dex1037.htm FORM OF AGREEMENT AND ASSIGNMENT OF PARTNERSHIP INTEREST , Viewed October 25, 2021, View Source on SEC .

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Lawyers with backgrounds working on assignments of partnership interest work with clients to help. Do you need help with an assignment of partnership interest?

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Results oriented business attorney focusing on the health care sector. Formerly worked in Biglaw doing large multi-million dollar mergers and acquisitions, financing, and outside corporate counsel. I brought my skillset to the small firm market, provide the highest level of professionalism and sophistication to smaller and startup companies.

www.linkedin/in/michaelbmiller I am an experienced contracts professional having practiced nearly 3 decades in the areas of corporate, mergers and acquisitions, technology, start-up, intellectual property, real estate, employment law as well as informal dispute resolution. I enjoy providing a cost effective, high quality, timely solution with patience and empathy regarding client needs. I graduated from NYU Law School and attended Rutgers College and the London School of Economics as an undergraduate. I have worked at top Wall Street firms, top regional firms and have long term experience in my own practice. I would welcome the opportunity to be of service to you as a trusted fiduciary. In 2022 I was the top ranked attorney on the Contract Counsel site based upon number of clients, quality of work and top reviews.

Christopher R.

Trusted business and intellectual property attorney for small to midsize businesses.

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Brent has been in practice since 2007 and been the principal attorney and owner of The Walker Firm, LLC since 2014. Brent focuses on providing an array of general counsel services to individuals and companies in a variety of industries.

I have a background in Criminal Law, Family Law, Contract Law, and Environmental Law. I also have five (5) degrees in the following: Here are my degrees and background: 1) B.S. in Environmental, Soil, and Water Sciences 2) A.S. in Pre-Medical Sciences (anatomy, physiology, medical terminology) 3) A.S. in Aircraft Non-Destructive Inspection (science of x-rays, cracks in metal, liquid penetrant, magnetic particle inspections, ultrasonic inspections, and spectrophotometric oil analysis) 4) Master's in Natural Resources Law Studies (1 year focus in the environmental and pollution laws (Hazardous Waste Laws such as RCRA, CERCLA, FIFRA, Natural Resource laws such as ESA, CWA, CAA, FWPCA, Environmental Law, Sustainable Development, and Global Climate Change issues) 5) Juris Doctor and certificate in Native American Law

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Home Business Assignment Agreement Partnership Interest

Assignment of Partnership Interest Form

Use our free Assignment of Partnership Interest to sell a stake in a partnership to a new partner.

Updated February 5, 2024 Written by Josh Sainsbury | Reviewed by Brooke Davis

A partner uses an Assignment of Partnership Interest form to sell their interest in the partnership to a new partner. Through the Assignment of Partnership Interest, the potential new partner (known as “the assignee”) agrees to pay the current partner (known as “the assignor”) in exchange for all the financial interests and obligations included in the partnership rights.

Keep in mind that in some cases, full partnership rights cannot be sold to the new partner unless all current partners also agree. Economic partnership rights, however, can still be sold without the agreement of all partners.

What is an Assignment of Partnership Interest?

When is a partnership assignment needed, the consequences of not having a partnership assignment, common uses for an assignment of partnership interest, what should be included in a partnership assignment, assignment of partnership interests sample.

An Assignment of Partnership Interest is a legal document that transfers the rights to receive benefits from an original business partner (“Assignor”) to a new business partner (“Assignee”).

It’s essential to learn about the types of partnerships and potential advantages and disadvantages of a partnership before entering into this business relationship.

This document will identify the following essential elements:

Partnership Details : legal name of the business, its purpose, and date established
Assignee : name and address of the new partner receiving the business interest
Assignor : name and address of the old partner giving the business interest
Partners : name and address of the remaining partners of the business
Consideration : the amount of money exchanged for the business transfer
Closing Date : when the assignment will end
Signatures : all members of the original partnership and the assignee must sign

This document is needed to formally document a business transaction between the old and new partners.

Some partnership agreements contain a right of first refusal so that the original partners have a right to purchase the interest before an outside party. [1]

What happens if I do not have one?

Without this document, neither the old nor new partners are legally obligated to follow through with their promises to buy or sell the business’s shares. The Assignment may also clarify whether the new partner has the right to participate in the business’s operation, finances, or management.

For example, a full-fledged partner usually has the right to inspect the books, take possession of partnership property, and make decisions with other partners.

Otherwise, the new partner only has the right to receive a share of the profits and any distributions if the partnership ends.

Most partnership agreements only allow the transfer of the partner’s interest in the business so that the new partner can only receive the old partner’s share of the money but not have a say in the business operations or finances.

An Assignment of Partnership Interest is usually just one of several legal documents needed during the sale process. A Confidentiality Agreement plus a Purchase Order are also used to complete the transaction.

Here are just a few of the situations when this document is commonly used:

Cash flow needs of the business change [2]
Business assets are allocated differently
The strategy of the partnership changes
The regulatory environment presents new challenges

An Assignment of Partnership Interest should generally address the following:

Who will be giving and receiving the business interest
What rights does the assignee have in terms of operation or management
Where is the business partnership located
When was the partnership first established
How much will the old partner receive in return for giving a part of their interests

Here’s what an assignment of partnership interests typically looks like:

assignment of partnership interest form template

Use can download the free template in PDF & Word format or use our document builder to help guide you through the writing process.

Legal Templates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we keep our content accurate, reliable and trustworthy.

Assignment of Partnership Interests. http://delcode.delaware.gov/title6/c017/sc07/index.shtml
ADAM HAYES. Cash Flow. https://www.investopedia.com/terms/c/cashflow.asp

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Assignment of Partnership Interest

Transfer of a partner’s interest does not

Result in loss of rights (other than the right to transfer the interest)
Excuse a partner’s performance of duties and obligations
Make the recipient (e.g., a person or estate) a partner
Dissociate or dissolve the partnership

Partnership rights may be assigned without the dissolution of the partnership. The assignee is entitled only to the profits the assignor would normally receive. The assignee does not automatically become a partner and would not have the right to participate in managing the business or to inspect the books and records of the partnership.

A partner’s transferable interest consists of a partner’s share of partnership profits and losses and the right to receive distributions. Partners may sell or otherwise transfer (assign) their interests to the partnership, another partner, or a third party without loss of the rights and duties of a partner (except the interest transferred). Moreover, unless all the other partners agree to accept the assignee as a new partner, the assignee does not become a partner in the firm. Without partnership status, the assignee has no obligation for partnership debts.

A partner may assign his or her interest in the partnership but is not allowed to assign rights in specific partnership property. A partner’s individual creditors may not attach partnership property but may charge a partner’s interest in the partnership. Only a claim against the entire partnership allows specific partnership property to be attached.

The assignment transfers the assignor’s interest in partnership profits and losses and the right to distributions.

Dissociation and Dissolution of Partnership
Limited Liability Partnership
Related Party Sales
Like Kind Exchanges

Assignment of Membership Interest: The Ultimate Guide for Your LLC

LegalGPS : May 9, 2024 at 12:00 PM

As a business owner, there may come a time when you need to transfer ownership of your company or acquire additional members. In these situations, an assignment of membership interest is a critical step in the process. This blog post aims to provide you with a comprehensive guide on everything you need to know about the assignment of membership interest and how to navigate the procedure efficiently. So, let's dive into the world of LLC membership interest transfers and learn how to secure your business!

Necessary approvals and consent, impact on ownership, voting, and profit rights, complete assignment, partial assignment.

Key elements to include

Step 1: Gather Relevant Information

Step 2: review the llc's operating agreement, step 3: obtain necessary approvals and consents, step 4: outline the membership interest being transferred, step 5: determine the effective date of the assignment, step 6: specify conditions and representations, step 7: address tax and liability issues, step 8: draft the entire agreement and governing law clauses, step 9: review and sign the assignment agreement.

Advantages of using a professionally-created template
How our contract templates stand out from the rest

Frequently Asked Questions (FAQs) about Assignment of Membership Interest

Do you need a lawyer for this.

What is an Assignment of Membership Interest?

An assignment of membership interest is a document that allows a member of an LLC to transfer their ownership share in the company to another person or entity. This can be done in the form of a sale or gift, which are two different scenarios that generally require different types of paperwork. An assignment is typically signed by the parties involved and delivered to the Secretary of State's office for filing. However, this process can vary depending on where you live and whether your LLC has members other than yourself as well as additional documents required by state law.

Before initiating the assignment process, it's essential to review the operating agreement of your LLC, as it may contain specific guidelines on how to assign membership interests.

Often, these agreements require the express consent of the other LLC members before any assignment can take place. To avoid any potential disputes down the line, always seek the required approvals before moving forward with the assignment process.

It's essential to understand that assigning membership interests can affect various aspects of the LLC, including ownership, voting rights, and profit distribution. A complete assignment transfers all ownership rights and obligations to the new member, effectively removing the original member from the LLC. For example, if a member assigns his or her interest, the new member inherits all ownership rights and obligations associated with that interest. This includes any contractual obligations that may be attached to the membership interest (e.g., a mortgage). If there is no assignment of interests clause in your operating agreement, then you will need to get approval from all other members for an assignment to take place.

On the other hand, a partial assignment permits the original member to retain some ownership rights while transferring a portion of their interest to another party. To avoid unintended consequences, it's crucial to clearly define the rights and responsibilities of each party during the assignment process.

Types of Membership Interest Transfers

Membership interest transfers can be either complete or partial, depending on the desired outcome. Understanding the differences between these two types of transfers is crucial in making informed decisions about your LLC.

A complete assignment occurs when a member transfers their entire interest in the LLC to another party, effectively relinquishing all ownership rights and obligations. This type of transfer is often used when a member exits the business or when a new individual or entity acquires the LLC.

For example, a member may sell their interest to another party that is interested in purchasing their share of the business. Complete assignment is also used when an individual or entity wants to purchase all of the interests in an LLC. In this case, the seller must receive unanimous approval from the other members before they can transfer their entire interest.

Unlike a complete assignment, a partial assignment involves transferring only a portion of a member's interest to another party. This type of assignment enables the member to retain some ownership in the business, sharing rights, and responsibilities proportionately with the new assignee. Partial assignments are often used when adding new members to an LLC or when existing members need to redistribute their interests.

A common real-world example is when a member receives an offer from another company to purchase their interest in the LLC. They might want to keep some ownership so that they can continue to receive profits from the business, but they also may want out of some of the responsibilities. By transferring only a partial interest in their membership share, both parties can benefit: The seller receives a lump sum payment for their share of the LLC and is no longer liable for certain financial obligations or other tasks.

How to Draft an Assignment of Membership Interest Agreement

A well-drafted assignment of membership interest agreement can help ensure a smooth and legally compliant transfer process. Here is a breakdown of the key elements to include in your agreement, followed by a step-by-step guide on drafting the document.

Key elements to include:

The names of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name of your LLC and the state where it was formed

A description of the membership interest being transferred (percentage, rights, and obligations)

Any required approvals or consents from other LLC members

Effective date of the assignment

Signatures of all parties involved, including any relevant witnesses or notary public

Before you begin drafting the agreement, gather all pertinent data about the parties involved and the membership interest being transferred. You'll need information such as:

The names and contact information of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name and formation details of your LLC, including the state where it was registered

The percentage and value of the membership interest being transferred

Any specific rights and obligations associated with the membership interest

Examine your LLC's operating agreement to ensure you adhere to any predetermined guidelines on assigning membership interests. The operating agreement may outline specific procedures, required approvals, or additional documentation necessary to complete the assignment process.

If your LLC doesn't have an operating agreement or if it's silent on this matter, follow your state's default LLC rules and regulations.

Before drafting the assignment agreement, obtain any necessary approvals or consents from other LLC members as required by the operating agreement or state law. You may need to hold a members' meeting to discuss the proposed assignment and document members' consent in the form of a written resolution.

Detail the membership interest being transferred in the Assignment of Membership Interest Agreement. Specify whether the transfer is complete or partial, and include:

The percentage of ownership interest being assigned

Allocated profits and losses, if applicable

Voting rights associated with the transferred interest

The assignor's rights and obligations that are being transferred and retained

Any capital contribution requirements

Set an effective date for the assignment, which is when the rights and obligations associated with the membership interest will transfer from the assignor to the assignee.

This date is crucial for legal and tax purposes and helps both parties plan for the transition. If you don’t specify an effective date in the assignment agreement, your state's law may determine when the transfer takes effect.

In the agreement, outline any conditions that must be met before the assignment becomes effective. These could include obtaining certain regulatory approvals, fulfilling specific obligations, or making required capital contributions.

Additionally, you may include representations from the assignor attesting that they have the legal authority to execute the assignment. Doing this is important because it can prevent a third party from challenging the assignment on grounds of lack of authority. If the assignor is an LLC or corporation, be sure to specify that it must be in good standing with all necessary state and federal regulatory agencies.

Clearly state that the assignee will assume responsibility for any taxes, liabilities, and obligations attributable to the membership interest being transferred from the effective date of the assignment. You may also include indemnification provisions that protect each party from any potential claims arising from the other party's actions.

For example, you can include a provision that provides the assignor with protection against any claims arising from the transfer of membership interests. This is especially important if your LLC has been sued by a member, visitor, or third party while it was operating under its current management structure.

In the closing sections of the assignment agreement, include clauses stating that the agreement represents the entire understanding between the parties concerning the assignment and supersedes any previous agreements or negotiations. Specify that any modifications to the agreement must be made in writing and signed by both parties. Finally, identify the governing law that will apply to the agreement, which is generally the state law where your LLC is registered.

This would look like this:

Once you've drafted the Assignment of Membership Interest Agreement, ensure that all parties carefully review the document to verify its accuracy and completeness. Request a legal review by an attorney, if necessary. Gather the assignor, assignee, and any necessary witnesses or notary public to sign the agreement, making it legally binding.

Sometimes the assignor and assignee will sign the document at different times. If this is the case, then you should specify when each party must sign in your Assignment Agreement.

Importance of a Professionally-drafted Contract Template

To ensure a smooth and error-free assignment process, it's highly recommended to use a professionally-drafted contract template. While DIY options might seem tempting, utilizing an expertly-crafted template provides several distinct advantages.

Advantages of using a professionally-created template:

Accuracy and Compliance: Professionally-drafted templates are designed with state-specific regulations in mind, ensuring that your agreement complies with all necessary legal requirements.

Time and Cost Savings: With a pre-written template, you save valuable time and resources that can be better spent growing your business.

Reduced Legal Risk: Legal templates created by experienced professionals significantly reduce the likelihood of errors and omissions that could lead to disputes or litigations down the road.

How our contract templates stand out from the rest:

We understand the unique needs of entrepreneurs and business owners. Our contract templates are designed to provide a straightforward, user-friendly experience that empowers you with the knowledge and tools you need to navigate complex legal processes with ease. By choosing our Assignment of Membership Interest Agreement template, you can rest assured that your business is in safe hands. Click here to get started!

As you embark on the journey of assigning membership interest in your LLC, here are some frequently asked questions to help address any concerns you may have:

Is an assignment of membership interest the same as a sale of an LLC? No. While both processes involve transferring interests or assets, a sale of an LLC typically entails the sale of the entire business, whereas an assignment of membership interest relates to the transfer of some or all membership interests between parties.

Do I need an attorney to help draft my assignment of membership interest agreement? While not mandatory, seeking legal advice ensures that your agreement complies with all relevant regulations, minimizing potential legal risks. If you prefer a more cost-effective solution, consider using a professionally-drafted contract template like the ones we offer at [Your Company Name].

Can I assign my membership interest without the approval of other LLC members? This depends on your LLC's operating agreement and state laws. It's essential to review these regulations and obtain any necessary approvals or consents before proceeding with the assignment process.

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes ( especially if you have multiple owners ). But often for single-owner businesses, you don't need a lawyer to start your business .

Many business owners instead use tools like Legal GPS for Business , which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

We hope this guide provides valuable insight into the process of assigning membership interest in your LLC. By understanding the legal requirements, implications, and steps involved, you can navigate this essential task with confidence. Ready to secure your business with a professionally-drafted contract template? Visit our website to purchase the reliable and user-friendly Assignment of Membership Interest Agreement template that enables your business success.

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Assignment Of Partnership Interest

When you want to transfer the stake in a partnership to a new member, you’ll use an Assignment of Partnership Interest to outline the terms of the transaction.

About document

What Is an Assignment of Partnership Interest?

An Assignment of Partnership Interest is a legal document establishing the terms under which stake in a partnership is transferred from an assignor to an assignee. In other words, the new partner (assignee) acquires the right to receive benefits from the partnership per the stake granted.

The particulars of the Assignment of Partnership respond, in large part, to the type of partnership in question. In some cases, the Partnership Agreement under which the partnership is formed doesn't allow for a transfer of interest to new members or does so only under specific circumstances.

It's also worth noting that a partnership carries both rights and responsibilities. A new partner who receives an interest in the partnership assumes all the Partnership Agreement obligations, including liabilities. However, some states place limitations on assignees' rights that don't recognize them on equal footing as the founding partners.

Other Names for Assignment of Partnership Interest

Depending on your state, an Assignment of Partnership Interest may also be known as:

Transfer of Partnership Interest

Partnership Interest Transfer Form

Transfer of Share in Partnership

Who Needs an Assignment of Partnership Interest

Most of the time, an Assignment of Partnership Interest is drafted by a partnership member who's looking to transfer their stake in a partnership. However, the interest assignee could also create the form if they believe specific clauses need to be included.

Other current members of the partnership are also typically involved in creating the document to ensure it's in line with the terms established in the Partnership Agreement. The terms of the agreement frequently place restrictions on the type and amount of interest transferred by each partner.

Situations calling for a transfer of interest may include the business's cash flow requirements, a need to reallocate business assets, changes in the overall partnership strategy, and changes in the regulatory landscape, among others.

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Create your own documents by answering our easy-to-understand questionnaires to get exactly what you need out of your Assignment of Partnership Interest.

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All you have to do is fill out a simple questionnaire, print, and sign. No printer? No worries. You and other parties can even sign online.

How to Create an Assignment of Partnership Interest with 360 Legal Forms

An Assignment of Partnership Interest needs to satisfy several parties. The assignor and assignee need to have their rights protected, and it must fall within the terms of the original Partnership Agreement. It's essential to use a form addressing all the details involved.

Let 360 Legal Forms help with our extensive library of attorney-vetted legal forms. The process is fast and easy. All you have to do is fill out our easy-to-understand questionnaire. Once complete, simply download your form as a PDF or Word document from your secure online account.

What Information Will I Need to Create My Assignment of Partnership Interest

To create your document, please provide:

Assignor: Full name and address of the partner transferring the business interest

Assignee: Full name and address of the incoming partner receiving the business interest

Partnership Details: Legal name and address of the partnership in which interest is being transferred, along with business purposes and other details

Remaining Partners: Names and addresses of the other members of the partnership

Consideration: Payment that the assignor will receive for the transfer of interest

Closing Date: When the assignment of interest will be executed

Assignment of Partnership Interest Terms

Warranties: A section of the Assignment of Partnership Interest clearly stating what the assignor promises are right about the interest and the terms of the partnership

Indemnification clause: A clause releasing each party from responsibility created by the other party's failure to act as the document requires

Implied terms: Terms and clauses including an agreement under law or custom even if they're not spelled out directly in the agreement

Exclusion clauses: A part of an agreement releasing a party from responsibility under a specific circumstance

Assignment of Partnership Interest Signing Requirements

To be legally enforceable, an Assignment of Partnership Interest must be signed by the assignor, the assignee, and all the remaining members of the partnership. If applicable, witnesses to the signing need to sign the document as well.

The signatures do not need to be notarized to be valid. However, you may choose to notarize the signatures to prevent any challenge arising at a later time.

What to Do with Your Assignment of Partnership Interest

Once the Assignment of Partnership Interest is signed (and signatures notarized if you so choose), distribute signed copies to every partnership member and the assignee. Keep a copy for your records and make sure the partnership's secretary records the transfer of interest in the minutes of the partnership. In some states, it may be necessary to file a document with the Commissioner of Corporations, and tax liabilities may arise based on the value of the interest.

Frequently Asked Questions

No. You can choose to notarize the signatures on the assignment document, but it’s not required for it to be legal and valid.

In theory, yes. However, this is not only inadvisable but could also result in legal issues down the line. Without the document to establish each party’s obligations, either may choose to back out of the transaction. Furthermore, it puts the partnership at risk, since the assignee ends up with a controlling stake in the business without explicitly being bound to the terms of the original Partnership Agreement.

When partnership interest is transferred, the assignor’s proceeds are typically treated as a capital gain/loss. But, some or all of the capital gains may end up as ordinary income if the assignor attributes it to unrealized receivables. State and local laws may also play a role and you’re well-advised to consult a tax attorney or CPA licensed to practice in your state.

Yes, the document can be used to transfer a partner’s interest to natural or legal persons in a general sense. However, it should be noted that federal tax audit rules may be affected for a partnership if one or more members is itself a partnership and the original agreement may prohibit this type of transfer specifically.

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Assignment of Interest Form: Everything You Need to Know

An assignment of interest form allows a limited liability company (LLC) member to assign their interest or ownership stake in the company to another person. 3 min read updated on January 01, 2024

Updated November 25, 2020:

An assignment of interest form allows a limited liability company (LLC) member to assign their interest or ownership stake in the company to another person. The information that you will need to include in this form depends on the laws governing LLCs in your state.

Assigning LLC Interest

LLCs are a popular business structure that offers certain features of both corporations and partnerships. Owners of a limited liability company are members, and each member's stake in the company is their interest. LLC members have the ability to transfer their interest by making an assignment of interest.

An LLC's operating agreement describes how the company will be run and dictates the requirements and limitations of members' interests in the company. If this agreement allows members to transfer their company interests, they can do so with an assignment of interest form. Every state will have specific rules for what you must include in this form before a member's interest can be assigned.

In most cases, an assignment of interest does not constitute a sale of a member's LLC interest. In many states, an assignment of interest only transfers the financial advantage of the stake or share, so the member who initially possessed the interest still retains his or her voting and managerial rights in the company while the assignee will not. Assignments of interest are commonly used as loan collateral, and once the loan is paid off, the assignment ends.

Furthermore, an assignment will only transfer a percentage of an LLC member's interest. You are not required to assign all of your stakes' financial benefits. Having the ability to transfer a portion of interest allows members of an LLC to use their ownership stake very flexibly. However, partial assignments can only be made if the LLC's operating agreement allows them.

Assignments and Partnerships

An assignment of partnership interest is similar to an assignment of LLC interest. Assigning a partnership interest involves a business partner assigning their right to financially benefit from the partnership to a new partner.

When writing an assignment of partnership interest form, you should be sure to include the correct information:

Details about the partnership, including the business's legal name and its formation date.
Contact information of the new partner who is receiving the partnership interest.
Contact information of the old partner who is assigning their interest.
Contact information of the other business partners.
The monetary amount being exchanged for the partnership interest.
The date where the assignment will be revoked.
Signatures of all parties, including the assignor, assignee, and remaining partners.

The main purpose of this legal document is to record the assignment of the partnership interest.

Without a valid assignment of interest form, the new partner would have no way to force the old partner to fulfill the terms of the assignment. In addition to making sure that the assignment is enforceable, this document outlines what role the new partner will play in the business. For instance, the assignment of partnership interest form can dictate if the new partner will have any management or financial responsibilities in the business. Full partners, for instance, can usually make decisions for the business and will also have access to the business's financial records.

There are countless reasons that a business partner may wish to assign their partnership interest to a new partner:

The business's needed cash flow has changed.
A change has occurred in how the business allocates its assets.
Implementation of a new partnership strategy.
New regulations pose challenges for the business.

When assigning a partnership interest, there are several issues you must address:

Which partner will assign their interest and who will receive the assignment.
The rights of the assignee to participate in managing or operating the business.
The location of the business partnership.
The establishment date of the partnership.
What the assigning partner will receive in exchange for assigning their partnership interest.

Whether you are a partner in a business or a member of an LLC, your ownership stake in the business entity likely provides you with a variety of rights. For instance, you may have the right to receive profits from the business and the right to receive business assets after the company dissolves. Depending on your operating or partnership agreement , you may be able to transfer these rights to another party in exchange for consideration.

If you need help with an assignment of interest form, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Assignment of Partnership Interest Agreement

by admin | Nov 28, 2022 | Agreements

An assignment of partnership interest agreement occurs when a partner sells their stake in a partnership to a third party. The assignment document records the details of the transfer to the new partner. The new partner will receive the business partnership’s benefits and obligations (including profits and losses) in exchange for compensation to the previous partner.

An assignment of partnership interest agreement is a type of business structure in which two or more people or entities own and operate a business. When one owner sells their stake in the partnership to a third party, an assignment of partnership interest records the transaction to the new partner. The assignment of partnership interest involves two parties: the assignor or the partner transferring their stake and the assignee, the new partner. The document that details the transaction needs to include the following information:

Information about the partnership like the name of the business
The type of interest being transferred
The names and information of both the assignor and the assignee
Information about the remaining partners

Members of an assignment of partnership interest agreement often need to transfer some or all of their stake to a new partner. Doing so can be a delicate process because it affects the partnership as a whole, not just the seller and the buyer. To make the transaction as transparent as possible and to satisfy potential requirements in the partnership articles, the transfer should be recorded in an assignment of partnership interest agreement. As the document’s name implies, its successful execution transfers a portion of the interest in the partnership from a current partner to a new partner.

The assignment of partnership interest agreement definition is a portion of the common law that is in charge of transferring the rights of an individual or party to another person or party. Moreover, the assignment of partnership interest agreement is often seen in real estate but can occur in other contexts as well. An assignment is just the contractual transfer of benefits that will accrue or have accrued. Obligations don’t transfer with the benefits of an assignment. The assignor will always keep the obligations.

What is an assignment of partnership interest agreement?

The assignment of partnership interest agreement is a legal document establishing the terms under which stake in a partnership is transferred from an assignor to an assignee. In other words, the new partner (assignee) acquired the right to receive benefits from the partnership per stake granted.

The particulars of the assignment of partnership interest agreement respond, in large part, to the type of partnership in question. In some case, the assignment of the partnership agreement under which the partnership is formed doesn’t allow for a transfer of interest to new members or does so only under specific circumstances. It is also worth noting that a partnership carries both rights and responsibilities. A new partner who receives an interest in the partnership assumes all the assignment of partnership interest agreement obligations. Nonetheless, some states place limitations on assignees’ rights that don’t recognize them on equal footing as the founding partners.

An assignment of partnership interest agreement occurs when one party to an existing contract (the “assignor”) hand off the contract’s obligations and benefits to another party (the “assignee”). Ideally, the assignor wants the assignee to step into his shoes and assume all of his contractual obligations and rights. In order to do that, the other party to the contract must be properly notified. Read on to learn how assignments work, including how to keep an assignment option out of your contract.

What is a partnership?

A partnership is a type of business organization where two or more individuals or business entities operate a business with the goal of making a profit. Each partner typically has rights and obligations enforced by a Partnership Agreement including liabilities and rights to profits of the business.

Who are the parties in an assignment of partnership interest agreement?

There are two parties in the assignment of partnership interest agreement: assignor and assignee. The assignor is the business partner who is transferring their rights in the partnership in exchange for compensation. The assignee is a new partner who purchases the previous partner’s interest in the partnership.

Do other partners have a say in who buys the interest in a partnership?

If there is an assignment of partnership interest agreement in place the answer is most likely, yes. An assignment of partnership interest agreement governing the activities of the partnership and conduct of the partners will often place some restrictions on the nature of the interest which may be acquired.

For example, the transferring partner might be limited to transferring only their economic interests and rights which would prevent the recipient of transferred interest from becoming a full partner (with voting rights and managerial input) by assignment alone. Full admission to the partnership would be decided by the remaining partners based on the terms of the assignment of partnership interest agreement.

The category of assignee is something else the partnership might have good reason for restricting. For example, federal tax audit rules introduced in 2018 mean that partnerships will be treated as taxable entities if one or more of the partners is itself a partnership, a trust, or an LLC. To avoid such tax consequences, and preserve individual tax treatment for the partners, the partnership agreement might prohibit assignments of partnership interest may be sold to any such business entity.

How is an assignment of partnership interest under an assignment of partnership interest agreement created?

To create an assignment of partnership interest under an assignment of partnership interest agreement, there should be a drafted document that records the transfer of rights and benefits from one partner to another and the exchange of compensation.

The partnership interest document under the assignment of partnership interest agreement should include:

Type of interest: either full partnership interest or limited to the economic rights in distribution
Partnership information: partnership name (e.g., Smith and Associates), establishment date, and purpose
Assignor details: name, address, and type of party (individual or business entity) of the partner transferring rights and benefits to a new partner
Assignee details: name, address, and type of party of the new partner receiving rights and benefits of the assignor
Remaining partner details (if applicable): name, address, and type of party of other partners still part of the partnership
Consideration details: a description of the price and agreed value to be exchanged for interest in the partnership (e.g., a monetary value or shares in stock)
Signing details: witness signatures (if applicable), party signatures, and the signing date

Common sections in assignment of partnership interest agreements

Below is a list of common sections included in assignment of partnership interest agreement. These sections are linked to the below sample agreement for you to explore.

Assignment of Partnership Interest
Consideration
Agreement to be Bound
Registration of Partnership Interests
Representations and Warranties of Assignee
Binding Effect
Severability
Counterparts
Governing Law

Security agreement under assignment of partnership interest agreement

A part of contract law that is responsible for financial transactions is a security agreement which is often under the assignment of partnership interest agreement. These are also called a secured transaction and include a grantor that promises collateral to the grantee. In contract law, the security under the assignment of partnership interest agreement doesn’t cover actual real estate or land. Instead, this agreement covers stock, vehicle, livestock, or another type of personal property. In a security agreement under the assignment of partnership interest agreement, in the case where a grantee already has the collateral, the grantor can verbally acquire the transaction.

However, it’s preferred to have a security agreement under the assignment of partnership interest agreement that is written down instead of having a verbal agreement, just in case there’s a disagreement among the parties. Both a security agreement and an assignment may apply to a variety of property rights.

Example of using assignment of partnership interest agreement and security agreements in property rights

As an example, the assignment of partnership interest agreement may cover the promise to use stocks as collateral or to transfer the rights of stock investments. It may also be possible for the agreements to include properties that are less tangible. The assignment of partnership interest agreement may apply to creative rights, such as film production or written works. If it is a case of creative rights, any benefits often include future revenue that may be earned from the distribution or sale of said works.

Assistance from an attorney regarding an assignment of partnership interest agreement

You may want to hire an attorney to help you draft a security agreement, legal assignment, and assignment of partnership interest agreement. There are other services that you might want to use that don’t cost as much but will still help you draft your contracts. The following are ways to save money while drafting a contract:

Buy software with a template that creates security agreements and assignments.
Buy a generic contract form at the bookstore.
Buy a book with advice.
Unless your background includes knowing particular legal knowledge about security agreements and assignments, you’ll want to talk to an attorney before you use any contract forms that are self-generated. Both security agreements and assignments are complicated areas of contract law.

Lease under assignment of partnership interest agreement

An agent is someone who is licensed by the state where a property is established to aid in real-estate transactions such as leases, assignments, and property sales. An agent is usually either an attorney, sales agent, or real estate broker. The tenant from the initial lease is the assignor, and he transfers his whole interest to another person. The assignee obtains the lease interest from the assignor or original tenant and will become the new tenant.

Consideration is what the assignor gets from the assignee for transferring the lease interest to the assignee. The consideration is often a certain amount of money. Interests that other people hold are encumbrances, and they can affect the title and possibly the possession and use of the property by the assignee and the assignor.

If the property in question is a residential unit that’s above a commercial property, the lease is considered to be a residential one, even though the property is in a commercial building. The governing law is that of the jurisdiction in which the property is located, no matter what jurisdiction the landlord, assignee, and assignor reside in. The assignee is allowed to receive a copy of the master lease. The assignor can either give the assignee a copy directly or include the copy with the lease assignment.

If the assignor isn’t liable for the assignee’s conduct, the landlord will need to go after the assignee if he or she causes property damage. However, if the assignor has liability for the conduct of the assignee, the landlord may then ask for compensation from both the assignee and assignor should the assignee cause any damage to the property.

How an assignment of partnership interest agreement works

How an assignment of partnership interest agreement plays out depends on many factors, especially the language of the contract. Some contracts may contain a clause prohibiting assignment; other contracts may require the other party to consent to the assignment.

Here’s an example of a basic assignment of partnership interest agreement: Tom contracts with a dairy to deliver a bottle of half-and-half to Tom’s house every day. The dairy assigns Tom’s contract to another dairy, and–provided Tom is notified of the change and continues to get his daily half-and-half–his contract is now with the new dairy.

An assignment of partnership interest agreement doesn’t always relieve the assignor of liability. Some contracts may include a guarantee that, regardless of an assignment, the original parties (or one of them) guarantees performance (that is, that the assignee will fulfill the terms of the contract).

When assignment of partnership interest agreement will not be enforced

An assignment of partnership interest agreement will not be enforced in the following situations. The contract prohibits assignment. Contract language, typically referred to as an anti-assignment clause, can prohibit (and “void”) any assignments. We provide a sample, below.

The assignment of partnership interest agreement materially alters what’s expected under the contract

If the assignment of partnership interest agreement affects the performance due under the contract, decreases the value or return anticipated, or increases the risks for the other party to the contract (the party who is not assigning contractual rights), courts are unlikely to enforce the arrangement. For instance, if Tom’s local, organic dairy assigned the contract to a factory farm dairy, this would be considered a material alteration.

The assignment of partnership interest agreement violates the law or public policy

Some laws limit or prohibit assignments. For example, many states prohibit the assignment of future wages by an employee, and the federal government prohibits the assignment of certain claims against the government. Other assignments, though not prohibited by a statute, may violate public policy. For example, personal injury claims cannot be assigned because doing so may encourage litigation.

Delegation or assignment of partnership interest agreement

In some cases, a party may not wish to assign the contract but only to get somebody else to fulfill its duties. Obviously, not all duties can be delegated–for example, some personal services are usually not delegated because they are so specific in nature. For example, if you hired Ted Nugent to perform at your event, he could not arbitrarily delegate his performing duties to Lady Gaga. To prohibit one party from delegating the responsibilities of the contract, the parties should include specific language to that effect in the agreement. For example, an anti-assignment clause might state, “Neither party shall assign or delegate its rights.”

Steps in the creation of an assignment of partnership interest agreement

There are three steps to follow if you want to assign a contract.

Step 1: Examine the assignment of partnership interest agreement for any limitations or prohibitions. Check for anti-assignment clauses. Sometimes the prohibition is not a separate clause but is included in another provision. Look for language that states, “This agreement may not be assigned.” If you find such language, you may not be able to assign the agreement unless the other party consents.

Step 2: Execute an assignment of partnership interest agreement. If you are not prohibited from assigning the contract, prepare and enter into an assignment of contract: an agreement that transfers the parties’ rights and obligations.

Step 3: Provide notice to the obligor. After you have assigned your contract rights to the assignee, you should provide notice to the other original contracting party (referred to as the obligor). This notice will effectively relieve you of any liability under the contract, unless the contract says differently (for instance, if the contracts says that the assignor guarantees the performance of the assigned contract or the contract prohibits an assignment) or the assignment is prohibited by law.

Anti-assignment clauses

If you’re making a contract and you don’t want assignment to be an option, you need to clearly state that in your agreement. Below are three variations of anti-assignment clauses that can be used in a contract.

Example 1: Consent required for assignment of partnership interest agreement

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Any assignment or delegation in violation of this section shall be void.

Example 2: Consent not needed for affiliates or new owners

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. However, no consent is required for an assignment that occurs (a) to an entity in which the transferring party owns more than 50% of the assets, or (b) as part of a transfer of all or substantially all of the assets of the transferring party to any party. Any assignment or delegation in violation of this section shall be void.

Example 3: Consent not unreasonably withheld

Assignment. Neither party may assign or delegate its rights or obligations pursuant to this Agreement without the prior written consent of the other. Such consent shall not be unreasonably withheld. Any assignment or delegation in violation of this section shall be void.

Anti-assignment clauses can also be modified to prohibit only one of the parties from assigning rights. Also, when preparing an anti-assignment clause, keep in mind that you can prevent only “voluntary” assignments; you cannot prevent assignments that are ordered by a court or that are mandatory under law–for example, in a bankruptcy proceeding.

Examples of assignment of partnership interest agreement

Assignment of partnership interest agreements is great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Assignment of partnership interest agreements in real estate

Assignment of partnership interest agreement is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts. This process is called real estate wholesaling.

Real estate wholesaling under assignment of partnership interest agreement

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit. The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract. But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

Direct mailers
Place newspaper ads
Make posts in online forums
Social media posts

The key to finding the perfect home for an assignment of partnership interest agreement is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to buy to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search. Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens, or other roadblocks that could prevent the sale from going through. Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages. If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Who handles assignment of contract?

The best person to handle an assignment of partnership interest agreement is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side.

Sample of an assignment of partnership interest agreement

This assignment agreement (this “Assignment Agreement”) is entered into as of [—], 2013, by and between Newcastle Investment Corp., a Maryland corporation (the “Assignor”), and New Media Investment Group, Inc., a Delaware corporation (the “Assignee”). Capitalized terms used but not defined herein shall have the meanings ascribed to them in that certain Stock Purchase Agreement, dated as of June 28, 2013 (as it may be amended in accordance with its terms, the “Stock Purchase Agreement”), by and among Dow Jones Ventures VII, Inc. (“Seller”), Dow Jones Local Media Group, Inc. (the “Company”), the Assignor, and, solely with respect to its obligations under Sections 7.3, 7.7, 7.13, 7.14, 9.2, 9.3 and 10.2 of the Stock Purchase Agreement, Dow Jones & Company, Inc.

WHEREAS, the Assignor wishes to transfer and assign to the Assignee all of the Assignor’s rights and interests in and to, and obligations under, the Stock Purchase Agreement, and the Assignee wishes to be the assignee and transferee of such rights, interests and obligations;

WHEREAS, pursuant to Section 12.11 of the Stock Purchase Agreement, the Assignor may not assign any of its rights, interests or obligations under the Stock Purchase Agreement, directly or indirectly (by operation of Law or otherwise), without the prior written approval of Seller; and

WHEREAS, on September [—], 2013, Seller provided its written approval to the assignment by the Assignor of all of its rights, interests and obligations in the Stock Purchase Agreement to the Assignee.

NOW, THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows:

Assignment and Assumption. The Assignor hereby transfers and assigns to the Assignee, and the Assignee hereby acquires from the Assignor all of the Assignor’s rights, and interests in and to the Stock Purchase Agreement, of whatever kind or nature, and the Assignee hereby assumes and agrees to perform all obligations, duties, liabilities and commitments of the Assignor under the Stock Purchase Agreement, of whatever kind or nature.
Retention of Obligations. Notwithstanding anything in this Assignment Agreement to the contrary, the Assignor shall remain obligated, as a principal and not a guarantor, to Seller with respect to all of the Assignor’s obligations, duties, liabilities and commitments under the Stock Purchase Agreement, of whatever kind or nature.
Effectiveness. This Assignment Agreement shall be effective as of the date set first set forth above.
Governing Law; Binding Effect. This Assignment Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and performed in such state without giving effect to the choice of law principles of such state that would require or permit the application of the laws of another jurisdiction.
Counterparts. This Assignment Agreement may be executed in one or more counterparts, including facsimile counterparts, each of which shall be deemed to be an original copy of this Assignment Agreement, and all of which, when taken together, shall be deemed to constitute one and the same agreement. Delivery of such counterparts by facsimile or electronic mail (in PDF or .tiff format) shall be deemed effective as manual delivery.

https://www.rocketlawyer.com/business-and-contracts/business-operations/contract-management/document/assignment-agreement

https://www.contractscounsel.com/b/assignment-of-contract

https://eforms.com/assignment/

https://www.sec.gov/Archives/edgar/data/1579684/000119312513435497/d603516dex1031.htm

https://www.upcounsel.com/assignment-agreement-definition#:~:text=The%20assignment%20agreement%20definition%20is%20a%20portion%20of%20the%20common,in%20other%20contexts%20as%20well .

https://www.nolo.com/legal-encyclopedia/assignment-of-contract-basics-32643.html

https://law.lis.virginia.gov/vacode/title50/chapter2.1/section50-73.45/

https://www.lawinsider.com/clause/assignment-of-partnership-interests

https://law.justia.com/codes/indiana/2012/title23/article16/chapter8

https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXV/Chapter109/Section40

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Provides Legal Transfer of Rights

Secures proof of transfer, both parties have consent with the agreement, states a limited liability partnership, reliable and effective, partnership information, assignor details, assignee details, clauses for the agreement, signatures of the involved parties, information of consideration.

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Assignment of Partnership Interests

This template Assignment of Partnership Interests is used to evidence the transfer of a partnership interest from one individual to another. The transferor must certify under the template that the interest is free from any lien or encumbrances. This template includes practical guidance and drafting notes. This template is typically used in conjunction with a sale and transfer agreement, setting forth detailed terms of the transfer of the partnership interest. Such broader agreement, as well as the partnership’s partnership agreement, should be consulted in order to conform the assignment document to the requirements of those agreements. For additional information regarding limited partnerships, see Formation State Law Survey (LP).

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Tax issues to consider when a partnership interest is transferred.

By Colleen McHugh - Co‑Partner‑in‑Charge, Alternative Investments

There can be several tax consequences as a result of a transfer of a partnership interest during the year. This article discusses some of those tax issues applicable to the partnership.

Adjustments to the Basis of Partnership Property Upon a transfer of a partnership interest, the partnership may elect to, or be required to, increase/decrease the basis of its assets. The basis adjustments will be for the benefit/detriment of the transferee partner only.

If the partnership has a special election in place, known as an IRS Section 754 election, or will make one in the year of the transfer, the partnership will adjust the basis of its assets as a result of the transfer. IRS Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner.
The partnership will be required to adjust the basis of its assets when an interest in the partnership is transferred if the total adjusted basis of the partnership’s assets is greater than the total fair market value of the partnership’s assets by more than $250,000 at the time of the transfer.

Ordinary Income Recognized by the Transferor on the Sale of a Partnership Interest Typically, when a partnership interest is sold, the transferor (seller) will recognize capital gain/loss. However, a portion of the gain/loss could be treated as ordinary income to the extent the transferor partner exchanges all or a part of his interest in the partnership attributable to unrealized receivables or inventory items. (This is known as “Section 751(a) Property” or “hot” assets).

Unrealized receivables – includes, to the extent not previously included in income, any rights (contractual or otherwise) to payment for (i) goods delivered, or to be delivered, to the extent the proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or (ii) services rendered, or to be rendered.
Property held primarily for sale to customers in the ordinary course of a trade or business.
Any other property of the partnership which would be considered property other than a capital asset and other than property used in a trade or business.
Any other property held by the partnership which, if held by the selling partner, would be considered of the type described above.

Example – Partner A sells his partnership interest to D and recognizes gain of $500,000 on the sale. The partnership holds some inventory property. If the partnership sold this inventory, Partner A would be allocated $100,000 of that gain. As a result, Partner A will recognize $100,000 of ordinary income and $400,000 of capital gain.

The partnership needs to provide the transferor with sufficient information in order to determine the amount of ordinary income/loss on the sale, if any.

Termination/Technical Termination of the Partnership A transfer of a partnership interest could result in an actual or technical termination of the partnership.

The partnership will terminate on the date of transfer if there is one tax owner left after the transfer.
The partnership will have a technical termination for tax purposes if within a 12-month period there is a sale or exchange of 50% or more of the total interest in the partnership’s capital and profits.

Example – D transfers its 55% interest to E. The transfer will result in the partnership having a technical termination because 50% or more of the total interest in the partnership was transferred. The partnership will terminate on the date of transfer and a “new” partnership will begin on the day after the transfer.

Allocation of Partnership Income to Transferor/Transferee Partners When a partnership interest is transferred during the year, there are two methods available to allocate the partnership income to the transferor/transferee partners: the interim closing method and the proration method.

Interim closing method – Under this method, the partnership closes its books with respect to the transferor partner. Generally, the partnership calculates the taxable income from the beginning of the year to the date of transfer and determines the transferor’s share of that income. Similarly, the partnership calculates the taxable income from the date after the transfer to the end of the taxable year and determines the transferee’s share of that income. (Note that certain items must be prorated.)

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the interim closing method, the partnership calculates the taxable income from 1/1 – 6/30 to be $100,000 and from 7/1-12/31 to be $50,000. Partner A will be allocated $10,000 [$100,000*10%] and Partner H will be allocated $5,000 [$50,000*10%].

Proration method – this method is allowed if agreed to by the partners (typically discussed in the partnership agreement). Under this method, the partnership allocates to the transferor his prorata share of the amount of partnership items that would be included in his taxable income had he been a partner for the entire year. The proration may be based on the portion of the taxable year that has elapsed prior to the transfer or may be determined under any other reasonable method.

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the proration method, the income is treated as earned $74,384 from 1/1 – 6/30 [181 days/365 days*$150,000] and $75,616 from 7/1-12/31 [184 days/365 days*$150,000]. Partner A will be allocated $7,438 [$74,384*10%] and Partner H will be allocated $7,562 [$75,616*10%]. Note that this is one way to allocate the income. The partnership may use any reasonable method.

Change in Tax Year of the Partnership The transfer could result in a mandatory change in the partnership’s tax year. A partnership’s tax year is determined by reference to its partners. A partnership may not have a taxable year other than:

The majority interest taxable year – this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%.

Example – Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority interest.

If there is no majority interest taxable year or principal partners, (a partner having a 5% or more in the partnership profits or capital) then the partnership adopts the year which results in the least aggregate deferral.

Change in Partnership’s Accounting Method A transfer of a partnership interest may require the partnership to change its method of accounting. Generally, a partnership may not use the cash method of accounting if it has a C corporation as a partner. Therefore, a transfer of a partnership interest to a C corporation could result in the partnership being required to change from the cash method to the accrual method.

As described in this article, a transfer of a partnership interest involves an analysis of several tax consequences. An analysis should always be done to ensure that any tax issues are dealt with timely.

If you or your business are involved in a transfer described above, please contact your Marcum Tax Professional for guidance on tax treatment.

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2007 California Corporations Code Article 7. Assignment Of Partnership Interests

Ca codes (corp:15671-15675).

Disclaimer: These codes may not be the most recent version. California may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.

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Free Assignment of Partnership Interest Template for Microsoft Word

Download this free Assignment of Partnership Interest template as a Word document to make it easy to assign your interest in a partnership to a third party.

Assignment of Partnership Interest

THIS ASSIGNMENT (the “Assignment”) made and entered into on [Insert Date]

AMONGST: [Insert Name] of [Insert Address] (the “Assignor”)

– AND- [Insert Name] of [Insert Address] (the “Assignee”)

– AND-

[Insert Name] of [Insert Address] (the “Remaining Partner”)

A. The Assignor is the holder of a partnership interest (the “Interest”) in [Insert name of partnership interest] (the “Partnership”), a partnership previously established on [Insert date of initial partnership agreement] for the purpose of and formed in accordance with an agreement (the “Partnership Agreement”).

B. The Assignor desires to assign the Interest to the Assignee and the Assignee desires to acquire the Interest from the Assignor.

C. The Interest acquired by the Assignee will include all rights in the Partnership previously afforded to the Assignor including the status as partner. The Remaining Partner has agreed and gives consent to such assignment according to the terms and conditions of this Assignment.

IN CONSIDERATION OF and as a condition of the parties entering into this Assignment and other valuable consideration, the receipt and sufficiency of which consideration is acknowledged, the parties to this Assignment agree as follows:

Sale and Purchase

1. By this Assignment the Assignor withdraws from the Partnership and to the fullest extent permitted by the Partnership Agreement, assigns all its rights, interests, title and benefits in the Partnership to the Assignee. The Assignee will become a partner in the Partnership taking the place of the Assignor in the Partnership with all the rights and obligations previously afforded to the Assignor. The Assignee, as a partner in the Partnership, will be bound by the terms and conditions of the Partnership Agreement as amended. On assignment of the Interest to the Assignee, the Assignor will cease to be a partner in the Partnership.

Consideration

2. As full consideration for the assignment of the Interest the Assignee has submitted and the Assignor has accepted the following consideration: [Enter consideration]

3. The closing of the purchase and sale of the Interest (the “Closing”) will take place on [Insert closing date] (the “Closing Date”) at the offices of the Assignor or at such other time and place as the Assignor and Assignee mutually agree.

Representations and Warranties of the Assignor

4. The Assignor warrants that the Assignor has a general partnership interest in the Partnership and that the Assignor has the legal right to execute and perform an assignment of the Interest exclusive of the Assignor’s status as partner.

5. The Assignor warrants that the Interest is free and clear of all liens, encumbrances, restrictions and claims.

6. The Assignor warrants that on completion of this Assignment the Assignor will retain no residual interest or interests in the Partnership.

7. The Assignor warrants that the Assignor is not in any way in default of any of the expressed or implied terms and conditions of the Partnership Agreement. The Assignor also warrants that this Assignment is in full compliance with all terms and conditions of the Partnership Agreement.

8. The Assignor warrants that the Assignor is not bound by any other contractual agreement or legal requirement that would be violated by this Assignment.

9. The Assignor warrants that it has provided the Assignee with the most current copy of the Partnership Agreement inclusive of all amendments.

10. The Assignor warrants that no other consent is required from any third party or government entity authorising this Assignment except for those consents of the Remaining Partner contained in this Assignment.

Assignee’s Obligations

11. On Closing of this Assignment, the Assignee will observe and perform any and all terms and conditions of the Partnership Agreement, relating to the newly acquired rights, that were previously binding on the Assignor. Transitional Rights and Obligations

12. To the full extent permitted by the Partnership Agreement, all income, rights, benefits, obligations and liabilities of the Interest will belong to the Assignor before the Closing and will transfer to the Assignee after the Closing. Consent of Remaining Partner

13. The Remaining Partner consents to the terms and conditions of this Assignment with the intent that the Assignee will become a partner in the Partnership with all of the rights, benefits, obligations and liabilities previously afforded to the Assignor under the Partnership Agreement as amended.

Governing Law and Jurisdiction

14. This Assignment will be construed in accordance with, and exclusively governed by the laws of the [Insert state or country].

15. The Assignor and the Assignee submit to the jurisdiction of the courts of the [Insert state or country] for the enforcement of this Assignment or any arbitration award or decision arising from this Assignment.

Miscellaneous

16. Time is of the essence in this Assignment.

17. This Assignment may be executed in counterpart. Facsimile signatures are binding and are considered to be original signatures.

18. All warrants and representations of the Assignor and the Assignee connected with this Assignment will survive the Closing.

19. This Assignment will not be assigned either in whole or in part by any party to this Assignment without the written consent of the other party.

20. Headings are inserted for the convenience of the parties only and are not to be considered when interpreting this Assignment. Words in the singular mean and include the plural and vice versa. Words in the masculine gender include the feminine gender and vice versa. Words in the neuter gender include the masculine gender and the feminine gender and vice versa.

21. If any term, covenant, condition or provision of this Assignment is held by a court of competent jurisdiction to be invalid, void or unenforceable, it is the parties’ intent that such provision be reduced in scope by the court only to the extent deemed necessary by that court to render the provision reasonable and enforceable and the remainder of the provisions of this Assignment will in no way be affected, impaired or invalidated as a result.

22. This Assignment contains the entire agreement between the parties. All negotiations and understandings have been included in this Assignment. Statements or representations which may have been made by any party to this Assignment in the negotiation stages of this Assignment may in some way be inconsistent with this final written Assignment. All such statements are declared to be of no value in this Assignment. Only the written terms of this Assignment will bind the parties.

23. This Assignment and the terms and conditions contained in this Assignment apply to and are binding upon the Assignor, the Assignee, the Remaining Partner and their respective successors, assigns, executors, administrators, beneficiaries, and representatives.

24. Any notices or delivery required here will be deemed completed when hand-delivered, delivered by agent, or seven (7) days after being placed in the post, postage prepaid, to the parties at the addresses contained in this Assignment or as the parties may later designate in writing.

25. All of the rights, remedies and benefits provided by this Assignment will be cumulative and will not be exclusive of any other such rights, remedies and benefits allowed by law.

IN WITNESS WHEREOF the Assignor, the Assignee and the Remaining Partner have duly affixed their signatures under hand and seal on [Insert date]

_____________________________ WITNESS: ___________________________ Address: _____________________________ Occupation: __________________________ _____________________________ ______________________________

What is Assignment of Partnership Interest?

Unless otherwise stated in the partnership agreement, a partnership interest is assignable in whole or in part.

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PARTNERS & PARTNERSHIPS

Special Issues Related to Distributions of Partnership Interests by Estates and Trusts

Partnership & LLC Taxation
Taxation of Estates & Trusts

Editor: Greg A. Fairbanks, J.D., LL.M.

With the popularity of family limited partnerships, it is not uncommon to find a partnership interest held by an estate or trust. However, eventually the estate or trust must distribute the partnership interest. The complex rules governing the tax treatment of distributions from estates and trusts are further complicated when a partnership interest is distributed.

General Rule

When an estate or trust distributes cash or property, the distribution is taxed to the beneficiary to the extent that the trust or estate has distributable net income (i.e., generally taxable in come not including capital gain) (Sec. 662). This means that the beneficiary, rather than the estate or trust, is taxed on the entity’s income up to the amount of the distribution. In the case of property, the distribution amount is the lesser of the property’s tax basis or its fair market value (FMV) (Sec. 643(e)(2)). Nevertheless, regardless of how the property distribution is measured, the beneficiary’s tax basis in the property will be the same as the estate or trust’s cost basis prior to the distribution.

In addition, there are situations in which an estate or trust will recognize gain as a result of the distribution of appreciated property, which will re quire an adjustment to the property’s basis: (1) the property is distributed in satisfaction of a specific pecuniary be quest; (2) the property is subject to liabilities in excess of basis; or (3) the fiduciary elects (under Sec. 643(e)(3)) to treat the distribution as a sale to the beneficiary for the property’s FMV. Further, if the property distributed is a partnership interest and the estate or trust has a negative tax capital account (this occurs when the liabilities of the partnership allocable to the interest ex ceed the estate or trust’s share of the partnership basis of its assets), then a gain will be recognized equal to the negative capital as a result of the requirement of Sec. 752(d) to include the partner’s liabilities in the amount realized.

Sec. 761(e)

Sec. 761(e) provides that any distri-bution of an interest in a partnership that is not otherwise treated as a sale or ex change, as discussed above, will still be treated as a sale or exchange for purposes of Secs. 708 and 743.

While the legislative history of this provision indicates that the IRS might issue regulations providing that estates and trusts would not be subject to this provision, no regulations have been issued to date. It seems relatively certain that any distribution by an estate or trust is a sale or exchange for Secs. 708 and 743.

Not all transfers of partnership in terests to a beneficiary are treated as distributions. For example, a transfer of a partnership interest specifically be queathed to a beneficiary is not a distribution and is therefore not subject to Sec. 761(e).

Under Sec. 708(b)(1)(B), a partnership terminates if 50% or more of the total interest in partnership capital and profits is sold or exchanged in any 12-month period. If the partnership terminates, the old partnership is deemed to contribute its assets and liabilities to a new partnership in ex change for a partnership interest and immediately distributes the new partnership interest in liquidation of the old partnership.

A partnership’s termination can result in both favorable and unfavorable tax consequences. The termination of the old partnership results in the creation of a new partnership that can choose its own tax accounting method and tax year end and does not inherit the old partnership’s elections (e.g., Sec. 754).

One particularly bad consequence of a termination for partnerships containing a significant amount of depreciable property is that the step-into-the-shoes rule of Sec. 168(i)(7) does not apply in the case of a Sec. 708(b)(1)(B) termination. As a consequence, the adjusted basis of the depreciable property would be depreciated over the applicable asset life as if it were newly acquired property. This provision is a trap for the unwary, but if recognized it can be easily avoided by ensuring that distributions are planned over a greater than 12-month period so as not to violate the 50%-or-more rule.

A distribution of a partnership interest by a fiduciary is treated as a sale or exchange for purposes of Sec. 743. Therefore, if the partnership has a Sec. 754 election in place, the transfer of the interest will require the partnership to adjust the basis of partnership property for the benefit of the transferee partner (i.e., beneficiary).

However, if the partnership does not have a Sec. 754 election in place, it will need a thorough review of inside basis of the partnership assets and their estimated FMVs to determine if a Sec. 754 election should be made or if the partnership has a substantial built-in loss that requires negative basis adjustments under Sec. 743(b). If Sec. 743(b) applies, then consideration should be given in these circumstances not to make a Sec. 754 election, since the election would affect future transfers of partnership interest.

Sec. 1245 Recapture

Sec. 1245(a)(1) requires taxpayers to recapture depreciation on tangible personal property as ordinary income on disposition of the property, not withstanding any other provision. Sec. 1245(b) provides exceptions to this general rule. One of the exceptions applies to “transfers at death,” but distributions from estates and trusts are not on the list. Applying the general rule of Sec. 643(e), without the Sec. 643(e)(3) election, should result in the estate or trust’s not recognizing re capture income. Regs. Sec. 1245-4(b) states that the transfer-at-death exception applies if the basis of the property to the beneficiary is determined under Sec. 1014. However, as discussed above, the beneficiary’s tax basis for in-kind distributions is determined under Sec. 643(e).

The uncertainty of distributions of Sec. 1245 assets held directly by the estate or trust is compounded when the recapture property is owned by a partnership. This determination will involve whether the aggregate theory of partnership taxation should be applied. Under this theory, each partner would be viewed as the owner of a direct undivided interest in each partnership asset. This is an issue that the IRS needs to clarify for taxpayers.

EditorNotes

Greg A. Fairbanks, J.D., LL.M., works for Grant Thornton LLPWashington, DC

Unless otherwise indicated, contributors are members of or associated with Grant Thornton LLP.

If you would like additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or [email protected] .

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How to Write a Partnership Proposal [Examples + Template]

Published: June 18, 2024

Partnerships generate $3.9 billion per year in the U.S. and supercharge the revenue of companies like Microsoft, Atlassian, and Shopify. Teaming up with another professional or company can multiply your capacity, expertise, and growth.

Woman shaking hands over partnership proposal

With so much at stake, approaching a potential partner can be intimidating. Whenever I make a business pitch, there are three items I work to perfect. First, an underlying relationship to build on. Second, a stellar verbal presentation for a pitch meeting. And third, a killer partnership proposal.

A partnership proposal is a powerful tool to showcase your professionalism and convince your potential partner why they should collaborate with you. I’ve compiled what you should include in your proposal, plus four partnership proposal templates to give you a head start.

What is a partnership proposal?

Types of Partnership Proposals

Components of a Partnership Proposal

How to write a partnership proposal, partnership proposal template, partnership proposal examples, partnership proposal tips.

A partnership proposal is a document outlining the benefits, scope, and structure of a future collaboration between two businesses or individuals.

Most partnership collaborations begin with an idea and verbal discussions. “ Hey, here’s a crazy idea. What if we…” If you don’t know the person, start with a warm intro email or phone call first.

A partnership proposal is the next step in the process, formalizing concepts to align goals and gain buy-in. While it isn’t a legal contract, it’s often a precursor to one.

Free Business Proposal Template

Propose your business as the ideal solution using our Free Business Proposal Templates

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Types of Business Partnerships

Before creating a business partnership proposal, it’s important to understand which type of partnership you want to pursue.

General Business Partnership

When two or more individuals enter a business agreement and share unlimited liability, you have a general business partnership. A proposal for a general business partnership should include the share of ownership, contributions of each partner, the distribution of profits and losses, and the terms for dissolution.

Joint Venture

A joint venture (JV) is an agreement between two companies to combine resources and expertise for a specific purpose. For instance, a global company might form a JV with a local company when bringing a product to a new country.

Limited Partnership

A limited partnership (LP) is a business partnership that includes at least one general partner and at least one limited partner. Limited partners have minimal liability and management oversight of the operations. An LP is common in single-purpose scenarios like a real estate transaction.

Limited Liability Partnership

The LLP structure is common in professional service fields such as law firms, doctor’s offices, and accounting. Similar to an LLC, a limited liability partnership (LLP) is an agreement between partners that grants them limited liability. LLP requirements vary by state.

Influencer Partnership

An influencer partnership is a limited-scope agreement between an influencer or creator and a brand to create and publish branded social media content.

Sponsorship Partnership

A sponsorship is a collaboration between businesses, nonprofits, or media companies where one company pays for access to promote their goods and services to the other company’s audience.

When I write proposals, I always aim to personalize each one and find the right balance between personable and professional. While the nuances of each partnership model vary, there are a few common elements that every partnership business proposal should have.

Executive Summary

Hook your reader’s attention with a summary explaining the partnership concept, key benefits, and a table of contents.

List each partner with their contact and background information. Specify the role each will have, and whether they are a general or limited partner. Make it visual, with photos or logos.

Goals and Objectives

All good partnerships start with shared goals. Explain your goals and dreams for the partnership, from a high-level vision to specific objectives.

Share who your audience is and any key demographics. Make sure that your audience will fit with the partner’s audience, and vice-versa. An audience is a key selling point for partners, especially with influencer or sponsorship partnerships. Some brands go as far as account mapping to identify customer overlap, but general audience data can be as effective.

Scope of Work

Next, define the scope of work and projects to be covered with the partnership. If this is for a limited-scope project like an influencer collaboration, give a precise breakdown of project steps. If this is for a general partnership, JV, or LP, list target activities and deliverables and who is responsible for each. Give timelines as appropriate.

Benefits and Challenges

If you’ve ever written a business plan, you’re likely already familiar with the SWOT analysis (strengths, weaknesses, opportunities, threats). Similar to this, give an abbreviated analysis of:

Challenges that will need to be tackled.
Benefits to the collaboration.
Market research and industry analysis.

Legal and Financial Information

Propose terms and conditions for the partnership, like payment and revenue-sharing structures. Spell out who will own intellectual property generated by the company and how royalties will be distributed. Address how disputes or a partnership dissolution would be handled.

To test this out, I wrote a general partnership proposal between a web designer and a web developer who want to team up to start a website studio. I used HubSpot’s partnership business proposal template to build a professional proposal outlining the partnership benefits and structure.

Creating a compelling partnership proposal requires a clear understanding of your potential partner's needs and how your collaboration can meet those needs. To simplify this process and ensure you have all the required information, consider using HubSpot Sales Software . This tool can help you gather insights, track interactions, and manage your proposal process more efficiently.

Here are the steps I took to create the proposal.

1. Outline the Benefits

To convince your partner, make the case why it’s worth them sharing their time (and profits) with you.

I started my proposal with an executive summary envisioning why the partnership would appeal to future clients. That leads into a “Benefits of Collaboration” section where I clearly outline the mutual advantages.

Partnership proposal summary and benefits

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8928 / How does a partner acquire interests in a partnership? Is the allocation of income amongst partners impacted if a partner acquires a partnership interest by gift?

(1) it does not allow for a reasonable salary for services rendered to the partnership by the donor of the interest; or

(2) the income attributable to the capital share of the donee is proportionately greater than the income attributable to the donor’s capital share. 2

The transfer must be complete and the family member donee must have control over the partnership interest consistent with the status of partner. If the donee is not old enough to serve in the capacity of partner, the interest must be controlled by a fiduciary for his benefit.

1 .IRC § 704(e)(1).

2 .IRC § 704(e)(2).

The IRS Takes Aim at Basis Adjustments in Partnership Transactions

Trevor R. Allen Edward E. Gonzalez Kathleen (Kat) Saunders Gregor Sarah Beth Rizzo Jeff A. Romero Paul Schockett Matt Dinger

On June 17, 2024, the IRS issued three pieces of guidance addressing certain “basis-shifting” transactions in the context of related-party partnerships:

In new proposed regulations, the IRS identified several transactions as “transactions of interest,” which would require taxpayers and material advisors to report such transactions to the IRS. 1
Notice 2024-54 describes two sets of forthcoming proposed regulations that would have the effect of (i) suspending the basis-adjustment benefits of certain transactions in the related-party partnership setting and (ii) disallowing basis-adjustment benefits where related partners are members of the same consolidated group.
Revenue Ruling 2024-14 applies the economic substance doctrine to three specific transactions in the related-party partnership setting, concluding that each transaction lacks economic substance, disallowing the intended tax benefit and imposing penalties.

Certain aspects of the guidance, if finalized, could apply to disallow deductions this year, even if the related-party partnership transaction occurred in prior years, and would apply without regard to a taxpayer’s intent. These and other key provisions and takeaways are described below.

In a press release accompanying the guidance, the IRS announced the formation of a new group within the Office of Chief Counsel that will handle issues surrounding partnerships and other pass-through entities, with a focus on “closing loopholes.” 2 Regarding the transactions addressed in the proposed guidance, the press release provides that “[c]urrently, the IRS has tens of billions of dollars of deductions claimed in these transactions under audit.” As previously reported, 3 the IRS has significantly ramped up enforcement activity in the partnership and pass-throughs area. This guidance shows that basis-shifting transactions are an early priority of this new group.

Transactions of Interest – Proposed Regulations Under Section 6011

Proposed Treasury Regulations Section 1.6011-18(c) describes four “basis-shifting” transactions in the related-party partnership setting identified as transactions of interest (requiring reporting by taxpayers and material advisors). The first three transactions involve current or liquidating distributions by a partnership to a “related partner” that result in a basis increase to property distributed to the partner or retained by the partnership under IRC section 732 or 734. 4 The fourth transaction involves a transfer of a partnership interest to a related partner in a nonrecognition transaction that results in a basis increase to partnership property under IRC section 743. 5 Finally, “substantially similar” transactions — e.g ., transactions that involve tax-indifferent (rather than related) partners or transfers of partnership interests to related transferees in recognition transactions that exceed the $5,000,000 threshold — would also be reportable transactions. 6

The comment period for the proposed regulations ends on August 19, 2024, and a public hearing has been scheduled for September 17, 2024.

Although the proposed regulations are not yet effective (and will be effective only after finalization), reporting by participating partners, partnerships and material advisors may nevertheless be required for transactions occurring before that date. This is because a partner or partnership is treated as “participating” in a transaction of interest both in the taxable year in which the basis-adjusting transaction occurs and in any taxable year in which the tax return of the partner or partnership, as applicable, reflects the tax consequences of the basis increase. 7
Increased audit scrutiny of these and similar transactions involving partnerships has already begun, meaning the IRS is likely developing theories for challenging tax benefits arising from existing ( i.e ., already completed) transactions that might be reportable at a later date — partnerships and partners might benefit from a risk assessment of existing transactions now, particularly in light of the reasoning set forth in Revenue Ruling 2024-14, discussed below.

Suspension of Benefits and Implications for Consolidated Groups – Notice 2024-54

Notice 2024-54 outlines two sets of forthcoming proposed regulations intended to address the basis-shifting transactions described above in the related-party partnership setting (defined in the notice as “covered transactions”):

Proposed regulations under IRC sections 732, 734(b), 743(b) and 755 (the “Proposed Related-Party Basis Adjustment Regulations”) are intended to disallow the benefit of the basis adjustment in covered transactions. The proposed regulations would generally disallow recovery of the basis increase through depreciation or amortization, and would also prohibit taking such basis increase into account upon a future disposition of the property.
Proposed regulations under section 1502 (the “Proposed Consolidated Return Regulations”) would address the interplay between the consolidated return rules and the rules of subchapter K. Short on any specific details, Notice 2024-54 provides that the forthcoming proposed regulations would “apply a single-entity approach with respect to interests in a partnership held by members of a consolidated group” and that such an approach is intended to “prevent direct or indirect basis shifts among the members of the group” resulting from the covered transactions described above. 8
Treasury and the IRS have requested comments regarding the approaches to addressing distortions of income from related-party partnership basis shifting transactions by July 17, 2024.
The Proposed Related-Party Basis Adjustment Regulations explicitly recognize that they could cover a host of transactions that are neither abusive nor lacking in economic substance as they are meant to apply mechanically regardless of taxpayer intent. 9 In addition, the rules would apply to suspend positive basis adjustments only, even if the related-party transaction also had the effect of reducing basis in other depreciable property.
Similar to the proposed reportable transaction regulations described above, the Proposed Related-Party Basis Adjustment Regulations could apply retroactively to transactions that occurred before June 17, 2024, as long as the basis increase from such transactions is reflected on a tax return after the effective date. 10
Although Notice 2024-54 describes the Proposed Consolidated Return Regulations as intended to prevent direct or indirect basis shifts among consolidated group members, the implications of this guidance are potentially much broader. If, as the notice suggests, a true “single-entity approach” were applied with respect to partnership interests held by consolidated group members, this could severely restrict the use of partnerships wholly-owned within consolidated groups. The applicability date for the Proposed Consolidated Return Regulations will be contained in future guidance.

Economic Substance Analysis – Revenue Ruling 2024-14

Revenue Ruling 2024-14 sets forth three situations involving basis-adjustment transactions in the related-party partnership setting and analyzes these transactions under the economic substance doctrine. In each situation, through the use of partnership distributions and/or related-party transfers of partnership interests, members of a controlled group shift basis from partnership property that is not depreciable or amortizable to depreciable or amortizable property held by the partnership or by a related partner, resulting in increased deductions or reduced amounts of gain (or increased loss). In each situation, (i) partnership contributions, distributions and allocations had been previously undertaken “with a view to creating a disparity” between inside and outside basis, (ii) the stated business purpose of the transactions at issue involved “cleaning up intercompany accounts, reducing administrative complexity and achieving other administrative efficiencies” and certain cost savings, and (iii) the cost savings resulting from the transaction were insubstantial relative to the reduction in aggregate federal income tax liability.

After discussing the relevant code provisions, Revenue Ruling 2024-14 concludes that, in each situation, the transactions at issue failed both the objective and subjective prongs of the economic substance doctrine as codified at IRC section 7701(o), i.e ., the transactions neither changed in a meaningful way (apart from federal income tax effects) the taxpayer’s economic position nor was there a substantial nontax business purpose for entering into the transactions. As a result, the ruling concludes that any resulting basis increases must be disregarded, and that the taxpayers are subject to a 20% penalty on any underpayment resulting from such a basis increase (increased to 40% for nondisclosure).

While the first two pieces of guidance describe new rules, Revenue Ruling 2024-14 states the IRS’s current position with respect to certain basis-shifting transactions in the related-party partnership context.
Notably, the IRS relies on IRC section 7701(o) and not Treasury Regulation section 1.701-2, the partnership anti-abuse rules. This reflects a broader and questionable trend by the IRS to expand the application of IRC section 7701(o) in contexts not traditionally considered to be subject to the economic substance doctrine or where another anti-abuse provision or doctrine already exists. Additionally, Revenue Ruling 2024-14 applies the economic substance doctrine without any consideration of its relevancy to the transactions at issue.

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1 REG-124593-23.

2 IR-2024-166, June 17, 2024.

3 See Armando Gomez, Kathleen (Kat) Saunders Gregor, Emily Lam, “ The Informed Board: The IRS Is Coming for Partnerships and High Net Wealth Individuals ,” Skadden Publications, Fall 2023.

4 Prop. Treas. Reg. § 1.6011-18(c)(1)(i)-(iii).

5 Prop. Treas. Reg. § 1.6011-18(c)(2).

6 Prop. Treas. Reg. § 1.6011-18(d).

7 Prop. Treas. Reg. § 1.6011-18(e)(5). In addition, taxpayers and material advisors may also be required to disclose a transaction of interest occurring in any taxable year for which the period of limitations remains open. See Treas. Reg. § 1.6011-4(e)(2)(i).

8 Notice 2024-54 § 5.01.

9 Notice 2024-54 § 4.01.

10 Notice 2024-54 § 6.01.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

2024-1273

Treasury and IRS issue guidance on certain partnership related-party basis adjustment transactions

On June 17, 2024, the Treasury Department and the IRS issued three items of guidance on partnership related-party basis adjustment transactions:

(Notice), Treasury and the IRS announced they intend to publish two sets of proposed regulations in the future addressing certain basis-shifting transactions involving partnerships and related partners. The future regulations in the Notice are proposed to apply to tax years ending on or after June 17, 2024. ) (Proposed TOI Regulations) identifying certain partnership related-party basis adjustment transactions, and substantially similar transactions, as "transactions of interest" under Treas. Reg Section 1.6011-4(b), which must be reported by taxpayers to the IRS on Form 8886, and by material advisors on Form 8918, (or successor form). (Ruling), the IRS ruled that the codified economic substance doctrine in IRC Section 7701(o) applied to (and was not satisfied in) certain fact patterns involving partnership related-party basis adjustment transactions under IRC Sections 732(b), 734(b) and 743(b).

Under the partnership tax rules, various transactions may result in basis adjustments to either the property of a partnership or property distributed by a partnership to its partners. The rules generally attempt to ensure that each partner's adjusted basis in its partnership interest (outside basis) equals its corresponding share of the partnership's adjusted basis in its property (inside basis).

The guidance addresses the following three types of transactions giving rise to basis adjustments (so-called related party basis adjustments):

This Alert discusses how each part of the guidance package addresses these transactions.

In the Notice, Treasury and the IRS stated they intend to publish two sets of proposed regulations in the future addressing basis-shifting transactions involving partnerships and related parties (covered transactions).

The first set of proposed regulations under IRC Sections 732, 734(b), 743(b) and 755 (proposed related-party basis adjustment regulations) would (i) provide methods for recovering basis adjustments resulting from a covered transaction, (ii) provide rules for determining gain or loss on the disposition of basis-adjusted property, and (iii) treat as covered transactions similar non-related party transactions involving taxable parties or tax-indifferent parties, such as certain foreign persons, a tax-exempt organization, or a party with tax attributes that make it tax-indifferent.

The second set of proposed regulations under IRC Section 1502 (consolidated return regulations) would treat consolidated group members that are partners in a partnership as a "single entity," so that a covered transaction cannot shift basis among group members and, according to Treasury and the IRS, thereby distort group income.

The proposed regulations would apply special rules to the cost recovery of basis adjustments arising from a covered transaction, generally called a related party basis adjustment (RPBA). The proposed guidance, if finalized, would govern whether and how to account for an RPBA.

According to the Notice, the proposed regulations are intended to be mechanical in nature and apply to all covered transactions, regardless of taxpayer intent and without regard to potential abuse or a lack of economic substance. The proposed regulations would define "related persons" as having a relation described by IRC Section 267(b) (determined without regard to IRC Sections 267(c)(3)) or 707(b)(1) immediately before or immediately after a covered transaction. The term "cost recovery" would mean an allowance for depreciation, amortization, or depletion under subtitle A of the Internal Revenue Code (Subtitle A).

The Notice identifies three categories of RPBA transactions.

An IRC Section 734(b) RPBA would arise when a partnership has a valid IRC Section 754 election in effect, the relatedness thresholds exist among two or more partners, and the partnership makes a current or liquidating distribution of property to one of the related partners that results in a positive basis adjustment to one or more of the partnership's remaining assets under IRC Section 734(b)

For such a basis adjustment to arise, the distributed property must have a relatively high inside basis in the hands of the partnership when compared to the distributee partner's outside basis in its partnership interest.

Under the proposed rules, the partnership would recover deductions attributable to the IRC Section 734(b) RPBA using the cost recovery method and period of the distributed property giving rise to the adjustment (referenced in the Notice as the "corresponding distributed property"). However, the special cost recovery method does not apply to an unrelated partner's share of the IRC Section 734(b) adjustment. The determination of each partner's share of the IRC Section 734(b) adjustment would follow the principles in the regulations for determining the partners' shares of IRC Section 734(b) basis adjustments for purposes of the IRC Section 197 "anti-churning" rules. Furthermore, the partnership generally would be prohibited from taking the IRC Section 734(b) RPBA into account upon the sale or disposition of partnership property.

Upon a "qualifying disposition" of the corresponding distributed property, any remaining basis attributable to the IRC Section 734(b) RPBA would be treated as giving rise to newly placed-in-service property, subject to the cost recovery period and method applicable to property to which it is allocated. Also, following a qualifying disposition, an IRC Section 734(b) RPBA could be taken into account in computing gain or loss upon that property's disposition. A qualifying disposition is one in which the distributed property is disposed of in a fully taxable transaction to an unrelated person.

If a partnership distributes property to a partner for which an IRC Section 734(b) RPBA exists, the partner would take the RPBA into account in calculating the basis of the property in the partner's hands under IRC Section 732 and the partner's remaining outside basis. The basis adjustment in the distributed property would, however, remain an IRC Section 734(b) RPBA until a qualifying disposition occurs.

If a partnership disposes of property (other than by distribution) that is subject to an IRC Section 734(b) RPBA, the IRC Section 734(b) RPBA would be reallocated to the partnership's other property under rules similar to Treas. Reg. Section 1.755-1(c) and would remain an IRC Section 734(b) RPBA. If the IRC Section 734(b) RPBA cannot be reallocated to property of a like character, the reallocation would occur when the partnership acquires property of a like character in the future. Similar rules would apply if a partner that receives property with an IRC Section 734(b) RPBA in a distribution subsequently disposes of that property.

An IRC Section 743(b) RPBA would arise when (i) a partner transfers an interest in a partnership that has an IRC Section 754 election in effect or a substantial built-in loss within the meaning of IRC Section 743(d) immediately after such transfer (ii) to a related transferee or a transferee that is related to one or more of the partners (iii) in a nonrecognition transaction in which the gain recognized, if any, and for which tax imposed by Subtitle A of the Code (subtitle A) is required to be paid, is less than the aggregate amount of the increase(s) in the basis of partnership property with respect to the transferee partner under IRC Sections 743(b) and 755. In addition, a transferee partner would have to have outside basis that does not equal the transferee partner's share of inside basis (ignoring any existing IRC Section 743(b) adjustment) of partnership assets.

The term "nonrecognition transaction" would have the same meaning as in IRC Section 7701(a)(45), , any disposition of property in a transaction in which gain or loss is not recognized in whole or in part for purposes of Subtitle A.

Under the proposed rules, the IRC Section 743(b) RPBA would be ineligible for cost recovery and could not be taken into account on the sale or other disposition of partnership property until the transferee partner ceases to be related to both the transferor and all persons that were partners immediately before or immediately after the covered transaction.

If a basis adjustment ceases to be an IRC Section 743(b) RPBA as a result of the transferee partner's ceasing to be related to the transferor and all others who were partners immediately before and after the covered transaction, the basis adjustment in question would be treated as giving rise to newly placed-in-service property that is subject to the cost recovery method and period of the property to which it was allocated and the basis adjustment may be taken into account on the disposition of that property.

If a partnership distributes property subject to an IRC Section 743(b) RPBA to the transferee partner, the transferee partner would take into account the basis adjustment in determining the partner's basis in the distributed property under IRC Section 732 and the partner's remaining outside basis in its partnership interest. The IRC Section 743(b) RPBA attached to property distributed to the transferee partner would be ineligible for cost recovery or for use in computing gain or loss on the disposition of the distributed property while it remains an IRC Section 743(b) RPBA ( , as long as the partners remain related).

If a partnership disposes of property to which an IRC Section 743(b) RPBA applies (other than in a distribution to the transferee partner) or a transferee partner disposes of distributed property to which the RPBA applies, the IRC Section 743(b) RPBA would be reallocated to other property of the partnership or partner under rules similar to Treas. Reg. Section 1.755-1(c) and remain an IRC Section 743(b) RPBA. If the IRC Section 743(b) RPBA could not be reallocated to property of a like character, the reallocation would occur when property of a like character is acquired in the future.

If tax must be paid on any gain recognized in an IRC Section 743(b) covered transaction, the portion of each basis increase attributed to that gain would not be treated as an IRC Section 743(b) RPBA ( , such increased basis amount would be eligible for cost recovery).

An IRC Section 732 RPBA would arise when a partnership makes a liquidating distribution of property to a partner that results in a basis increase to the distributed property under IRC Section 732(b) and (c), and either:

Under the proposed rules described in the Notice, the IRC Section 732 RPBA from a covered transaction resulting in a basis increase under IRC Section 732(b) and (c) to a distributee partner's property would be recovered using the cost recovery method and period of the corresponding partnership property whose basis was reduced (in the case of a complete liquidation, the basis reduction under IRC Section 732; or in the case of a continuing partnership, the basis reduction that either was made under IRC Section 734(b), or that would have been made under IRC Section 734(b) if the partnership had had a IRC Section 754 election in effect) with respect to a related partner. The distributee partner would not take the 732 RPBA into account in calculating gain or loss upon the disposition of the property to which it applies.

The preceding rules would not apply to any portion of a basis increase corresponding to a basis decrease to property distributed to an unrelated partner. The determination of an unrelated partner's share of the basis decrease would follow the principles in the regulations under IRC Section 197 for determining the partners' shares of IRC Section 734(b) basis adjustments for purposes of the IRC Section 197 "anti-churning" rules. For multiple distributed properties, each distributed property would be treated as having a separate IRC Section 732 RPBA for each basis decrease to corresponding property. The IRC Section 732 RPBA would be proportional to the share of the basis decrease to that IRC Section 732 RPBA's property out of the aggregate of the basis decrease for all corresponding property.

A distributee partner would not be eligible to take the IRC Section 732 RPBA into account when disposing the property to which it applies unless a qualifying disposition of corresponding property occurs. A "qualifying disposition" is a disposition of property to an unrelated person in a fully taxable arm's length transaction. Upon a qualifying disposition, the remaining basis previously attributed to the IRC Section 732 RPBA would be treated as giving rise to newly placed-in-service property subject to the cost recovery period and method of the distributed property. In addition, a qualifying disposition would allow the distributee partner to take into account the IRC Section 732 RPBA when disposing of the property.

The forthcoming proposed related-party basis adjustment regulations would apply to covered transactions that involve other provisions, such as IRC Section 732(d) and (f), as well as tiered-partnership structures.

According to the Notice, the proposed regulations would also treat as covered transactions certain partnership arrangements involving taxable and tax-indifferent parties and would otherwise be covered transactions if the relatedness requirements described in Section 3.02, 3.03, or 3.04 of the Notice (relating to the definition of covered transactions) were satisfied. For purposes of these forthcoming provisions, a tax-indifferent party would be defined as a person that is not liable for US federal income tax (due to tax-exempt or foreign status) or for which gain from a transaction would not result in tax liability for the tax year in which the gain is recognized.

To prevent distortions of consolidated group income, the forthcoming proposed consolidated return regulations would apply a "single-entity" approach to interests in a partnership held by consolidated group members. The regulations would be intended to prevent direct or indirect basis shifts among members of a consolidated group through covered transactions.

The final regulations, if adopted, would apply to some transactions occurring before June 17, 2024. More specifically, once adopted, the final regulations would apply to the availability and amount of cost recovery deductions and gain or loss calculations for tax years ending on or after June 17, 2024, even if the related transaction that originally gave rise to the basis adjustment occurred in a prior year.

The proposed applicability date for the consolidated return regulations will be contained in forthcoming proposed regulations.

Written comments on the Notice should be submitted by July 17, 2024.

The Notice defines covered transactions broadly and mechanically, without regard to a taxpayer's intent or the economic substance associated with a transaction. Given this broad application, it is likely that many ordinary-course business transactions would be covered transactions. For example, the proposed IRC Section 732 RBPA rules could apply to an actual or deemed liquidation of a partnership (including as part of a merger, division, or incorporation) with related partners in which the basis of distributed property is increased for one related partner and decreased for another related partner under IRC Section 732. As another example, if a taxpayer purchases a partnership interest from an unrelated party in a taxable transaction, giving rise to a positive basis adjustment under IRC Section 743(b), and the taxpayer then transfers the partnership interest to a related party in a nonrecognition transaction, such as a contribution under Section 351, giving rise to a new basis adjustment under Section 743(b) for the benefit of the transferee, it appears that the proposed rules governing IRC Section 743(b) RBPAs could apply to the final transferee's IRC Section 743(b) adjustment. This is the case even though the original acquisition of the partnership interest was an arm's length transaction with an unrelated party and the related transferee's IRC Section 743(b) basis adjustment will likely not exceed the IRC Section 743(b) basis adjustment of the related transferor.

The proposed regulations described by the Notice have a seemingly broad tax-indifferent party rule that expands covered transactions well beyond related-party transactions. The tax-indifferent party rule relates to partnerships with partners that are tax-exempt, foreign, and perhaps even partners with net operating loss attributes. It seems possible that many partnerships with unrelated owners participating in ordinary-course business transactions could become subject to this particular provision. In addition, the same language in the Notice also provides that the proposed regulations would apply to certain transactions with taxable persons where the transactions would otherwise be covered by the Notice if the relatedness requirements had been met. It is not clear exactly what type of transactions this language is intended to cover. However, because this language signals an intention to apply the rules in the Notice to transactions with taxable parties, even where the relatedness requirements are not satisfied, it potentially represents a broad extension of the principles set forth in the Notice.

The proposed regulations, as described in the Notice, would lead to significant administrative complexity. Tax preparers for both partnerships and their partners would need to track RPBAs and monitor relevant distributions and disposals of property, both past and present. For example, where multiple properties with different recovery periods are distributed giving rise to IRC Section 734 RPBAs to the partnership's remaining assets, those RPBAs apparently would have split recovery periods based on the profile of the various distributed assets. Moreover, if individual distributed assets are then sold separately in qualifying dispositions, the IRC Section 734 RPBAs to the partnership's retained assets would apparently be treated in part as newly placed-in-service property. For partnerships with many different distributed assets of different characteristics and/or many retained assets of different characteristics, these calculations would be quite complex.Adding to the complexity is the fact that, if the partnership has some partners who are related to the distributee partner and some partners who are not, only a portion of the IRC Section 734 basis adjustments would be subject to the rules on IRC Section 734 RPBAs. The balance of the IRC Section 734 basis adjustments would be subject to the existing rules under IRC Sections 734 and 755.

Interestingly, the Ruling (discussed later) makes clear an intent to subject partnerships to consequences from other provisions of Subchapter K (such as the basis reduction rules under IRC Section 732(f), relating to distributions of stock in controlled corporations), while the Notice simultaneously creates limitations around cost recovery of an RPBA. The interaction of these various provisions will hopefully be evaluated further by the IRS as part of its notice and comment procedures.

Finally, taxpayers should carefully consider the scope of transactions subject to the Notice in light of the proposed effective date provision. The regulations described in the Notice are proposed to apply to tax years ending on or after June 17, 2024. Therefore, as stated explicitly by the Notice, the regulations would govern the availability and amount of cost recovery deductions and gain or loss calculations for tax years ending on or after June 17, 2024, even if the relevant covered transaction was completed in a prior tax year. Thus, transactions completed before 2024 would be subject to the rules described in the Notice, to the extent that basis adjustments arising from such transactions continue to give rise to cost recovery deductions or to impact the taxpayer's gain or loss on the disposition of property in tax years ending on or after June 17, 2024.

The Proposed TOI Regulations would identify certain partnership related-party basis adjustment transactions as "transactions of interest," subjecting them to reporting under the reportable transaction rules and the material advisor rules. The Proposed TOI Regulations will become effective on the date Treasury and the IRS publish final regulations in the Federal Register.

Generally, every taxpayer that has participated in a reportable transaction and who is required to file a tax return must file a disclosure statement with the IRS. Reportable transactions include listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest (TOIs). A TOI is a transaction that is the same as or substantially similar to one of the types of transaction the IRS has identified by notice, regulation, or other form of published guidance as a TOI.

A brief overview of the taxpayer rules for reportable transactions is provided below. The Proposed TOI Regulations are then described in detail.

A taxpayer that participates in a reportable transaction must attach a disclosure statement, Form 8886 (or successor form), to its tax return for each tax year in which it participates in a reportable transaction. The taxpayer must also send the disclosure statement to the IRS's Office of Tax Shelter Analysis (OTSA) at the same time that it first files a disclosure statement for a particular reportable transaction.

If a transaction becomes a TOI between the time a taxpayer files a tax return (including an amended return) reflecting its participation in the TOI and the end of the period of limitations for assessment for that tax year, the taxpayer must file the disclosure statement with the OTSA within 90 calendar days after the date on which the transaction becomes a TOI. This requirement exists regardless of whether the taxpayer participated in the transaction in the year the transaction became a TOI.

Taxpayers that participate in a reportable transaction and fail to disclose may be subject to penalties under IRC Section 6707A. Those taxpayers may also be subject to additional understatement penalties under IRC Sections 6662A.

The Proposed TOI Regulations identify two types of basis adjustment transactions as TOIs: (i) certain transactions involving transfers of partnership interests between partners (Transfer TOIs) and (ii) certain transactions involving partnership distributions (Distribution TOIs and, collectively with the Transfer TOIs, Basis Adjustment TOIs).

A Transfer TOI is defined as a transaction in which a partner transfers an interest in a partnership to a "related partner" (as defined later) in a nonrecognition transaction, the basis of one or more partnership properties is increased under IRC Section 743(b)(1) and (c), and the $5m threshold (as defined later) is met.

For purposes of the rules on Transfer TOIs, the term "related partner" means that the transferor of a partnership interest is related to the transferee, or the transferee is related to one or more of the partners in the partnership, immediately before or immediately after the transaction giving rise to the IRC Section 743(b) adjustment. "Related" means that the relevant partners have a relationship described in IRC Section 267(b) (without regard to IRC Section 267(c)(3)) or IRC Section 707(b)(1). "Nonrecognition transaction" means for this purpose a nonrecognition transaction within the meaning of IRC Section 7701(a)(45) (other than a transfer on the death of a partner).

Distribution TOIs include the following types of transactions:

A transaction in which a partnership distributes property to a person that is a "related partner" (as defined later) in a current or liquidating distribution, the partnership increases the basis of one or more of its remaining properties under IRC Section 734(b) and (c), and the $5m threshold is satisfied. A transaction in which a partnership distributes property to a person that is a "related partner" in liquidation of the person's partnership interest (or in complete liquidation of the partnership), the basis of one or more distributed properties is increased under IRC Section 732(b) and (c), and the $5m threshold is satisfied. A transaction in which a partnership distributes property to a person that is a "related partner," the basis of one or more distributed properties is increased under IRC Section 732(d), the related partner acquired all or a part of its interest in the partnership in a transaction that would have been an IRC Section 743 TOI if the partnership had an IRC Section 754 election in effect for the year of the transfer, and the $5m threshold is satisfied.

For purposes of the rules on Distribution TOIs, the Proposed TOI Regulations define a "related partner" as a partnership with two or more direct or indirect partners that have a relationship described in IRC Section 267(b) (without regard to IRC Section 267(c)(3)) or IRC Section 707(b)(1) immediately before or immediately after the Distribution TOI.

The Proposed TOI Regulations would also apply to transactions that are "substantially similar" to Basis Adjustment TOIs. The proposed regulations state that "substantially similar" transactions include, but are not limited to:

The Proposed TOI Regulations define a tax-indifferent party as any person that is not liable for US federal income tax because of tax-exempt or, in certain cases, foreign status. A tax-indifferent party also includes a person that would not recognize US federal income tax because of other attributes ( , the taxpayer has a net operating loss carryforward or capital loss carryforward).

For the purpose of determining whether a transaction is a Basis Adjustment TOI or a substantially similar transaction, the $5m threshold is met for a tax year if the sum of all basis increases resulting from all such transactions of a partnership or partner during the tax year (without netting for any basis adjustment in the same transaction or another transaction that reduces basis) exceeds by at least $5m the gain recognized from such transactions, if any, on which tax imposed under subtitle A is required to be paid by any of the related partners (or tax-indifferent party, in the case of a substantially similar transaction).

As discussed previously, only participants in, or material advisors to, TOIs have disclosure obligations under the reportable transaction rules. Under the Proposed TOI Regulations, participants in Basis Adjustment TOIs include participating partners (Participating Partners), participating partnerships (Participating Partnerships), and related subsequent transferees (Related Subsequent Transferees) as described next (collectively, participants).

A Participating Partner is any partner that receives a distribution of property or an interest in a Participating Partnership, or directly transfers an interest in a Participating Partnership in a Basis Adjustment TOI. A Participating Partnership is any partnership that distributes property to a Participating Partner in a Distribution TOI, or whose interest is transferred in a Transfer TOI. A Related Subsequent Transferee is a person that (i) shares a relationship with a Participating Partner described in IRC Section 267(b) (without regard to IRC Section 267(c)(3)) or IRC Section 707(b)(1), and (ii) receives a transfer of property from a Participating Partner in a nonrecognition transaction that was previously subject to a Basis Adjustment TOI. For example, if a Participating Partner receiving a distribution of property in an IRC Section 732(b) TOI contributes that property to a related partnership in an IRC Section 721 contribution, the related partnership would be a Related Subsequent Transferee. The Proposed TOI Regulations also provide that a Participating Partner, Participating Partnership, or Related Subsequent Transferee participates in a transaction in any year in which the participant's tax return reflects the US federal income tax consequences of the basis increase. For instance, if a Participating Partner sells property received in an IRC Section 732(b) TOI in a subsequent tax year, the Participating Partner participates in the TOI (and has a reporting obligation) in the subsequent tax year. Similarly, if a Participating Partnership holds property with a positive adjustment from an IRC Section 734 TOI, the Participating Partnership will participate in the TOI in every year that it claims depreciation or amortization deductions attributable to the positive adjustment ( , the Participating Partnership could have a reporting obligation for 15 years for amortizable IRC Section 197 intangibles, or even longer for certain other long-lived assets).

A Participating Partner, Participating Partnership, or Related Subsequent Transferee would have to attach a Form 8886 (or successor form) to the taxpayer's tax return and at the same time file the form with the OTSA for the first year it participates in a Basis Adjustment TOI. The participant must also attach a Form 8886 (or successor form) to its return for each subsequent year that it participates in a Basis Adjustment TOI, as participation is defined under the rules. In addition, a participant that disposes of the basis-adjusted property in a transaction in which gain or loss is recognized, in whole or in part, in a subsequent tax year must attach a Form 8886 (or successor form) to its tax return for that year and simultaneously file the form with the OTSA (even if the taxpayer previously filed the form with the OTSA in the first year of participation).

Among other things, the Form 8886 would need to include the following information:

Taxpayers should be mindful that the reporting requirements under the Proposed TOI Regulations may apply to transactions entered in prior tax years. First, if a transaction becomes a TOI after the filing of Participating Partner's, Participating Partnership's, or Related Subsequent Transferee's tax return (including an amended return) reflecting its participation in the TOI and before the end of the period of limitations for assessment for any tax year in which it participated in the TOI, the Participating Partner, Participating Partnership, or Related Subsequent Transferee must file a Form 8886 with the OTSA within 90 calendar days after the date on which the transaction becomes a TOI. Second, as described above, the Proposed TOI Regulations also provide that a Participating Partner, Participating Partnership, or Related Subsequent Transferee participates in a transaction in any year in which the participant's tax return reflects the U.S. federal income tax consequences of the basis increase ( , claiming amortization or depreciation deductions). Therefore, even if the transaction that resulted in the positive adjustment occurred in the early 2010s, it is possible that the participant would have to attach a Form 8886 to its tax return once the Proposed TOI Regulations become final in the 2020s.

Given their broad scope, the Proposed TOI Regulations could apply to many ordinary-course business transactions where the parties entered into the arrangement for commercial reasons wholly unrelated to basis adjustments under Subchapter K. For example, the types of transactions previously described as potentially subject to the Notice would potentially also be subject to reporting under the Proposed TOI Regulations.

It is likely that the "substantially similar" transactions that the IRS identified in the Proposed TOI Regulations will have surprising consequences. Some examples of this are listed below.

, it means that the transferee of the partnership interest is related either to the transferor to any person who is a partner in the partnership immediately before or immediately after the transaction. The $5m threshold is met for a tax year if the sum of all basis increases resulting from all such transactions of a partnership or partner during the tax year (without netting for any basis adjustment in the same transaction or another transaction that reduces basis) exceeds by at least $5m the gain recognized from such transactions, if any, on which tax imposed under subtitle A is required to be paid by any of the related partners or a tax-indifferent party to such transactions. However, where (i) transferor and transferee are unrelated, (ii) the transaction is potentially a Transfer TOI only because the transferee is related to partner in the partnership, and (iii) the transferor is a taxable person ( , not a tax-indifferent party), the $5m threshold test does not appear to take into account any gain recognized by the transferor. It is not clear whether this omission was intentional. Whether intentional or not, failure to take into account gain recognized by an unrelated taxable transferor could cause a transfer to be treated as a Transfer TOI even in cases where the transferee's IRC Section 743(b) adjustment does not exceed the transferor's recognized gain. Moreover, even where it is a related transferor or a tax-indifferent party that recognizes gain (and is required to pay tax), the IRC Section 743(b) step-up to the transferee may easily exceed the amount of gain recognized by the transferor by more than $5m, potentially causing the transfer to be treated as a Transfer TOI. This may happen because the determination of the step-up under IRC Section 743(b) takes into account only the positive basis adjustments to partnership assets, with any offsetting negative basis adjustments to partnership assets being ignored. Or it may happen because the transferor's basis in its partnership interest exceeded the transferor's share of the partnership's basis in its assets immediately prior to the transaction ( , the transferor may have had a relatively small interest with a disproportionately large reverse IRC Section 704(c) layer). Thus, any transfers of partnership interests where the transferee was related to the transferor or to any other partner will need to be studied closely to determine if the sale will result in a reporting obligation.

In the Ruling, the IRS applied the economic substance doctrine to disallow basis adjustments generated through partnership transactions where all the partners of the partnership were related under IRC Section 267(b) or IRC Section 707(b)(1). The ruling outlines three situations in which a corporation and its subsidiaries (each Sub 1, Sub 2, and Sub 3) generated inside-outside basis disparities in a partnership that, in conjunction with later transactions undertaken with a view to exploit those earlier basis disparities, resulted in basis adjustments to either partnership property or distributed property in the hands of a partner. Depreciable or amortizable assets received additional basis through application of the mechanical partnership tax rules in each of the three situations described.

For each situation, the stated business purpose was "cleaning up intercompany accounts, reducing administrative complexity, and achieving other administrative efficiencies." The actual cost savings were relatively small compared to the tax effect of the basis adjustment. Additionally, inside-outside basis disparities arose due to partnership contributions, distributions, and allocations that were undertaken by the parties with a view to creating such disparities. In all cases, the relevant partnership had a valid IRC Section 754 election in effect.

The Ruling states that the economic substance doctrine was developed to address transactions such as those at issue in the Ruling, which follow the literal words of the Code but lie outside of Congress's plain intent. In the Ruling, the IRS applied the two-prong conjunctive test for economic substance under IRC Section 7701(o)(1) to each of the situations. For each of the three situations, the IRS determined that the contribution or distribution lacked economic substance because the transactions (1) did not change the economic position of the parties and (2) the parties did not have a substantial purpose to enter the transactions outside of the US federal income tax benefits. The IRS determined that each situation failed the first prong of the economic substance doctrine because the contribution or distribution, as the case may be, shifted ownership of property among related entities without effecting any real change in the flow of economic benefits or providing any real opportunity to make a profit. Each situation also failed the second prong because the stated business purpose was not substantial when compared to the associated US federal income tax benefits of the transactions. The IRS noted that the basis increase generated by the contribution or distribution in each situation was relatively large compared to any cost savings for the corporation or its subsidiaries.

The basis adjustments were disregarded because the transactions lacked economic substance. The corporation and/or its subsidiaries, as applicable, were also subject to the 20% penalty under IRC Section 6662(b)(6) for a transaction lacking economic substance, or the 40% penalty under IRC Section 6662(i) for a nondisclosed transaction lacking economic substance, as applicable.

The Ruling makes clear that Treasury and the IRS believe that the economic substance doctrine is relevant and applies to various basis-shifting transactions. Though not a change in law or particularly surprising, the Ruling's conclusions make clear that the IRS will analyze the extent to which a transaction changes the economic position of its participants and will weigh potential tax benefits of a related-party basis-shifting transaction against a taxpayer's articulated business purposes.

When applying the economic substance doctrine to the three situations, the IRS looked at a series of "connected" transactions that may occur over the course of several tax years. It is unclear from the Ruling what makes a transaction "connected" to other transactions. It is also unclear how the IRS will determine if the related partners and the partnership made contributions, distributions or allocations "with a view to creating" a basis disparity or whether a later transaction was made "with a view to exploiting" an existing basis disparity.

While focusing on the economic substance doctrine in its analysis, the IRS noted that the partnership anti-abuse rules under Treas. Reg. Section 1.701-2 could also apply to the three situations, as well as the substance-over-form and step-transaction doctrines.

* * * * * * * * * *

As discussed later, at least one set of these proposed regulations, once finalized, would govern the availability and amount of cost recovery deductions and gain or loss calculations for tax years ending on or after June 17, 2024, even if the relevant covered transactions were completed in a prior tax year.

This adjustment is only permitted when the partnership has made an election under IRC Section 754.

This includes a basis adjustment under IRC Section 732(d), whereby a partner acquired its interest within two years of the distribution of property (other than money) and the partnership did not have an IRC Section 754 election in effect at the time the partnership interest was acquired. To be clear, basis adjustments under IRC Sections 732(b), 734, or 743 may generally be positive or negative, but the IRS guidance on partnership related-party basis adjustments applies only to positive adjustments.

IRC Section 755 and its regulations provide rules for allocating basis adjustments under IRC Sections 734 and 743 among partnership assets.

Treas. Reg. Section 1.6011-4(a).

Treas. Reg. Section 301.6111-3.

Treas. Reg. Section 1.6011-4(b).

* * * * * * * * * *

For additional information concerning this Alert, please contact:

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

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