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Theproposed regulations specify that such an "assets- up" transactionwill be treated as occurring only if the distributed assets are firsttitled to the distributee and then retitled to the resultingpartnership. As a result, this preserves the low assetbasis of Whiteacre and prevents a net basis step-up. Taxation of Mergers Under the Proposed Regulations a. If the form is not respected, then the transferwill be recharacterized as an assets-over transfer from thedivided partnership to the resulting partnership. R and S thencontribute the distributed assets to newly-formedpartnership RS.
314, but provide substantially more detail and haveconsiderably greater reach. This is thepreferred form of transfer in the proposed regulations and definesthe taxation of a merger or division that occurs by operation ofstatute without any actual asset transfer or if any unapproved formof asset transfer is adopted. The initialdistribution can, but need not, be in complete liquidation of thedistributee partners interest in the distributing partnership. Part Assets Over, Part Assets Up (a) The proposed regulations seem to contemplate thata partnership which transfers its assets as part of amerger will use either the assets-over or the assets-upform of transfer for all of its assets. Assuming ABC is not thecontinuing partnership, the transaction will b recastas if Blackacre had been transferred directly from ABC to D. (2) Example 5: Suppose partnership PQRS distributes some ofits assets to partners R and S in complete liquidation oftheir interests in PQRS (renamed PQ).
The assets received by Eare treated as having been transferred in an assets-overtransfer from D.
Partnership D is not treated asreceiving any assets in any form of transaction.
Non-Continuing Partnerships Deemed Liquidating: All of themerging partnerships not treated as continuing under the rulesdescribed above are treated as terminating and must file returns forthe short taxable year ending on the date of merger orconsolidation. While this is structured as an "assets-over"merger of AB into CD, the "continuing" partnership is AB. Accordingly, the assetsactually owned by Z prior to the merger are treatedas transferred to a new partnership, new Z, in anassets-over transfer. In the context of a merger, this resultingpartnership will be, under state law, one of the mergingpartnerships. If a merger orconsolidation is effected by operation of law without anyactual asset transfer, all assets received by the resultingpartnership are treated as having been transferred in assets-overtransfers.
In this circumstance the resulting partnership is not treated as thecontinuation of any of the merging partnerships. Any book-tax disparities in transferredassets must be allocated to partners of the transferor partnership. However, becausepartnership CD is deemed to terminate, its assets aretaxed as if they were transferred to the continuingpartnership (that is, to AB) in an assets-overtransfer. (b) Example 2: Reconsider the example above butassume that the resulting partnership (B) is treatedas a continuation of partnership A.If none of the appreciation inthe partnerships assets is subject to 704(c), then merging XY into some other partnership in an assets-up transfer willincrease asset basis to apiece because the distributionof the assets out of XY steps- up asset basis under 732(b). Absent this rule the merger of a highly-leveragedpartnership could cause a taxable distribution under752(b) as a result of the deemed asset transfer. If PQRST distributessome of its assets pro rate to its partners who then contribute thoseassets to newly-formed partnership PQRST-Prime, then PQRST isthe "prior" partnership, both PQRST and PQRST-Prime are"resulting" partnerships, and both PQRST and PQRST-Prime arecontinuations of PQRST. The "Divided" Partnership (deemed transferor) (1) General Rule: The proposed regulations call thepartnership that is treated as transferring assets in thedivision the "divided" partnership. However, they do provide that the "prior" partnership istreated as the transferor partnership and they furtherprovide that all assets-over transfers and all assets-uptransfers will be taxed in accordance with their forms. Thatis, prior partnership A has divided into resultingpartnerships A, B, C, D and E, using assets-up transfers toform B and C and assets-over transfers to form D and E.(3) Distribution of Marketable Securities and Cash: Distributions of cash or of marketable securities can betaxable to the extent such distributions exceed thedistributee partners outside basis. Theseprovisions can apply to distributions forming an assets-uptransfer as part of a partnership merger. Assets-Over Transfers: An assets-over transfer as part of a mergershould be tax- free to all parties. Thus, distribution of that interest in theresulting partnership by the terminating partnershippotentially could trigger taxation under 704(c)(1)(B). As a resultof this rule, a partner in a merging partnership willrecognize gain on the transaction under 752(b) only if thenet 752 distribution exceeds the partners outside basis inthe resulting partnership immediately after the "assetsover"transaction. Exiting Partners: (1) Election to Treat Exit as Prior to Merger: It may be thecase that not all of the partners in the merging partnershipscontinue to have an interest in the enterprise after themerger or consolidation. (2) Consequences of the Election: If such an election is madein the merger on consolidation documents, the exitingpartner will be taxed pursuant to 741 (applicable totransfers of partnership interests) rather than pursuant to731 (applicable to partnership distributions). Note that the "prior" partnership maynot be treated as the transferor of assets under the proposedregulations; that partnership is called the "divided"partnership. (2) The "Resulting" Partnerships: The partnerships thatsurvive the division are called "resulting" partnerships inthe proposed regulations, see Prop. 1.708-1(d)(3)(iv);if the prior partnership continues in existence after thedivision, then it is one of the resulting partnerships as well. The "Continued" Partnerships: any resulting partnership whosemembers owned more than 50% of the capital and profits of theprior partnership will be treated as a continuation of the priorpartnership. (a) If none of the resulting partnerships is treated as acontinuation of A, then all of the transfers will betaxed in accordance with their forms.(2) Excess Outside Basis: If the partners have an aggregateoutside basis in excess of the partnerships aggregate insidebasis, merging in an "assets- up" transaction will permit theexcess outside basis to move into inside basis. Thus, for tax purposes the "divided" partnershipis treated as the transferor partnership in the transaction. If in suchcircumstances the prior partnership does not liquidate aspart of the transaction, it will be treated as transferring itsassets to a new resulting partnership in an assets-overtransaction. Assets-Over Form (1) General Rule: In all other asset transfers, the transactionwill be recast as an assets-over transfer from the dividedpartnership to the resulting partnership. These partners then contribute thedistributed assets to partnerships B and C.
For example,suppose X and Y each have an outside basis of 0 intheir 50% partnership interests while the XY partnershipowns two capital assets, each with adjusted basis of and fair market value of . For example, supposepartnership PQRST has 5 equal partners. (2) No Continuing Partnership: If none of the resultingpartnerships is a continuation of the prior partnership, thenthe regulations do not define the "divided" partnership. As part of thesame transaction, partnership A transfers some of its assetsto partnership D and other assets to partnership E, receivingin exchange interests in partnership D and E which are thenimmediately distributed to partners of partnership A. Thisdistribution can, but need not, be in complete liquidation of thedistributee partners interests in the partnership. An "assets-up" transaction is the distribution ofassets from a partnership to a partner and then the contribution ofthose assets by the distributee to a new partnership. This iscalled an "interests over" transfer, and the proposedregulations provide that such a transaction will be recast inthe form of an assets-over transaction. If, though, AB is treated as thecontinuation, then the transaction is treated as if the assetsof AB remained in AB and the assets of CD weretransferred from CD to AB in an assets-over transfer. As part of the same transaction, ABC transfers Whiteacre to D in exchange for interests in D,interests which are then distributed to A and B inliquidation of ABC.