An issue that has raised its head on numerous occasions in our practice (including earlier this year) is the tax impact of a partner acquiring the partnership interest of another partner and then almost immediately flipping the acquired interest to a third party for the same amount paid by the acquiring partner. Is this a benign transaction for tax purposes?

The answer is not totally clear – Rev. Rul. 84-53 provides that a partner has a single basis for its partnership interest. In addition, Reg. §1.1223-3 provides for a bifurcation of a partner’s holding period when there is a disposition of all or a portion of partner’s partnership interest and the partner has contributed capital to the partnership within one year of the sale. For example, assume a long-time partner has a partnership interest with a basis of $100 and a value of $500.The partner acquires another partner’s interest for $500, thereby doubling its interest in the partnership. If the acquiring partner then flips the “acquired” interest for $500, Rev. Rul. 84-53 suggests there is gain of $200, because there is a single basis of $600 for the partnership interest and half the interest is being sold. Then, applying the principles of Reg. §1.1223-3, half the gain would be short-term. There are strong arguments that the principles of the above authorities should not apply, based on the “equitable apportionment” concepts contained in Reg. §1.61-6(a), which generally states that when a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts. This controversy can be avoided by having a non-partner act as the accommodation party, but unfortunately clients do not always consult with their tax professional when entering into a transaction that appears to be a tax nothing.

This year’s Tax Planning Forum® materials take a deeper dive into the above controversy, and, as usual, the program delves into the latest developments (including the impact of OBBBA on flow-through taxation) and hottest structuring techniques in the flow-through and closely held business arena. Register now for your choice of virtual and in-person programs (and our week of in-person programs in Las Vegas begins October 27).