Admitting New Partners: Tax Consequences

Incorporating a new partner into a partnership or LLC has significant underlying tax implications. Contributions of appreciated property can trigger special allocations under IRC Section 704(c). The regulations include three allocation methods for these built-in gains: traditional, traditional with curative allocations, and remedial. To further complicate matters, property is often contributed subject to debt. The debt may or may not exceed the fair market value of the property contributed, further complicating these allocations.

Partnerships with Section 751 "hot assets" must specially allocate ordinary income from these assets, which include accounts receivable, inventory, and depreciation recapture, to existing partners or members.

When a partnership interest is transferred to a new partner, the partnership may want to elect to step up the basis of appreciated assets under Section 754. This election also requires special allocations among the partners. Once made, the election applies to transfers made by the partnership in any subsequent years. Partnership tax advisers, partners, and members must thoroughly grasp the tax implications surrounding the admission of a new partner.

Listen as our panel of skilled partnership professionals points out the tax considerations of admitting new partners and members to partnerships and LLCs.

I. Tax consequences of new partner admissions: introduction

II. Operating agreement provisions

III. Section 704(c) allocations

IV. Section 754 basis step-up election

V. Section 751 hot assets

VI. Disguised sales

VII. Equity vs. service partners

VIII. Self-employment tax

IX. Other matters

The panel will cover these and other key issues:

• Special allocations for contributed property under Section 704(c)
• Distributions of cash or property that trigger the disguised sale rules
• Key provisions in the operating agreement impacting the admission of partners
• The tax ramifications of Section 751 hot assets on the admission of new partners

Learning Objectives

After completing this course, you will be able to:

• Decide when a partnership might benefit from a Section 754 election after admitting a new partner
• Identify key provisions in operating agreements impacting the admission of partners
• Determine when and how to make allocations under Section 704(c) for property contributions with inherent gain
• Ascertain how disguised sale rules can be triggered after a new partner joins a partnership

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

  
  

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).