IPED Tax Credit Property Disposition 2008: Obligations and
Opportunities Through Year 15 and Beyond
Boston, Massachusetts, November 20-21, 2008
Tax Consequences of
Dispositions
Forrest David Milder
Nixon Peabody LLP
100 Summer Street
Boston, MA 02110
617-345-1055
fmilder@nixonpeabody.com
Kinds of Dispositions
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Sale of partnership Interest
Sale of property and allocation of gain
to partners
Donation of partnership interest
Sale of partnership Interest
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Gain is equal to cash and other property
received reduced by the partner’s basis in
his/its interest
The partners’ share of nonrecourse debt is
included in this computation as cash
received. Rev. Rul. 74-40.
Example
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Partner’s basis is $100,000, partner’s
share of debt on property is $80,000.
Partner receives $50,000 for the
partnership interest.
Gain is $80,000 (debt relieved) plus
$50,000 (cash received) less $100,000
(basis), or $30,000
Sale of property and allocation of gain
to partners
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Gain is computed at partnership level, and
then allocated to the partner
Subsequent distribution of cash can result
in further gain or loss
Example
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GP’s capital account is $1. LP’s is $2m
Property has basis of $3m, and there’s $1m of debt. Sales
price is $4.8m
Gain is $4.8m less $3m, or 1.8m.
If 80% of the gain is allocated to the GP, he gets $1.44m of
gain, and the LP gets .36m of gain.
So, cap accounts are now GP $1.44m and LP $2.36m.
Proceeds of $4.8m go $1m to pay off the debt, $1.44m to GP
and $2.36m to LP.
Donation of partnership interest
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Charitable Contribution of a Limited Partnership
Interest is treated as a “part gift part sale”. Rev.
Rul. 75-194. Treas. Reg. section 1.1011-2(c),
example 4.
The excess of the value of the property over the
debt is the gift, but the amount of the debt is the
“proceeds of sale”
The Basis in the property has to be divided
between the two
Example
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Assume: Partnership interest has a gross value of $1.5 m;
partner’s share of nonrecourse debt is $1m; basis in interest
is $900k.
The amount of the gift is the $1.5m gross value of the
property less $1m of debt, or $500k. The “proceeds of sale”
is the debt, or $1m.
The basis is allocated between the gift and the debt, so, onethird ($500k/$1.5m) goes to the gift, and two-thirds
($1m/$1.5m) goes to the sale. Since the basis is $900k, this
would be $300k to the gift and $600k to the sale.
Thus, the gift is $500k; the sale is $1m of “proceeds” less
$600k of basis, or $400k of gain – i.e., $500k of gain and
$400k of deduction.
Other Tax Issues
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Ordinary Income vs. Capital Gain
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Installment Sales
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Partnership Termination
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Distributions in Accordance with Capital Accounts
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Nonpayment of Deferred Fees
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Sale of Less Than All of an Interest
Ordinary Income vs. Capital Gain
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Receivables and depreciation recapture are
treated as “hot assets” under Section 751, and
are subject to tax at ordinary rates.
This is true, even if the partnership interest
(rather than partnership assets) is sold.
Corporations pay the same rate on both (35%),
but individuals do not (35% vs. 15%)
Distributions in Accordance with
Capital Accounts
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What’s the business deal? Get LP to a target? (like original capital
contribution?) Get GP to a certain percentage? Share residuals at
a certain rate?
The parties often have a deal that calls for the GP to get a high
percentage (e.g., 80%) of proceeds, and the LP to get the balance,
regardless of where there capital accounts are at the time of the
sale.
But distributions have to be made in accordance with capital
accounts
So, if the LP has a large capital account, it may get most of the
money
What to do when the numbers don’t add up?
Example
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GP’s capital account is $1. LP’s is $2m
Bus. deal is 80% to GP, 20% to LP
Property has basis of $3m, and there’s $1m of debt. Sales
price is $4.8m
Gain is $4.8m less $3m, or 1.8m. If entire amount of gain is
allocated to GP, then cap accounts are now GP $1.8m and
LP $2m.
Proceeds of $4.8m go $1m to pay off the debt, $1.8m to GP
and $2m to LP. This is 47%--53%, not 80%--20%.
Installment Sales
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Installment sales treatment is only
available for capital asset part of sales
price
So, not for depreciation recapture or
receivables
Also there will be an interest component
(at AFR) on delayed payments
Nonpayment of Deferred Fees
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Suppose that it’s 15 years later, and the
development fee is unpaid.
Forgiving it is a taxable event
The IRS may dispute failure to pay the
development fee, since it wasn’t just a
depreciable/deduction item; it also went
into tax credit basis.
Partnership Termination
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A partnership “terminates” for tax purposes if
within a 12-month period there is a sale or
exchange of 50 percent or more of the total
interest in partnership capital and profits.
Not that much of a tax problem, BUT
Many partnership agreements require special
approvals or tax opinions if the transfer would
cause a termination.
Sale of Less Than All of an Interest
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Can have LIHTC recapture if a partner’s interest
is reduced below 66-2/3% of what it used to be
(Reg. 1.47-6)
E.g., partner owns a 99% interest, and it is
reduced to 60%. Thirty-nine percent may be
subject to recapture
Elimination of recapture bond rules make this
less important, provided property is well run