Academic journal article Journal of Accountancy

Step Right Up

Academic journal article Journal of Accountancy

Step Right Up

Article excerpt

The Tax Court upheld as having economic substance a partnership's nearly $12 million distribution of notes to redeem partners' interests in real estate on which the partnership claimed a step-up in basis. The IRS had denied the partners' resulting nonrecognition of gain on grounds that the distribution consisted of either cash or marketable securities and that the partnership was not entitled to step up its basis.

The partnership, Countryside Limited Partnership, was owned by Arthur M. Winn, Lawrence H. Curtis and others. Countryside owned a 448-unit residential property in New Hampshire that it planned to sell at a gain. Before the sale, Countryside and a limited liability corporation it indirectly owned borrowed a total of $11.9 million at the London Interbank Offered Rate (LIBOR) plus 175 basis points. The LLC used the cash to purchase four privately issued notes paying interest at LIBOR minus 55 basis points. The partnership distributed its interest in another LLC indirectly holding the notes to redeem the partnership interests of Winn and Curtis. The partnership made a section 754 election and increased the basis of the real estate, eliminating the gain on its sale. The Service concluded, however, in a final partnership administrative adjustment that the distribution created taxable gain to Winn and Curtis. Winn sought a partial summary judgment on that issue, which the Tax Court granted and issued a memorandum opinion.

Section 731 generally provides for non-recognition of gain or loss on partnership distributions that don't exceed a partner's outside basis. One method previously used to avoid excess gain was to purchase and distribute marketable securities instead of cash. …

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