Potential Tax Traps in Liquidating a Family Limited Partnership

Posted: 19 Dec 2003

See all articles by Mark P. Gergen

Mark P. Gergen

University of California, Berkeley - School of Law

Abstract

In this report, Gergen explains that several tax traps await in subchapter K if appreciated assets are passed down through a family limited partnership at a discounted value. When assets are distributed to the heirs non pro rata - that is, the assets are divided among the heirs - much and perhaps even all of any precontribution gain will be recognized on the distribution under sections 704(c)(2), 731(c), and 737. Some have argued a refuge may be found in a contributed property exception in sections 731(c) and 737. In a non-pro-rata liquidation this exception is a partial refuge at best, for even if it applies to a transferee, much precontribution gain still will be recognized under section 704(c)(2). Moreover, says Gergen, there is good reason to think the distributed property exception in sections 731(c) and 737 does not apply to a transferee, in which case all precontribution gain will be recognized. The trap in section 704(c) can be avoided by distributing assets pro rata. But the trap in section 737 still awaits in a pro rata liquidation if the contributed property exception does not apply to a transferee. The best advice, he says, is patience for the traps in sections 704(c)(2) and 737 can be avoided by leaving assets in the partnership for seven years. But, he warns, you must still beware the trap in section 731(c).

Suggested Citation

Gergen, Mark P., Potential Tax Traps in Liquidating a Family Limited Partnership. Available at SSRN: https://ssrn.com/abstract=481722

Mark P. Gergen (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

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