Partnership dead or not

[TAXMAN]

Father and son have a very small partnership, about 20k income each year for many years. Dad decides he is to old to work it anymore and gives his half to sons wife.(no assets involved except a very small bank balance of $1500.00. Question becomes Is this a terminated partnership? Sons wife will do the work that dad was doing. This was all done on 12-31-2015.

I would think that if this is terminated, New partnership must get new FEIN or can they choose to operate under a joint venture with 2 schedules C's going forward? What do you think would be best? NO EMPLOYEES

[jklcpa]

You still have a partnership. It had more a 50% ownership change so you have a technical termination, but the partnership continues. It uses the same EIN.  See the following links:

See the last question and answer (Q16) at the bottom of this IRS page for how to handle the filing: https://www.irs.gov/Tax-Professionals/e-File-Providers-%26-Partners/Partnership-FAQs

And see the last bullet point in the "Partnership" section on this page about the EIN: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Do-You-Need-a-New-EIN

[TAXMAN]

I kinda thought this would be the way. Thank you for leading me down the path of correctness.

[Gail in Virginia]

A technical termination is deemed to have occurred if there is a sale of exchange of 50% or more of the total interests in the partnership within a 12 month period.  But I believe the regs at Section 1.708-1(b)(2) specify three transactions that are NOT deemed to be sales or exchanges triggering a technical termination, and the first one is disposition of an LLC interest by gift, bequest or inheritance. 

I am not positive, but I think that if he had sold his interest to his daughter in law, it would have triggered a termination but giving it to her did not. 

You might want to read this article http://www.thetaxadviser.com/issues/2014/jun/case-study-june2014.html

 

[BHoffman]

Can Dad "sell" his interest in the partnership to his DIL for $1?  Or is that too clever?

[Lion EA]

It would be a gift if less than FMV, and a related-party transaction, too.

[BHoffman]

Doh!  Pretty sure I have treated a transaction like this as a technical termination before but it was a long time ago.  You learn something unpleasant every day

[TAXMAN]

If DIL pays him for his capital account would this be considered a FMV exchange. The partnership has had very small profits during it run due to the fact that son did 90% of the work and took guaranteed payments during these years. Current year even shows a very small loss. There would be no real value of the ptrship if son quit. Dad took very little income from it during the last 10 years or so.

If this is a termination on the last day of the year it would marked as final and then next year (2016)would be marked as initial under termination?

BTW dad hasn't done much work in the ptrship since he was hurt several years ago. Dad is 72 and income comes from ss and pension not that this would make a difference.

Is there a better way to handle this? Thanks for all the guidance.