Heckerling
Institute 2003
Reports from the event, as posted to the ABA-PTL List Serve |
Report #6
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As we have done in January for the last six years, and again
with the permission of the University of Miami School of Law Center
for Continuing Legal Education, we will be posting to this list
throughout the coming week highlights of the proceedings of the
37th Annual Philip E. Heckerling Institute on Estate Planning that
is being held January 6-10, 2003 at the Fontainebleau Hilton Resort
and Towers in Miami Beach, Florida.
We also will be posting the full text of this year's Reports on
the ABA RPPT Section's Web site, as we have since the 2000 Institute.
Those Reports can be found at URL http://www.abanet.org/rppt/meetings_cle/heckerling/home.html.
In addition, each Report can also be accessed at any time from the
ABA-PTL Discussion List's Web-based Archive at URL http://mail.abanet.org/archives/aba-ptl.html.
A complete listing of the proceedings and speakers is available
on the Institute's Web site.
The URL for that site is http://www.law.miami.edu/heckerling.
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REPORT NO. 6
Unwinding the Discount Entity: What to do When the Family
Wants to Take the Money and Run
Rich Robinson
January 9
Rich’s program describes the tax effects of unwinding an entity
taxed as a partnership. He debunks the theory that unwinding
or withdrawing property from such a partnership is always a tax
free transaction. He discussed and analyzed 3 sections that
cause significant headaches in distributing property from the FLP/FLLC:
The general rule under §731 is that no gain is recognized when a
partnership distributes property to a partner unless the amount
of cash distributed exceeds the distributee’s basis for the partnership
interest. However, the following sections may create substantial
income tax liability if they apply.
§704(c)(1)(B) gain. If partner A contributes appreciated property
to a partnership and within 7 years, such property is distributed
to another partner, partner A is taxed on the built-in gain (FMV
at date of contribution less adjusted basis) as if it was sold by
the partnership.
§731 gain. Cash includes marketable securities unless the
partnership is an investment company and the distributee is an eligible
partner or the distributee partner previously contributed the securities
to the partnership. This rule often causes a distribution
of marketable securities to be treated as cash, and the FMV of the
securities is greater than the distributee partner’s adjusted basis.
§737(a) gain. If with 7 years after the date of the contribution,
a distribution is made to a partner, such partner shall be treated
as recognizing gain in an amount equal to the lesser of the excess
distribution (the excess of FMV of the distributed property over
the partner’s adjusted basis) or the partner’s pre-contribution
gain. Pre-contribution gain is the 704(c)(1)(B) gain which
would be allocated to the partner if all of that partner’s
contributed property had be distributed to another partner
Rich then discussed several examples and the tax effects of each.
Many of the problems arise because of the normal operation of an
FLP/FLLC - mom and dad form the partnership and then make gifts,
often substantial, to the children. The rules will operate
on distributions of property after these gifts and the gain can
often exceed the amount of the FMV of the distribution and affect
all of the partners, not just the distributee.
A short example (most had numbers associated, and Rich’s analysis
is quite complete):
Mom contributes assets to an FLP, including a condo. She makes
gifts of 30% of the FLP to children. Within 7 years, the condo
is distributed back to Mom. Result: 30% of the condo is a
704(c)(1)(B) taxable distribution with respect to the children and
the same 30% would be a §737 taxable distribution to Mom since it
is no longer her previously contributed property under the “step
into the shoes” rule.
CAVEAT: Before advising a partnership anticipating making
a distribution from a partnership, either study the rules or retain
competent tax counsel (or both) to make sure the anticipated tax
effects are correct.
__________________________________________
GENERAL INFORMATION:
Inquiries/Registration:
Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone: 305-284-4762 / FAX: 305-284-6752
Web site: www.law.miami.edu/heckerling
E-mail: heckerling@law.miami.edu
===========================================
Headquarters Hotel - Fontainebleau Hilton
4441 Collins Avenue
Miami Beach, FL 33140
Telephone (305) 538-2000, FAX (305) 674-4607
==================================================
NOTICE: Although audio tapes of all of the substantive session
at the Miami Institute currently are only made available to Institute
registrants for purchase, the entire proceeding of the Institute
are
published annually by Lexis/Nexis. For further information, go to
their Web site at http://www.lexisnexis.com/productsandservices.
The text of these proceedings is also available on CD ROM from
Authority On-Demand by LexisNexis Matthew Bender. For further
information, contact your sales representative, or call (800) 833-
9844, or fax (518) 487-3584, or go to http://www.bender.com,
or write to Matthew Bender & Co., Inc., Attn: Order Fulfillment
Dept.,
1275 Broadway, Albany, NY 12204.
______________________________________________________
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//-----------------------------------------------------------------------
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Denver, Colorado
Mail:
ezuspann@zuspann.com
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