Yvette Brooks-Williams: I see that we're nearing the top of the hour. So for those of you just joining, welcome to today's webinar Sale of Partnership Interests: Comprehensive Case Study. We are glad you're joining us today. My name is Yvette Brooks-Williams, and I am a Senior Stakeholder Liaison with the Internal Revenue Service. And I will be your moderator for today's webinar, which displayed it for 90 minutes. Now, before we begin, if there is anyone in the audience that is with the media, please send an email to the address on the slide. And make sure you include your contact information. And the news publication that you're representing. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. And as a reminder, this webinar will be recorded and posted to the IRS video portal in a few weeks. The portal is located at www.irsvideos.gov. Please note, continuing education credit or certificates of completion are not offered if you view any version of our webinars after the live broadcast. Now we hope you won't experience any technology issues. But if you do, this slide shows helpful tips and reminders. We posted a technical help document and you can download from the material section on the left side of your screen. It provides the minimum system requirements for viewing this webinar, along with some best practices and quick solutions. And due to compatibility issues, we encourage you to use a browser other than Internet Explorer, you may experience frozen screens and other technology issues if you choose to use Internet Explorer.

Now if you're using anything other than Internet Explorer and you're still having problems, try one of the following. First, close the screen where you're viewing the webinar and relaunch it.

And you can also just click on settings on your browser viewing screen and select HLS. Now you should have received today's PowerPoint and a reminder email. But if not, no worries we got to cover. You can download it by clicking on the materials drop down arrow on the left side of your screen as shown on this slide. And we've also included a resource document with links related to today's topic that you can download. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers, please click the closed captioning drop down arrow located on the left side of your screen. This feature will be available throughout the webinar. If you have a topic specific question today, please submit it by clicking the ask question drop down arrow to reveal the textbox. Type your question in the textbox and then click submit or send. Very important, please do not enter any sensitive or taxpayer specific information into the textbox. Now during the presentation, we'll take a few breaks to share knowledge based questions with you. And at those times a polling style feature will pop-up on your screen with a question and multiple choice answers. So select the response you believe is correct by clicking on the radio button next to your selection and then click submit. Some people may not get the polling question and this may be because you have your pop-up blockers on. So please take a moment to disable your pop-up blocker now, so that you will be able to answer the question. So we're going to take some time right now and assess the polling feature. Here's your opportunity to ensure that your pop-up blocker is not on. So that you can receive the polling questions throughout the presentation. So here's the polling question. How many times have you attended an IRS national webinar? A, this is your first time; B, One to five times; C, six to 10 times; D, 11 to 15 times; or E, 16 or more. So take a moment and click the radio button that corresponds to your answer. Select your answer to this question, how many times have you attended an IRS national webinar? A, this is your first time; B, one to five times; C, six to 10 times; D, 11 to 15 times; or E, 16 or more. So I will give you just a few more seconds to make your selection. Okay, we're going to stop the polling now. Let's see how often you've attended an IRS national webinar. Okay, I see that 18% of you are first time attendees. So welcome. We are glad you are joining us today. For those of you who have joined us for multiple webinars, welcome back. And I see that 27% of you have attended one to five webinars, 17% of you have attended six to 10 webinars, 10% of you have attended 11 to 15 webinars. And wow. 28% of you have attended 16 or more webinars. Now we hope you received the polling question and were able to submit your answer. If not, now is the time to check your pop-up blockers to make sure you have turned it off. We've included several technical documents that describe how you can allow pop-up blockers based on the browser you're using. We have documents for Chrome, Firefox, Microsoft Edge, and Safari for Mac users. You can access them by clicking on the materials drop down arrow on the left side of your screen. So again, I want to welcome you and thank you for joining us for today's webinar. Before we move along with our session, let me make sure you're in the right place. Today's webinar is Sale of Partnership Interest: Comprehensive Case Study.

And this webinar is scheduled for approximately 90 minutes. So Marietta is a Team Manager in LB&I's Pass-Through Entities Practice Area and leads the PTE Campaign Development Team. So I'm going to turn it over to Marietta to introduce our speakers. Marietta? Marietta Pietrzak: Thank you, Yvette. My name is Marietta Pietrzak and I'm the Team Manager of LB&I's Pass-Through Entities Practice Area. And I've been with the IRS for 35 years. I lead the Pass-Through Entities Campaign Development Team, which develops and evaluates campaigns involving pass-through entities. And my team was instrumental in getting the sale the partnership interest campaign approved into the field. I would like to now present the speakers too, they are Andrew Dux, who is currently a Senior Revenue Agent with a Partnership Practice Network Team and has been with the IRS for 16 years. Andrew has been serving as and as one of our best partnership subject matter experts co-leading the sale of partnership interest campaign for the past four years.

Geoff Gaukroger is currently another of our best partnerships Subject Matter Experts in the Partnership Practice Network, and has been with the IRS for 19 years. Prior to joining the IRS, Geoff worked in Public Accounting for five years, and also in the corporate world for seven years. Geoff has been the lead on the Sale of Partnership Interest Campaign for the past four years. And with that, I hope you enjoy the webinar, and I will now hand it over to Geoff. Geoff Gaukroger: All right. Thanks, Marietta. So for today's webinar, first of all, what we plan to do is introduce the tax law relating to the Sale of Partnership Interest. Then we plan to do an overview of what we've learned from co-leading this campaign. And we're going to do that through a case study that we've created. And then finally, our goal is to explain what the IRS position is with respect to some of the common sale of partnership interest tax issues we've seen. Okay, so this is not going to be the same old sale of partnership interest class. There's going to be some new things that you haven't heard before. So we know, yes, you've all heard the tax law. What is going to be new is Andrew and I we've worked with tax practitioners across the country. We've identified various ways in which the sale partnership interests have and Section 751 have been reported, so we've seen what practitioners are doing, I'll describe that. In addition, we're going to dive into the important concept of valuation. So, as part of the sale of partnership interest, Section 751 hypothetic sales needs to be done. And valuations are required. And that is a very subjective topic. But we plan to bring a straight forward approach that the IRS is using as our position in these exams. Okay, to get started this position of a partnership, and there's five ways a partner may dispose of a partnership in which are sale, exchange, gift, death, or abandonment. And then for today's webinar, we're going to limit our discussion just to sales of partnership interest. So a sale of a partnership interest, that's when an existing partner sells part or all of their partnership interest to an existing or new partner. Okay, so two theories of partnership taxation. You've probably seen a slide like this, that breaks up the two major theories underlying partnership taxation, which is Entity Theory, and the Aggregate Theory. So Entity Theory, this is the concept that most of us are more familiar with. This is where the business is a distinct and separate entity from its owner.

Whereas the Aggregate Theory, this is a more complex concept. And in this webinar, we're going to dig into this concept of Section 751, which has Aggregate Theory as its base. Again, real quick, Entity Theory, the business is treated as a separate and distinct entity in and of itself.

Partnership or LLC units can be purchased or sold to transfer ownership of the entity. And the entity on its own makes its own elections and has methods separate of counting from their partner. So let's jump back to Aggregate Theory. Aggregates Theory, here the business is considered, an aggregate of the individual co-owners, the co-owners, they bound themselves together with intention of sharing gains and losses. So, under the Aggregates Theory, each partner is treated as the owner of an interest in the partnership assets, liabilities and operations. So, for example, we have two 50-50 partners, each partner is considered an owner of all the assets and liabilities, and each have a 50% ownership interest in each item held by the partnership. A computation of gain or loss. So when a partner who sells their partnership business, they must recognize gain or loss on that sale. The total gain or loss is the difference between the sales proceeds received less the partners tax bases in their partnership venture.

This is a concept most accountants would know, sales proceeds minus basis equals gain. Let's not go too fast here, let's focus on each one of these items. So the first one, sales proceeds, those items are listed on this slide at $50,000 in cash received, in this example. The second item basis, this is computed by computing the partners interaction with the partnership since inception. So you'd start with the partners initial contribution to the entity, then you adjust each year based on the Schedule K-1 for income loss, debt distributions, et cetera rather straightforward. Okay, now the last item the gain. Here in our example, we're showing a $40,000 gain. This is the gain and we're done. And that's it. So no, that is the whole point of this webinar is to understand how this $40,000 gain will be taxed. The gain may be bifurcated into components and parts taxed at different tax rates. You may ask why? Well, because of that Aggregate Theory, we must look inside the entity to see the type of assets held by the partnership. So if this $40,000 gain had been from the sale of corporate stock, well, you would be done and you would just tax that gain at the correct tax rate. That is the Entity Theory.

However, for partnerships, the Aggregate Theory is employed for determining how to tax this $40,000 gain. Okay, as Andrew and I have presented this in the past we've got a lot of commonly asked questions, so we're going to address some of them as we go. So one of our first commonly asked questions from previous webinars is: Can the service determine the buyer should have paid more for the sellers partnership interest? The service would not say the buyer should have paid $500,000 in cash for partnership interest when they actually paid $50,000. Bargain sales are allowed in that outside transaction. However, the service may challenge the methodology and with the partnership has assigned fair market value to its assets. So this internal computation, the IRS may question. All right character of gain or loss. So, this is what we're going to dig into it. The first bullet here states that gain or loss in the sale of partnership interest results in capital gain. That is the simple Entity Theory concept, and that is the general rule on partnerships. And it is possible that is the answer. But the tax law requires us to employ the Aggregate Theory here and look within the partnership and the type of assets it holds, if the partnership entity holds certain types of assets, which are called, 751 assets, then a portion of the gain or loss on the sale of partnership interest by the partner must be treated as ordinary instead of capital. Okay, next slide, we're going to see what this looks like. Character of gain or loss continue. So, this ordinary gain or loss portion, it is subtracted from the total gain or loss. The remaining gain is then capital gain or loss. So it is possible for a partner to recognize ordinary gain and capital loss on the sale of its partnership interest. The remainder of this webinar we're going to address what these 751 assets are and how the computation is made in order to determine the amount of the ordinary portion. So I want to mention a second complexity here. So we stated the ordinary portion of the gain is going to be subtracted from the total. Remainder would be capital. However, not all capital gains are taxed at the same rate.

The capital gains from collectibles are taxed at a maximum rate of 28%. Unrecaptured Section 1250 gain is taxed at a rate of 25%. And then all other capital gains are taxed at a maximum rate of 20%. And real quick note that, this 20% capital gain rate, that's not taking into account the additional 3.8% tax relating to the net investment income tax, which can apply in certain situations. So my point here is that in step one, we are going to bifurcate the total gain on the sale the partnership interest between its ordinary portion and its capital portion. Then once we determine the capital portion, we're then potentially going to bifurcate the capital gain into components. This to emphasize again, this is all done based on the Aggregate Theory. Okay, so if I confuse you at all, hang in there. This is the extent of the new topics we're going to discuss today. The rest of this webinar explains it in more detail and we're going to provide examples. Okay, real quick, another commonly asked questions we want to cover. Why is Section 751 gain considered ordinary gain instead of capital gain? So partnerships and the partners, they receive ordinary deductions under Schedule K-1. So Section 751 gain, it's a way of equaling out the economic reality when a sale transaction occurs. Okay, Yvette. We are ready for our first polling question. Yvette Brooks-Williams: That is right. So before we get to our first polling question, there were some questions and comments about not receiving the test polling question, then if you did not receive the polling question, now it's the time to check your pop-up blocker to make sure you have turned it off. We've included several technical documents that explain and describe how you can allow pop-up blockers based on the browser you're using. So we have the documents in Chrome, Firefox, Microsoft Edge, and Safari if you're using a Mac. And you can access them by clicking on the materials drop down arrow on the left side of your screen. So I hope that information is helpful. And audience I hope you are ready. Here is our first polling question. What code section requires a partner to report ordinary gain if the partnership owns assets that generate ordinary income at the time the partner sells its partnership interest? Now, is it A, Section 61; B, Section 731; C, Section 741; or D, Section 751. So take a moment to review the question again, and click the radio button that best answers the question. What code section requires a partner to report ordinary gain if the partnership owns assets that generate ordinary income at the time the partner sells its partnership interest? Your choices are again A, Section 61; B, Section 731; C, Section 741; or D, Section 751. And I'll give you a few more seconds to make your selections. Okay, we're going to stop the polling now and let's share the correct answer on the next slide. And the correct response is D, Section 751. I see that 83% of you responded correctly. Great job. Let me turn it back over to Geoff to give you some more information. Geoff Gaukroger: All right, thank you, Yvette. Okay. So, last question was something, what are Section 751 assets. So we introduced the gain for sale partnership interests.

Then we discussed the Section 751, which applies due to the aggregate theory. So what is it? So, as listed on this slide, Section 751 assets includes one, unrealized receivables and two, inventory items. And note, the most common type of Section 751 assets are depreciable and amortizable assets, which we're going to discuss further on the next slide. Since depreciable assets are such a big deal, we want to begin to emphasize it. So some practitioners will state Section 751 doesn't apply to their case, or state section 751 doesn't apply because there's no depreciation recapture in the underlying assets. But in reality, that's almost impossible in the majority of the cases, for a company that has hundreds to thousands of assets being just depreciated at accelerated rates, it's very unlikely the fair market value of these assets will be exactly equal to the tax net book value for each and every asset. So although this concept of 751 is more complicated, it's often overlooked or not dealt with correctly. The fact is sales of partnership interests are very common issues and practitioners need to be aware of the correct 751 treatment for their clients. All right, we're going to jump into the hypothetical sale of partnership assets. So, the portion of the gain or loss that is subject to ordinary income treatment under Section 751, it is determined through a hypothetical sale of all partnership assets. Partnership is treated as selling all of its property in a fully taxable transaction for cash in an amount equal to the fair market value. So the Accounting Controller is going to do a side computation to determine this, a five step hypothetical sale requirement is discussed in more detail on the next slide. Note Section 751 assets or items that will cause ordinary income treatment and this includes unrealized receivables and inventory and depreciation recapture is a component of unrealized receivables as defined in the code. All right, hypothetical sale partnership asset. Each partnership asset must be classified as a 751 property or an item of other property. Once that's separated, then the gross fair market value of each asset must be determined. Basically allocating the total sales price of all your assets, the amount of the computed Section 751 total gains must then be allocated to each partner based on the partnership agreement, or the partners interest in the partnership. The amount of any 751 gain computed in Step 3 must be adjusted for any pre-contribution built in gain or loss that certain partners have contributed that type of property or any Section 743(b) basis adjustments allocable to the selling partner. Lastly, the residual gain is computed which is the total gain on the sales of the partnership interest, overall total gain less the amount of the 751 ordinary portion, computed in Step 4, it is this residual gain that is subject to the capital gain treatment. Okay, now that we've introduced the hypothetical sale of partnerships assets concept, we wanted to discuss some common areas of non-compliance that Andrew and I've seen as executing these exams.

In our experience, it is common that partnerships do not perform a hypothetical sale partnership assets as required when one or more partners sell their partnership interest, they need to notify the partnership and that Accounting Controller needs to perform this hypothetical sale because the partners do not have the general ledger or the fixed asset schedule to do this computation. Additionally, for partnerships that do conduct a hypothetical sale partnership assets, it is common that the fair market value assigned to the partnership assets at the time of the sale, not reasonable. So, another point I want to emphasize starting in 2019, the Form 1065 Schedule K-1 was changed to require partnerships to report each selling partners' share of Section 751 gain or loss, collectibles gain or loss or unrecaptured Section 1250 gain directly on the Schedule K-1 in box 20., you have to include an Alpha Code. In the past, this was just provided by the partnership as a white paper attachment to the Form 1065. Okay, real quick, two more of these commonly asked questions we have. How does a minority partner determine if there's any gain subject to Section 751 recapture? The answer, any partner that sells a partnership interest should notify the partnership and the partnership should provide the selling partner the information needed to prepare a correct return. Another question that Andrew and I get in LB&I (Large Business and International) is: Does Section 751 apply to the smaller SBSE partnerships?

Yes, requirements to conduct a hypothetical sale computation and inform the partners of the gains tax at these higher rate than the long-term rate applied to all Form 1065. Okay, Yvette. I think we're ready for our second polling question. Yvette Brooks-Williams: I think you're right, Geoff.

Audience, here's our second polling question. Who is responsible for conducting a hypothetical sale computation to determine Section 751 ordinary gain? Is it A, the purchasing partner; B, the selling partner; C, the partnership; or D, no hypothetical sale computation is required. So take a moment and review the question again, and click the radio button that best answers the question who is responsible for conducting a hypothetical sale computation to determine Section 751 ordinary gain? Again, the choices are A, the purchasing Partner, B, the selling partner, C, the partnership or D, no hypothetical sale computation is required. I'll give you a few more seconds to make your selection. And okay, we're going to stop the polling now. And let's share the correct answer on the next slide. And the correct answer is C, the partnership. Now let's see, I see that 76% of you responded correctly. So Geoff, I'm going to ask you to clarify why C is the correct answer? Geoff Gaukroger: Sure, understand. This is great and this is a good question. So and the audit regimes have changed by TEFRA, non-TEFRA BBA. It's very clear now that the partnership is the one that has the books and records for the fixed assets. They're the ones that have the information. And along with this new requirement that it must be put on the Schedule K-1, it is the requirement of the partnership to do this computation. All right, let's move on to our next slide. So we said there'd be some new things that we can share about non-compliance that Andrew and I have seen as we've been doing all these exams. And so we're going to start with the partnership. So the first area of non-compliance we've seen is the hypothetical sale computation is not being performed, the information is not being provided to the partners and they are not made aware of the Section 751 and components of capital gains that must be taxed at the higher unrecaptured Section 1250 gain. So once we start an exam, partners may initially indicate that they don't have to conduct a hypothetical sale computation claiming that all their assets have a fair market value equal to the tax net book value. However, assets tax net book value is not an estimate of fair market value. You know rarely would the tax net book value be the same as the fair market value. Good examples are if a taxpayer takes bonus depreciation or expense an asset under 179 or uses MACRS double-declining accelerated depreciation method, these methods do not mean that assets fair market value decrease at the same accelerated rate at which the tax net book value has decreased. We often see partnerships using the wrong method valuation methodology as well. So, a lot of the people think the correct fair market value is a liquidation or fire sale value for each asset. However the correct valuation methodology should be a going concern and in-continued-use methodology is where the buyer is going to continue to use these assets in this business to generate revenue. Another commonly asked question, how can a partnership determine Section 751 gain, if it does not know the partners outside basis? Again, just the component, how can the partnership figure out for the partner. The answer is: The partnerships responsibility is to look at the assets owned by the partnership at the time the sale took place. The partnership is really looking at the fair market value of the 751 assets and just providing the partner with their share of the ordinary gain, it is the partner who then would be responsible for determining the overall gain based on their sales proceeds and basis and then adding in the ordinary portion based on the information from the partnership. Okay, next slide please. Here we have more non-compliance and now at the partner level. What are we seeing? Let's just assume the partnership conducted the hypothetical sale analysis of partnership assets and did the correct hypothetical sale with the right fair market values. The partnership should have provided each selling partner their share of the gain to be taxed at the higher rates on their Schedule K-1 in Box 20. So what we've seen is that even if the partnership does everything right it is not uncommon for the partner to fail to report its share section 751 or unrecaptured 1250 gain on their taxable partner return. Again another item, if the installment method is used. The selling partner does not always report the entire amount of the 751 gain in the year of the sale, which is required under the law. And a final area of partner non-compliance is the partner underreporting the total amount of the gains from the sale of its partnership interest due to either overstating its basis or understating the sales proceeds. All right, on the next slide, more partner level common areas of non-compliance. So mentioned a few slides ago that starting in 2019, the Schedule K-1 instructions have been modified to include this requirements of reporting the Section 751 collectibles and unrecaptured Section 1250 gain, a separately stated item with an Alpha Code in Box 20. Two more of these commonly asked questions, Is all Section 751 gain recognized in the year of the sale even if the sale as a partnership interest qualifies as installment sale? Yes, Section 751 gain is not eligible to be reported on the installment method. Second one, If a partnership interest is sold at no economic gain or loss, breakeven, is it possible that 751 gain still exists? Yes, a partner could recognize ordinary gain under 751 and have a capital loss in an equal amount. So even if partner has an overall net loss on the sale of partnership interest transaction, they still could have a 751 ordinary gain component to report, the total loss would be the same. Okay, so I'm going to start the example here. So let's look at a fact of a hypothetical example. Andrew and I are going to go over throughout today's webinar, ABC Partnership, they own and operate an apartment complex, it is a calendar year entity and one of the partners in ABC Partnership, Partner C sells his entire 40% interest on September 30, 2020 for $20,000 in cash and Partner C was relieved of $4,000 of liabilities as part of this sale transaction. Continuing on, Partner C's outside basis at the time the sale was $6,000. But note this included $2,000 in tax capital plus his allocated $4,000 of partnership liability, giving him a total outside basis of $6,000. Therefore, Partner C has an $18,000 gain, and let's focus on a number here, we're going to be revolving around that a lot, is it a sale, so the total sales price was $24,000, which is $20,000 in cash plus because they're relieved the partial liabilities, additional $4,000 in proceeds. So, the total proceeds is $24,000. We computed the basis of $6,000, $24,000 minus $6,000 gives us the $18,000 gain. All right, throwing some more facts here in the setup for Andrew, the partnership did not conduct a hypothetical sale computation as of September 30, 2020. It did not determine the fair market value of all partnership assets as of the date of the sale. The partnership took the position that all the partnership assets had a fair market value equal to their tax net book value. The partnership did not file a Form 8308 to disclose the transaction on its partnership tax return, partnership did not check the box on Partner C's Schedule K-1 to acknowledge Partner C had a sale of a partnership interest in 2020. So during an exam, partnership's position was that all gain to be recognized by the selling partner would be capital gain that $18,000. Therefore, the partnership did not provide information on the selling partner's Schedule K-1 in the box 20 with Alpha Code to classify any of the gain as subject to ordinary or unrecaptured 1250, Section 1250. All right, couple more facts here. Partner C, is an individual that files a 2020 Form 1040. So I mentioned the gain was $18,000. The partnership reported the entire $18,000 gain on Form 8949 as capital gain, and no ordinary was reported on Form 4797. Okay, let me hand over to Andrew, he's going to delve deeper into this example. Andrew Dux: Okay, thanks, Geoff. This is the depreciation schedule of ABC Partnership that Geoff discussed in the previous couple of slides. Partner C sold his 40% interest in ABC Partnership, as Geoff just discussed, so as you can see, there were six assets owned by the partnership at the time the partner sold his interest, a building, carpet, a parking lot, a range, a refrigerator and goodwill. The building was placed in service in 1996 and the other assets were placed in service more recently. ABC accelerated depreciation of these assets for tax purposes. The tax net book value column or the Partnership claimed bonus depreciation for both the parking lot and the refrigerator which adjusted tax basis, shows the tax net book value on the date when the partner sold his partnership interest on September 30 2020. So the question that we need to consider is what is the fair market value of these assets on the date of the sale. This spreadsheet is exactly the same as the one on the previous slide with the exception of using the tax net book value of each asset as the assets fair market value. It is common to see partnerships use tax net book value as the fair market value of their assets. By doing this, the partnership is saying the selling partner does not have to taint any portion of their gain on the sale as subject to higher than the long-term capital gains tax rates. The building has an estimated fair market value of $924, if we just use tax net book value. However, buildings generally do not decrease in value, except for in unusual situations like an economic depression. The carpet has an estimated fair market value of $0, is $0 really an appropriate fair market value if the carpet is still being used by the partnership in their business operations? The parking lot has an estimated fair market value of approximately 31% of cost. However, parking lots generally last many years in a partnership's business operations. The range has an estimated fair market value of $432, which is less than 20% of costs even though the asset is only three years old at the time of the hypothetical sale.

Using the fair market value methodology, we are saying that the partnership replaces the ranges quicker than every four years. Is the apartment complex really replacing their ranges this often?

The refrigerator has an estimated fair market value of $0, is $0 really an appropriate fair market value. The refrigerator was only nine months old at the time of the hypothetical sale, and will likely be used for many more years by the apartment complex. Finally, the tax goodwill asset has an estimated fair market value of just over $3,000 in comparison to its cost basis of $7,000. So with the limited amount of information available, let's ask ourselves, is the fair market value equal to each assets equal to tax net book value really correct. And we're going to come back to that question a little bit later, when we revisit this depreciation schedule again.

We've introduced the facts with example 1 and before we go further with this example, we wanted to take a step back and consider what is meant by the term fair market value. Most of us on this webinar are accountants, not valuation experts. However, it's important to consider what the definition of fair market value is for purposes of conducting a hypothetical sale of partnership assets. This area of the tax law does not provide valuation techniques for assets. Rather, the internal revenue code just uses the term fair market value. The most commonly referenced IRS cite regarding fair market value is Revenue Ruling 59-60. Revenue Ruling 59-60 characterizes the arm's length definition of fair market value as the price at which the property would change hands between a willing buyer and a willing seller. Therefore, when a partner sells a partnership interest, we look at a fair market value using a going concern or in-continued-use valuation.

The seller is not selling these partnership assets at a bankruptcy auction or a liquidation sale.

Instead, they're selling them to a willing buyer that wants to continue to use them in an ongoing business to continue to generate revenue. Often when there's a sale of a partnership interest, the buyer and seller have a signed sales agreement, which discusses the fair market value, they agreed to assign to the partnership's assets. One of the reasons this agreement exists is to treat these assets consistently between the buyer and the seller. A buyer assigns values for purposes of determining how their purchased assets will be depreciated. We have reviewed sale of a partnership interest transactions where the buyer prepares a Section 743(b)

adjustment to depreciable assets with short class lives. So they are taking the position that the fair market value of the partnerships depreciable assets is greater than the assets' adjusted tax basis. However, in the same transaction, the seller takes the position that all depreciable fixed assets have a fair market value equal to their adjusted tax basis. Additionally, we have reviewed sale of a partnership interest transactions where the buyer and seller's fair market value allocations for partnership assets is consistent. If the service believes the fair market value assigned for Section 751 purposes is not reasonable. It will make adjustments even if the partnership Section 751 valuations are consistent with how the buyer allocated them for Section 743(b) purposes. It is common for a seller to obtain an appraisal for further support its valuation assigned to the partnership assets. Although the seller may get an independent appraisal to support their position, the seller is motivated to have lower fair market values assigned to the partnership assets. These appraisals often are not arm's length. Treasury Regulation 1.1060-1(d) Example 2 gives the service the authority to determine the correct fair market value when the taxpayer has failed to do so. Just because the taxpayer has an appraisal or there's an agreement between two unrelated third-parties does not mean the service will respect it. Agreements often seek to maximize tax savings between the buyer and the seller. However, these agreements do not override the tax law requiring items to be valued at their fair market values. Okay, so two more commonly asked questions that we've received from prior webinar presentations. If the partners agree in the sales agreement, that all assets have a fair market value equal to tax net book value, does the partnership still have to conduct a hypothetical sale of all assets? And the answer is yes, just because the legal agreement states the fair market value of all assets is equal to their tax net book values does not mean this is the reality of the situation. A partnership is required to conduct a hypothetical sale computation with reasonable fair market values in order for the selling partners to report their correct share of ordinary gain on the sale transaction. IRS counsel supports the agents' requirement under Treasury Regulation 1.1060-1(d) Example 2 to correct valuations when the amounts are not representative fair market values even though buying and selling taxpayers have agreed upon asset allocations in an arm's length agreement. The next question, do partnerships always need to hire an appraiser? And I would say no. Partnerships just need to assign reasonable fair market values to all partnership assets. Okay, now we want to further discuss some common problems with the partnership's hypothetical sale computations on the next six slides before we get back to discussing the facts from Example 1. Some of these concepts might be a little repetitive. But the point of these next six slides is to provide an overview of the main areas of non-compliance identified by the Sale of Partnership Interest Campaign. A taxpayers depreciation method has no impact on an asset's decline in fair market value. When considering fair market value, let's ask a couple questions. Is the taxpayer using accelerated depreciation methods, such as MACRS, Section 179 and bonus depreciation? The fact that a taxpayer claimed bonus depreciation on a specific asset does not mean that this asset's fair market value decreased faster than if the taxpayer would not have taken accelerated depreciation deductions. Has the taxpayer taken tax amortization deductions? For Section 1250 assets taxpayers sometimes take bonus depreciation. If an accelerated depreciation method was used, such as bonus depreciation or MACRS, then the gain on the sale will be recaptured as ordinary income to the extent by which the amount of accelerated depreciation taken exceeded depreciation that would have been allowed if straight line depreciation was used. One common practice we wanted to point out is cost segregation studies. Taxpayers obtain cost segregation studies to separate out their depreciable assets into various asset categories in an effort to obtain accelerated depreciation deductions. Just because a partnership obtained a cost segregation study does not mean that the partnership assets decreased in value faster than if a cost segregation study was not obtained. Another commonly asked question that we wanted to cover, If the partnership has assigned fair market values to all assets at the time of the sale, how does the service determine whether the fair market values were correct? This is really based upon the examiner's judgment based upon all the facts of the case. If the partnership used reasonable fair market values, then the service would accept the partnerships hypothetical sale computation as being reasonably correct. When a partnership values its assets by conducting a hypothetical sale analysis. At the time a partner sells its partnership interest. It is common for taxpayers to use a liquidation or fire sale valuation methodology. What would the assets be worth if the business ceased operating and the assets were sold at an auction? By using this valuation methodology, it produces a lower fair market value than if a going concern valuation methodology was used. The service believes a partnership should use a going concern or in-continued-use valuation methodology. The buyer and seller agreed to an overall purchase price and then this purchase price must be allocated across all assets. The correct methodology is to consider each asset to continue to be used to operate a business to generate revenue. Okay, Yvette, I think we're ready for our third polling question. Yvette Brooks-Williams: I think you are right. And I think you should have a glass of water. Before we do our polling question, I just want the audience to know that we are aware of the closed captioning issue and we are working diligently to resolve it. So audience with that, here's our third polling question. What is the IRS's position on the proper valuation methodology when a partner sells its partnership interest? Is it A, going concern or in-continued-use; B, liquidation or fire sale; C, net book value or D, GAAP book value. So take a moment and review the question again, and click the radio button that best answers the question. What is the IRS position on the proper valuation methodology when a partner sells its partnership interest? A, going concern or in-continued-use; B, liquidation or fire sale; C, net book value; or D, GAAP book value. So I'll give you a few more seconds to make your selections. Okay, we're going to stop the polling now. And let's share the correct answer on the next slide. And the correct answer is A, going concern or in-continued-use. And I see that 78% of you responded correctly.

And I'm going to ask Andrew to clarify why going concern or in-continued-use is the correct answer for the IRS position on the proper valuation methodology. Andrew Dux: Yes, no problem, Yvette. It seems like 78% most people did get the right answer. But the point the service was trying to make is when we have a sale of a partnership interests, the seller is selling it to the buyer. And in most cases, the buyer is coming in and they are wanting to continue to have a share of the partnership assets, the partnership is going to continue to operate and it's going to continue to generate revenue. So a going concern or in-continued-use valuation methodology should be used to value the partnerships to asset. So okay, yes. Yvette Brooks-Williams: Thanks for the answer. Yes, Thank you. Andrew Dux: No problem. Yvette Brooks-Williams: So I'm going to send it back to you. Andrew Dux: Yes, thanks, Yvette. Well, we'll continue on with our presentation. So another concept that we want to discuss is older assets that have been fully depreciated. A common observed filing position is that these assets are old and do not have any value. However, the service does not believe that position is correct. The service believes all assets that the taxpayer still owns and uses in its business operations have value. Since they've been fully depreciated., whatever value was assigned to these assets would be recaptured under Section 751. In order to continue to operate the taxpayer's business, they need these assets, or they would have to purchase new assets to replace them to continue to operate at their current level. If the taxpayer no longer owns these assets, then they should have removed them from their depreciation schedule. Another common issue is leasehold improvements. We have reviewed common arguments regarding leasehold improvements. Some of these arguments include: Leasehold improvements have minimal value, as they would have to be removed and sold to someone that would not use them in the same way that the taxpayer was using them. Removing the leasehold improvements would damage them and diminish their value. The partnership doesn't own the building and if the business is abandoned, the contract states the leasehold improvements belong to the building owner. The service understands these arguments. However, the correct valuation methodology is not being applied with these arguments. There is a reason the taxpayer put these leasehold improvements in service. The taxpayer believes they will add value and increase revenue for a long period of time. At the time of the sale, the buyer is planning on using these assets in their current use, they are not planning on selling them. Therefore the correct valuation methodology is to use a going concern value. When certain partnership interests are sold, some partnerships have existing and intangible assets on the books. These intangible assets were created in a prior transaction where the fair market value paid by the buyer of the entity at that time was greater than the tax net book value. The partnership has amortized these intangible assets over the years by claiming ordinary deductions as amortization expense. In the current year when this latest sale of a partnership interest occurs. Some entities are not allocating value to the prior intangible assets. Instead they create new intangible assets. This results in the selling partner not having to recapture any of the prior amortization deductions.

The services position in many cases is: The existing tax intangible assets on the books still have substantial value. The existing intangible assets represent the ongoing knowledge and know how existing in the entity and the workforce in place. The existing intangible assets are normally worth at least its original recorded value, or even more. And the valuation of the entity at the date of the sale should properly allocate value to these prior existing intangible assets. So one more commonly asked question that I wanted to cover. Why is amortization taken on a goodwill asset subject to Section 751 recapture? And the answer is an amortizable Section 197 asset is considered Section 1245 property and potentially subject to Section 751 depending on the goodwill assets' fair market value. If you remember the facts from Example 1 from a few slides ago, we updated the spreadsheet to show estimated fair market values using a going concern or in-continued-use valuation methodology. The following fair market value estimations are purely for this example, for discussion purposes and we're not addressing the methodology used. Generally, buildings do not decline in value unless there's a recession or an unusual fact pattern. For this building, we are using an estimated fair market value of $14,000. For carpet, value of $2,000 or 50% of cost for this asset. The carpet is completely depreciated. If the this asset was about five years old at the time of the sale, we have estimated a fair market taxpayer were to rip the carpet up and sell it, it's likely they would not receive much money if any money at all. However, the carpet is still being used in the taxpayer's business operations, and therefore still has value. If the apartment complex replaces the carpet about every 10 years than a 50% fair market value is appropriate. The parking lot was about 4.5 years old at the time of the sale. We have estimated a fair market value of $4,650, which estimates the parking lot would last about 15 to 20 years. For the range this asset was about three years old at the time of the sale, we have estimated the fair market value of $1,875, which estimates the apartment replaces its ranges about every 12 years. For the refrigerator, this asset was about nine months old at the time of the sale, it will likely be used for another 10 years by the apartment complex. And since it is less than one year old at the time of the sale transaction, we have used an estimated fair market value of $3,000, which is equal to the cost of this assets. For goodwill, this is a goodwill asset that was placed in service in 2012, which the taxpayer has been amortizing for tax purposes. The estimated fair market value of this intangible asset is $10,000. The partnership has increased in value since 2012 and therefore its existing goodwill asset went up in value as well. And I want to express that I understand the numbers on this table are not very large. However, if we added several zeros to the end of them, you could see the materiality of this issue greatly increases. When partnerships have taken ordinary depreciation and amortization deductions over the years, reasonable going concern fair market values must be used in order to determine the proper character of the gain to be reported by the selling partners. Okay, so on this slide, we are continuing with Example 1 and we are conducting a hypothetical sale computation. We are using the estimated fair market values that were discussed on the prior slide. On this slide, it shows the 40% selling partner share of Section 751 and unrecaptured Section 1250 gain. On the top part of this computation, we just determined the partnership's total Section 751 and unrecaptured Section 1250 gain amounts that would exist if 100% of the partnership interests were sold in the sales transaction. Then on the bottom part of the computation, we use the selling partners ownership percentage to determine the amount applicable to each selling partner. For buildings, we can see the total unrecaptured Section 1250 gain is $9,076. For carpet, there is a total of $2,000 of Section 751 gain. For parking lots, there's $2,330 of Section 751 gain and $451 of unrecaptured Section 1250 gain. Remember, if an accelerated depreciation method was used, such as bonus depreciation or MACRS and the parking lots are Section 1250 assets, then the gain on the sale will be recaptured as ordinary income to the extent by which the amount of accelerated depreciation taken exceeded depreciation that would have been allowed, if straight line depreciation was used. Any gain in excess of the amount treated as ordinary income because of Section 1250 recapture, but not exceeding the total depreciation claimed is unrecaptured Section 1250 gain. For the range, the entire $1,443 of gain is Section 751 gain. For the refrigerator, the entire $3,000 of gain is Section 751 gain. For goodwill, there's $3,968 of Section 751 gain, and the remaining gain above the amount of previously taken tax amortization deductions is treated as capital gain. So as you can see, the 40% selling partner must report $5,097 of Section 751 ordinary gain and $3,811 of unrecaptured Section 1250 gain. These amounts are simply computed by taking the total Section 751 and unrecaptured Section 1250 gain amounts and multiplying them by the 40% selling partners ownership percentage. Okay, so one more commonly asked question that I wanted to go over is: If the selling partner is willing to sell its interest at a certain price, why wouldn't that be the fair market value? And so this kind of goes back to what Geoff said earlier, we would not challenge the amount paid to purchase a partnership interest, just the allocation of fair market value to partnership assets, which would impact the character of the gain to the selling partners. Now that we've discussed example 1 in detail, let's discuss the partnership's reporting requirements.

The partnership is required to prepare the selling partner's Schedule K-1 reflecting Box 20 Alpha Code AB with $5,097 and Section Technical Difficulty]. Geoff Gaukroger: Yvette, did we lose Andrew? Yvette Brooks-Williams: I think so, Andrew, are you still there? Geoff Gaukroger: I could take over until he comes back. So what Andrew was saying. Yvette Brooks-Williams: Thank you.

Appreciate that. Thank you. Geoff Gaukroger: Okay, and Andrew was just going over the reporting requirements. So here's those new Alpha Codes I was mentioning that 751 portion just computed would go in Box 20 with AB code with $5,097 and then Alpha Code AD with $3,811 for the unrecaptured Section 1250. We talked about this in prior years partnerships just attached the statement to their return which showed the selling partner's share of section 751 gain but starting in 2019 this information is now reported on Box 20 of the Schedule K-1. The partnership is also required to check the box on the selling partner's 2020 Schedule K-1 showing the partner had a sale of a partnership interest. And also, we want to note the partnership is required to attach a Form 8308 to its Form 1065 tax return to explain the key information regarding the sales transaction such as the date and the parties involved. Okay, Yvette, do we have another polling question? Yvette Brooks-Williams: We do, we do, we have a polling question. I have an announcement that the close capturing has been fixed and my condolences that we lost Andrew on the call. So hopefully he'll be back with us soon. So audience, our final polling question is, Which of the following requirements is new starting in 2019? A, partnership computing Section 751 gain; B, partners reporting gain on the sale of a partnership interest; C, partnerships reporting partner's Section 751 gain on Schedule K-1 of Form 1065 Box 20, Alpha Code AB; or D, partnerships filing Form 8308. So please take a minute and review the question again. And then click the radio button you believe most closely answers the question, which of the following requirements is new starting in 2019? A, partnership computing Section 751 gain; B, partners reporting gain on the sale of a partnership interest; C, partnerships reporting partner's Section 751 gain on Schedule K-1 of Form 1065 Box 20, Alpha Code AB; or D, partnerships filing Form 8308. So I'll give you a few more seconds to make your selections. Okay, we are going to stop the polling now. And we will share the correct answer on the next slide. And the correct answer is C, partnerships reporting partner's Section 751 gain on Schedule K-1 Form 1065 Box 20 Alpha Code AB and yes, 84% of you responded correctly. That's great. Awesome, guys. Got through the job, Andrew, are you back with us? Geoff Gaukroger: I can keep going, Yvette. Yvette Brooks-Williams: Thank you. I appreciate it. Andrew was going to talk about discussing partner level reporting.

Geoff Gaukroger: Okay, sounds good. You know, so if you remember when I started this, I mentioned this $18,000 gain. So here we've come full circle. So the partner will use the information provided from the partnership reported sale on its Form 1040 tax return, the partner will have to report this on the correct forms, for example, Form 4797 for the 751 gain, the Form 8949 for the capital gain, partner will consider the total proceeds received, and subtract its basis to determine the total gain, the taxpayer subtracts the gain amounts taxed at rates higher than the long-term capital gain tax rates from the total gain to determine the remaining residual capital gain amount. So in this example $9,092 is the residual amount that will be taxed at the long-term capital gain tax rates. Real quick, two more that's commonly asked questions we've gotten. Where does the selling partner report their gain or loss on the sale of a partnership interest? So, a selling partner reports ordinary Section 751 on Form 4797, Part 2 and reports capital gain on Form 8949, which then flows to the Schedule D. Another question, How does the departing partner's negative capital account impact a sale of a partnership interest? So that's outside the partnership. So determining the total amount of gain or loss is a partner level determination. So, a negative tax capital accounts just means the taxpayer would have a larger total gain than a partner with a positive tax capital account. Okay, let's move to partnership audit regimes. So before we finish up today's presentation, we want to take three slides to talk about partnership audit regimes. And the reason we're doing this is during exams the last couple of years, we've been asked a lot of questions from tax practitioners as we've executed the sale partnership interest campaign. The Centralized Partnership audit regime, which is probably more commonly known that you heard BBA, generally applies to all partnerships required to file tax returns whose years begin on or after January 1 2018, except for partnerships electing out of the BBA, Okay, there is a hyperlink in your documents that will link you to irs.gov website. And it has most aspects of the BBA partnership audit process laid out in a nice graph and additional information. If a partnership elects out of the BBA, it is generally subject to the investor level statute control or ILSC procedures. IRM, Internal Revenue Manual 4.31.5 provides detailed field examination procedures for partnerships that are subject to the ILSC procedures. Okay, we could have multiple pass-throughs on BBA. But we're going to go quick here and just explain how BBAs can apply to what we've discussed when there is a sale of a partnership interest. So this slide shows that when a partnership is being examined under the BBA procedures, how we would treat the sale of partnership interest component. So under the hypothetical fact pattern number one on this slide, we're saying the partnership did not conduct a hypothetical sale computation and did not inform the selling partner their share of the 751 ordinary gain on Schedule K-1.

However, the partner did report $2 million of 751 gain as ordinary income on its tax return. If a partnership audit is conducted, and the Service determines the selling partner's correct share of the Section 751 ordinary gain is $3 million, the examiner would propose the entire $3 million adjustment as a partnership related audit adjustment. Now note that even though the partner did report the $2 million, the partnership could request a modification or make a push-out election in order for the correct amount of tax to be assessed to account for the selling partner's $2 million reported 751 gain. But the key thing here, since the partnership did not properly put any 751 gain amount on the Schedule K-1, the service is required by law to make this entire $3 million partnership related item adjustment at the partnership level. Yes, let's go to the next one, under this example number two here, the partnership did conduct a hypothetical sale computation and informed the selling partner of their share of 751 ordinary gain, put on Schedule K-1 Box 20 Alpha Code AB and they put the $2 million and the partner then reported this $2 million of 751 ordinary gain. The partnership is audited by the IRS, the service determines the selling partners correct share again should be $3 million. Now the examiner is going to propose a $1 million adjustment as the partnership related item adjustments. And this is because the partnership did originally compute $2 million of 751 on the K-1 and exam adjustment is just increase that by $1 million. Okay, one more real quick on BBA here. The partnership representative may submit a request to modify the imputed underpayment only after the NOPPA or PPA has been issued. Note the partnership is liable for that, that is what else is different in BBA. So the partnership representative will have 270 days from the date of NOPPA to make such a request. Partnership representative must complete and electronically submit Form 8980 to request this modification. So a simple example when a taxpayer may want to request modification. Let's say the whole adjustment is on unrecaptured Section 1250 gain at the partnership level, originally, the examiner has to assess that at the highest tax rate of 37%. But since on unrecaptured Section 1250 gain is only taxed at 25%, the partnership representative would fill out the Form 8980 and request a modification of the payment due by the partnership. The partnership representative may submit an election to push out audit adjustments that's different.

Underlying the IU, this imputed under and push it out to the partners rather than make it payment itself. This can be done only after the FPA has been issued. Partnership representative who have 45 days from the date of the FPA to make this push out election. If a partnership representative does not make the election, then it's actually the partnership and the partnership is liable for the imputed underpayment amounts. The partnership representative must complete and electronically submit Form 8988, Election to Alternative to Payment of the Imputed Underpayment, under IRC Section 6226. All right. this is a summery here. Good job, everybody. Now, you should be able to identify the correct tax law related to sale partnership interest. Next thing we did, we want to share with you what the Service has encountered during sales of partnership interest examinations and give you some insight of what's going on out there. And then what's most important, we want to explain the Service's position on valuations placed on assets as part of the hypothetical sale computation. Okay, Yvette, that's all we have for today. So back to you.

Yvette Brooks-Williams: Thanks. Yes, hello again. It's me Yvette Brooks-Williams and I will be moderating the Q&A session. But before we start the Q&A session, I want to thank everyone for attending today's presentation, Sale of Partnership Interest Comprehensive Case Study. Now earlier, I did mention that we wanted to know what questions you have for our presenters. So here's your opportunity. Now, if you haven't already done so, there's still time to input your questions. Go ahead and click on the drop down arrow next to the Ask Question field, type in your question and click Send. Now Geoff is on with us to answer your questions. And we're still trying to get Andrew back on. Andrew, are you back with us yet? Andrew Dux: Yes, I'm back on.

Thanks. Yvette Brooks-Williams: Okay, so Andrew and Geoff are going to stay on with us to answer your questions. And one thing before we start, we just need you to know we might not have time to answer all of the questions submitted. However, let me assure you, we will answer as many as time allows. If you are participating to earn a certificate, and related continuing education credit, you will qualify for one credit by participating for at least 50 minutes from the official start time of the webinar which means the first few minutes of chatting before the top of the hour does not count towards the 50 minutes. So let's get started, so we can get to as many questions as possible. So Andrew, since you're back, we're going to give Geoff a little break on his voice. And ask you the first question, Why is there unrecaptured Section 1250 gain for a building when it has been depreciated, using straight line depreciation? Andrew Dux: Okay, sure. Yes, I'll go ahead and answer that question. Basically, unrecaptured Section 1250 gain is a special 25% capital gain tax rate for Section 1250 assets, normally buildings or leasehold improvements. They're subject to these higher tax rates, just because that's the tax law that has existed. So buildings, other 1250 assets, even though straight line depreciation is taken, they have the special 25% unrecaptured section 1250 gain rate. Yvette Brooks-Williams: Thank you.

Geoff, Do buildings maintain their value or is all excess value based upon the increase in the value of the land? Geoff Gaukroger: Okay, so it really depends on fact, but I think we all know in general, and watch the real estate go up, we believe in general buildings maintain their value or go up in value. So the building replacement placed in service 20 years ago it is very likely the cost to build a similar building would be much greater than the old building. Yvette Brooks-Williams: Okay, Andrew, back to you conducting a Section 751 analysis will significantly increase tax preparation fees excessively for smaller partnerships. What are your thoughts on this? Andrew Dux: Okay, yes, we understand smaller partnerships might not spend as much on tax preparation fees as larger partnerships. However this requirement to do a 751 analysis is required for small and large partnerships. So maybe the smaller partnership doesn't have to have an appraisal, but they still need to make an effort to determine reasonable fair market values for the partnership's assets. Yvette Brooks-Williams: Thank you. Geoff, what is the easiest way for a small partnership to determine the fair market value of all assets as required by Section 751? Geoff Gaukroger: Yes, sure. Even though, lot of this can be very sophisticated, we get it you know, a small partnership doesn't want to incur a lot of fees, you can do it yourself. I mean, we've prepared this. I think the most important thing to know is that in-continued-use methodology, don't do the liquidation value and just look at the age, the tax basis and consider that the value should be for purchasing new partners' hands and what is the overall value of these assets that continue in conducting the business in place. Yvette Brooks-Williams: Andrew, are you there? Andrew Dux: Yes, I'm here. Yvette Brooks-Williams: Okay. Does the service see a lot of disagreements or disputes regarding fair market value? Andrew Dux: Okay, when we talk to taxpayers and their representatives, at first they really do believe they did a reasonable 751 analysis and there might be a little bit of disagreement at the beginning, but after we discuss the facts, the tax law requirements. In the end, the service and the taxpayers are able to reach agreement on almost every single case. Yvette Brooks-Williams: Okay, thank you, Geoff, what is Section 743(b)? Geoff Gaukroger: Okay, so that is the matching of inside and outside basis. So a business, partnership starts with their general ledger, that is their inside basis, partners, that is if one of the partners were to sell to new partner, that new partners possibly pay the higher price for the partnership interest. And because of that, they get to make their 754 election basis, just for their related assets portion that they get to step up the inside basis of assets equal to their outside basis as an equalization of inside and outside basis. And if they step up depreciable assets that partner will get additional depreciation deduction from the 743(b) assets. Yvette Brooks-Williams: Okay, and Andrew, so the seller of a partnership interest, does the tax of the seller differ if the seller one sells his interest to an existing partner or two sells his interest to a new partner? Andrew Dux: Okay, yes, it doesn't matter if the seller sells to an existing partner or new partner. The partnership still has the hypothetical sale analysis, the 751 or unrecaptured Section 1250 gain amount. And then at the partner level, their total amount of the gain the proceeds minus the basis, that would be the same too. So it really doesn't matter. Yvette Brooks-Williams: Good to know, good to know. Geoff, so I have an example here from one of our audience members. The LLC purchases $10,000 asset in 2014 with estimated useful life of 10 years, which the LLC depreciates on a straight line basis and Partner A sells its interest in 2021. What is Partner A Section 751 gain or loss? Geoff Gaukroger: Okay, so what would happen is we go to fix assets schedule, and we look at this asset that's being depreciated over 10 years. So I tried to scribble down the facts real quick, it sounds like the things just about fully depreciated. So Andrew and I have had the position that even I think and Andrew mentioned that that assets are now have a zero tax net book value. We'll throw out like a kitchen table in the office room or something, it still has some value because it's being used. And we know it's minimal. So I can't give you the exact, but we're using maybe residual values 20% like you had sent that maybe 2001 that we just always depends on the facts and circumstances. But it's not zero, not the tax net book values here. There would be -- and the 751 is going to be right up to whatever the fair market value is, because that had zero basis. Let's just -- I'll just say -- let's say we agreed $1,600. So they'd have a $1,600 751 amount. Yvette Brooks-Williams: Thank you for that. Andrew Dux: And, Geoff, I wanted to add one thing. I think, if I remember the facts correctly on that example, it said a $10,000 asset that only it was about seven years old. The taxpayers established that, they have a history that they only use this asset for 10 years. And they only took straight line depreciation on that, but no bonus. So if it's really a 10 year asset, they're taken straight line over 10 years, and they really have facts to support that it's only used for 10 years, and then they always dispose of it, then in that particular case, maybe the fair market value is equal to the adjusted tax basis.

But that type of fact pattern I would say is relatively rare. I was just going to clarify. Geoff Gaukroger: Yes, no, thanks Andrew. I scribbled quickly and now that you say that. So I feel like yes, the question was trying to throw something out very reasonable. And it's like, we will accept that then. Yes, that would be exactly right. There would be no adjustment, it would be equal to tax net book value it is possible. Yvette Brooks-Williams: Andrew, if Section 751 calculated is a loss.

Is the loss treated as an ordinary loss? Andrew Dux: Okay. So most of the time we're going to have 751 gains due to the partnership accelerated depreciation method, but it is possible that there could be a 751 loss, which would be an ordinary loss for the partner. Yvette Brooks-Williams: Okay. Geoff, where does the ordinary 751 gains get reported on a Form 1040?

Geoff Gaukroger: It goes to the Form 4797 and flows on through. That's where it'll be picked up as ordinary. Yvette Brooks-Williams: Okay, and Andrew, what if the seller has a negative basis?

Andrew Dux: Okay. So again, we covered that throughout the presentation. And we do get that question a lot. And this hypothetical sale requirement, that's a partnership responsibility, they have to look at the asset. And the partners basis has no impact on the 751 computation. The partnership does this hypothetical sale, they inform the selling partner their share of gain at rates higher than the long-term capital gain rate on the Schedule K-1 on Box 20. And then the partner is going to use that information to report their character of the gain and any residual gain or loss, that would be reported by the partner as well. So that's just a partner level determination that would not impact the hypothetical sale of partnership assets computation.

Geoff Gaukroger: Yes, if I could just add a little bit. But it's a fine question, we get that question. Technically, you can't have negative basis. So there is there's loss limitations, and you're in a partnership, you can't go below zero. So maybe the person mentioned, kind of really thinking negative capital. But then they have debt basis that it allows them to increase their basis to zero. If in fact, an error was made and then went negative, you're going to have your proceeds less your basis, you get it truly had a negative paces, then that would increase the overall gain. Yvette Brooks-Williams: My thanks to both of you. How are the 751 gains reported to the selling partner? Geoff Gaukroger: Okay, I'll grab that one real quick. So again, this is responsibility, the partnership controller does this hypothetical sell, which is really means it's not in the general ledger accounting records to the side computations done, taking all the fixed assets, assigning fair market value to each and every one, whether 10,000 assets. Figure out the portion in total for the whole entity, then once they get that computation, which is or running it through 4797, or pretend and get the total. Let's say the partner, I think and our example was 40%, then we now know, that is that partners share of the ordinary components. And we mentioned in the presentation, they used it for many years, decades, that that would be attached to the K-1, there wasn't a spot in the K-1 for it to be. A lot of the tax software had statements that would be attached to K-1 to get that information. But now starting 2019 there is a separately stated item now it goes in Box 20, which can have a lot of different items and get to Alpha Code, and that partner share of the gain is put there and so real quick note you know Schedule K-1s mostly income items, ordinary, all that that's P&L type stuff. That partnership interest. It's not income at the entity for the year. It's how you report yourself Box 20 is information. And that's going to go to the separate transaction of you selling your partnership interest, the information to have the ordinary component. Yvette Brooks-Williams: Thank you so much. Audience, I am sad to say that that is all the time we have for questions.

This has been a rich dialog and I hope you guys have gleaned some knowledge from it as I have. I want to thank Andrew and Geoff for sharing their knowledge and expertise and for answering your questions. Now before we close the Q&A session, Geoff, what key points do you want the attendees to remember from today's webinar? Geoff Gaukroger: Okay, so I started off, mentioning Section 751. And use that word unrealized receivables, which is common, wherever you might just know unrealized receivables are depreciable and amortizable assets. So that is most of the Section 751 assets. If your partnership has that you've got 751. When throughout that and then these are things that we don't want to solve by just doing lots of exams, we want to share with you right now just because there's an appraisal, or there's an agreement between two unrelated third-party that does not mean the Service will respect the fair market value allocation. Again, not the sales price between the two. But when they go to allocate in that hypothetical sale analysis and assign a reasonable fair market value to each asset. There would be a focus to try to minimize ordinary and we know that and so that tax law cannot be overwritten by an agreement. Next one, just that when they do the fair market value assignment as part of the sale, it is not liquidation value. It's not like how much would that one item sell out in the parking lot. No, you have to use it's an overall sale of partnership interest is performed, it's actually a group of assets which is a trade or business and so you have to use them in that context, that is a going concern and in-continued-use valuation. We want to mention that this Form 8308, that goes in the partnership return when a partner has sold, so the Schedule K-1 is going to get marked that there was sale of partnership interest in the main partnership tax return, there needs to be a Form 8308, when they emphasized and because since this is new in 2019, there were new requirements from the K-1, so there, you have to prepare the partnership return, you need to put this information on the Schedule K-1, that is required and expected. And if you're preparing the partners returns, look at that box to see if your partner needs to report that portion.

Lastly, just want to add, you know this issue that we're talking about this expensing of assets in the quickest accelerated depreciation, under the Tax Cut and Jobs Act, this allows taxpayers to expense 100% of the cost of assets acquired after September 27, 2017. So this is going to have a lot of partnerships embedded with potential for 751. Back to you, Yvette. Yvette Brooks-Williams: Thanks, Geoff. Audience we are planning additional webinars throughout the year on Tuesday, July 19, the IRS is offering a webinar called Accessing IRS Online Services Understanding the Identity Verification Process. So if you haven't registered, there's still time and to register for all upcoming webinars, please visit irs.gov. Use keyword search webinars and select the Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering Certificates and CE credit for upcoming webinars. We invite you to visit our video portal at www.irsvideos.gov, there you can view archived versions of our webinars. And please note continuing education credit and or certificates of completion are not offered if you view any version of our webinars after the live broadcast. Again, a big thank you to our speakers, Andrew and Geoff for a great webinar, sharing their expertise and answering your questions. And I also want to thank you our attendees for attending today's webinar, Sale of Partnership Interest Comprehensive Case Study. Now if you attended today's webinar for at least 50 minutes from the official start time of the webinar, you qualify for one possible CE credit. Again, the time we spent before the webinar started does not count towards those 50 minutes. If you're eligible for continuing education from the Internal Revenue Service, and you register with your valid PTIN, your credit will be posted in your PTIN account. If you qualify and you have not received your certificate and or credit by August 4, please email us at cl.sl.web.conference.team@irs.gov. The email address is shown on the slide as well. If you are interested in finding out who your local stakeholder liaison is, you may send us an email using the address shown on this slide and we will send you that information. Now we would appreciate it if you would take just a few minutes to complete a short evaluation before you exit. If you would like to have more sessions like this one, let us know. If you have thoughts on how we can make them better, please let us know that as well. Now if you have requests for future webinar topics, or if you have pertinent information you would like to see in an IRS Fact Sheet or a Tax Tip or even an FAQ on irs.gov, then please include your suggestions in the comment section of the survey. Click the survey button on the screen to begin. If it doesn't come up check to make sure you've disabled that popup blocker.

And I just want to say that it has been an absolute pleasure to be here with you and on behalf of the Internal Revenue Service and our presenters, we would like to thank you for attending today's webinar. It's important for the IRS to stay connected with a tax professional community, individual taxpayers, industry associations along with federal, state and local government organizations. You really make our job easier by sharing the information that allows for proper tax reporting. Thanks again for taking time out of your day to attend today's webinar, and we hope you found the information helpful. You may exit the webinar at this time.