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Tax Law Explained FLASHPOINTS February 2019

February 15, 2019Print This Post Print This Post

Keith B. Baker, CPA, JD, Law Offices of Keith B. Baker, Ltd.,Skokie
847-933-0200 | E-mail Keith Baker

Partnership Tax Law Change — Technical Terminations

There has been a significant change in the federal income tax laws relating to “technical terminations” that did not make the headlines. Technical terminations only affect entities taxed as partnerships (i.e., partnerships and limited liability companies (LLCs) taxed as partnerships). For this article, we will refer to any entity taxed as a partnership as being a “partnership,” even if it is actually an LLC taxed as a partnership.

The Old Law

For decades, the federal income tax laws provided that a partnership terminated, for tax purposes, if there was a sale or exchange of 50 percent or more of the total interests in the partnership’s capital and profits within any 12-month period. Former 26 U.S.C. §708(b)(1)(B). This type of termination is often referred to as a “technical termination.” In a technical termination,

  1. the “old” partnership is treated as making a tax-free Internal Revenue Code §721 contribution of its assets to a “new” partnership; and

  2. the ownership interests in the new partnership are treated as having been distributed to the “new” partners.

Technical terminations often happened without the partners intending it or even realizing that it happened. This presented many traps for the unwary. Even those who were aware of technical terminations may have been tempted to believe that nothing changed and that nothing needed to be done. They might have had some comfort in knowing that the legal entity itself and the employer identification number (EIN) remained unchanged

However, in a technical termination,

  1. the partnership’s tax year closed on the date of termination/creation of the new partnership (meaning, among other things, that separate “short-year” income tax returns had to be filed (i.e., two Form 1065));

  2. the tax attributes of the old partnership were terminated;

  3. any elections that had been made by the old partnership were no longer valid (meaning that the new partnership would have to file new elections on a timely basis); and

  4. depreciation periods restarted for the assets of the new partnership.

The new partnership and its partners also had to confront the dreaded disconnect between “inside basis” versus “outside basis” and determine whether to make a Code §754 election. The consequences were not all bad. In some cases, the new partnership had fresh opportunities for various elections, depreciation, etc.

The New/Current Law

The Tax Cuts and Jobs Act of 2017 (TCJA), Pub.L. No. 115-97, 131 Stat. 2054, repealed technical terminations for all tax years of partnerships beginning after December 31, 2017.


For most, the repeal of technical terminations provoked a sigh of relief. However, it also removed a strategic tool in the toolbox of tax planners who could identify opportunities.

For more information about tax law, see STATE AND LOCAL TAXATION — 2017 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.


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