481 adj new entity

Technical topics regarding tax preparation.
#1
oldguy  
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If a cash basis partnership contributes (untaxed ) receivables to a new partnership in tax free contribution under Section 721 and, because of the ownership of the new partnership, it must adopt accrual method on its initial return, what happens to the contributed receivables ? Is there a change in accounting method for the new partnership for which section 481 applies or are receivables simply recognized as income by newco as collected ?
 

#2
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The untaxed receivables were not earned by the partnership. I think you have two items here - zero basis receivables that will be taxed on collection (who says they’ll all be collected?), and an accrual method of accounting for income (receivables) earned by the new partnership.

Is 704(c) being considered for the allocation of income for the zero basis receivables? That would effectively keep the accounting method consistent for the contributing partner (and no impact to the non-contributing partner).
 

#3
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Agree with the 704(c) comment completely.
There is no 481 ADJ to calculate because this is a new entity. New entities adopt methods of accounting, not apply for a change to something else.
Is there any reason the AR contributing partner couldn't record a receivable with the partnership and pay that off as they collect the AR outside the partnership instead of accelerating income on contribution?
~Captcook
 

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“instead of accelerating income on contribution”

What would cause the acceleration?

Or is this a “play” to spread the income on cash-basis receivables over 4 years with a 481(a) adjustment?
 

#5
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thanks - that's how I viewed it but am second guessing myself because there is a tax notes article (May 28,2018 ) that says on these same facts, if the new partnership must be on accrual, as in this case, it has a 481 adjustment ( without a citation).
 

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There is a notion that a business can continue in a new legal entity form (in which case perhaps methods don’t automatically reset).

Do you have a cite from the tax notes article ?
 

#7
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I'm confused but what's new about that?

The "new" partnership's "ownership" is what requires it to be accrual method? Is one of the new partners a C corp.? Is there an ongoing business being contributed by the C corp., or just cash.

Is this the scenario? The existing cash method partnership (OP's client) contributes its business's assets, including the zero basis receivables, and the C corp. contributes cash, thus forming a "new" partnership that has a C corp. as its partner? If so, assuming no exceptions apply, then as you say they may not use the cash method.

But might the "new" partnership in those facts be viewed as the existing partnership with just a new C corp. partner, so in substance being the same partnership, thus requiring a change in method? Because they'd have the same result if they structured a straight capital contribution under 721 by the C corp. to the existing partnership, thus requiring the existing partnership to change method.

Just askin'.

Here's an article. May or may not be "the" article. Have not read it. https://www.crowell.com/files/20180613- ... ethods.pdf.

OK, read it. That's the article.
 

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Not sure I agree with this analysis. The authors didn’t discuss whether an untaxed receivable contributed to an accrual-basis partnership by a cash-basis partner could be viewed as a separate “item”. And to the authors’ point, it would be appropriate under 704(c) because the partner’s method is cashbasis.
 

#9
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Nilodop wrote:I'm confused but what's new about that?

The "new" partnership's "ownership" is what requires it to be accrual method? Is one of the new partners a C corp.? Is there an ongoing business being contributed by the C corp., or just cash.

Is this the scenario? The existing cash method partnership (OP's client) contributes its business's assets, including the zero basis receivables, and the C corp. contributes cash, thus forming a "new" partnership that has a C corp. as its partner? If so, assuming no exceptions apply, then as you say they may not use the cash method.

But might the "new" partnership in those facts be viewed as the existing partnership with just a new C corp. partner, so in substance being the same partnership, thus requiring a change in method? Because they'd have the same result if they structured a straight capital contribution under 721 by the C corp. to the existing partnership, thus requiring the existing partnership to change method.

Just askin'.

Here's an article. May or may not be "the" article. Have not read it. https://www.crowell.com/files/20180613- ... ethods.pdf.

OK, read it. That's the article.



yes- basically those facts. That is the correct article. No cite for their position in the article but I am guessing it is a 708 issue - that the new partnership is a continuation of the old partnership under 708 carrying with it the historic cash method. Therefore, when the bad owner comes in , it is not what I thought - just a prohibition from the new entity using cash method but, instead, it is a required change to accrual from using their historic cash method and therefore change and accounting method treatment applies.
 

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Not a continuation of an existing or old partnership (if I understand, there was no prior partnership). Is the new partnership a new business? Adding a new accrual basis partner to the business seems like a very significant change, how is it the same business?
 

#11
oldguy  
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HenryDavid wrote:Not a continuation of an existing or old partnership (if I understand, there was no prior partnership). Is the new partnership a new business? Adding a new accrual basis partner to the business seems like a very significant change, how is it the same business?



yes - was old partnership - from my original post:

If a cash basis partnership contributes (untaxed ) receivables to a new partnership in tax free contribution under Section 721 and, because of the ownership of the new partnership, it must adopt accrual method on its initial return,

In Len's link ,was an old partnership too I believe,
 

#12
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My error, thought it was a single member entity. Agreed, continuation makes sense - 481(a) and 704(c) to deal with.
 


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