Partnership interest & 754 when outside basis is less

Is your view that the above arrangement will/should/more likely than not be treated as a liquidating cash distribution by the partnership and a sale of the LLC assets by the partnership for federal income tax purposes?

In the instant case, if they wrote up the acquisition as a purchase by 2 parties, that’s likely why the accounting firm is saying we’re dealing with a cash distribution. And I get why they’re saying that. But I haven’t seen the agreement.

It’s one of those situations where you can’t have it both ways. It can’t be a distribution of the asset and also a purchase of it (ignoring Partner B).

To be clear, we do not know that the accounting firm views this as a cash distribution and cash purchase. That was a theory floated by the OP.

Just curious, if that was the accounting firm’s position based on my hypothetical facts (the purchase agreement says it is a purchase by A and B for cash, redemption agreement says cash redemption, etc.), would you agree with the firm?

Just curious, if that was the accounting firm’s position based on my hypothetical facts (the purchase agreement says it is a purchase by A and B for cash, redemption agreement says cash redemption, etc.), would you agree with the firm?

I kinda think this is one of those heavy fact-intensive situations. I also think that if the accounting firm is proposing the cash distribution position, then OP’s client should attempt to get up with the owners of the existing partnership, explain the situation, and see if it can be resolved in OP client’s favor. And if everyone agrees to the distribution route, and if the documentation is ambiguous, OP should see if it can be redone. That’s how I’d approach this situation. At present, it seems OP is just going along with what the accountant is telling him. That much is clear. I wouldn’t do that if that will create an immediate tax consequence that could be avoided. So that would be my advice to the OP. This path especially makes sense if existing partnership isn’t harmed by property distribution treatment.

With that said, if things can’t get favorably resolved, then I’d seriously consider going with Inconsistent Treatment if enough info is available for New Partnership to book things up that way.

To be clear, we do not know that the accounting firm views this as a cash distribution and cash purchase. That was a theory floated by the OP.

Well, OP did say this in Post #16:

Correct. The CPA on the Parternship Entity side told me that they plan to issue a final K-1 showing that amount as a distribution.

And then there’s all the stuff in Post #27:

A's entity mentioned above* will receive a K1 that shows the amount of the equity exchanged in the sale treated as a distribution. The equity in the transaction is valued at $1,014,023. This distribution will put his capital account in a negative position of $324,573. I do not know his situation on loss-carryforwards so this may be offset if he has some, but otherwise would be treated as a LTCG if the entity took the prior year losses.

We know the accountants plan to treat the exchange of partnership equity for LLC equity as a distribution. I don’t think they have said anything to suggest that they are treating the same as a cash distribution.

We know the accountants plan to treat the exchange of partnership equity for LLC equity as a distribution. I don’t think they have said anything to suggest that they are treating the same as a cash distribution.

…except the comment about gain recognition. And the fact that they plan on using a value number, rather than a basis number. Those comments are very suggestive to me.

But OP can just ask…and take the advice I offered up in #42…or not. And in the second sentence of that Post, I used the word “if.”