No minimum gain chargeback from partnership termination.

In Rev. Rul. 93-90, the IRS found no minimum gain chargeback resulted if a partnership holding property subject to nonrecourse debt terminated through the sale of 50% or more of capital and profits interest.

For several years, two equal partners operated a partnership that had nonrecourse liabilities. Because of nonrecourse deductions taken, the partnership also had partnership minimum gain. One partner sold its interest to a third party. The partnership terminated under Sec. 708(b)(1)(B), which provides for termination if there is a sale or exchange of 50% or more of the total interest in partnership capital and profits within a 12-month period.

On the partnership's termination, one-half of the partnership property was deemed distributed t o each of the partners. Each partner was then deemed to contribute the property received by anew partnership.

Immediately before the deemed distribution, the book capital accounts of the new partners were adjusted to show how the partnership gain would be shared if the partnership property was sold for its fair market value (FMV) immediately before the partnership's termination. Through this revaluation, the partnership's minimum gain was reduced to zero. Ordinarily, this would trigger a minimum gain chargeback.

The ruling provided that under Regs. Sec. 1.704-2(f)(5) no minimum gain chargeback occurs if a partnership terminates under Sec. 708(b)(1)(B). The former partner's share of minimum gain was accounted for at the sale of the partnership interest. The former partner realized an amount that reflected the FMV of the encumbered property, and gain or loss recognized included an amount of gain equal to its share of the partnership minimum gain.

The remaining, original partner's share of the minimum gain was taken into account on the deemed distribution of the partnership assets to the remaining partner, who was deemed to recontribute them to the partnership. The minimum gain was converted into Sec. 704(c) minimum gain equal to the difference between the outstanding nonrecourse debt and the property's adjusted basis (see Regs. Sec. 1.752-3).

The ruling provides a sensible approach to the minimum gain chargeback provisions by recognizing that the remaining partner's minimum gain is merely converted to Sec. 704(c) minimum gain and remains attributable to the partners on disposition of the property. Thus, no gain recognition should occur at this time.

From Dan Baucum, J.D., John Schmalz, J.D., Bob Crnkovich, CPA, J.D., and Sam Starr, CPA, J.D., Washington, D.C.