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Super-Recognition and the Return-to-Sender Exception: The Federal Income Tax Problems of Liquidating the Family Limited Partnership

35 Pages Posted: 23 Aug 2006  

Samuel A. Donaldson

Georgia State University College of Law

Abstract

This article discusses three income tax rules that can cause partners to recognize gain for federal income tax purposes upon the liquidation of a family limited partnership: §§ 704(c)(1)(B), 731(c), and 737. From a policy perspective, the application of these rules to traditional family limited partnerships creates two problems. These problems are illustrated through the use of a hypothetical case study.

The first problem (which arises where the partnership holds loss property) is that of super-recognition, where a partner recognizes more gain from the liquidation than he or she would recognize upon a sale of his or her partnership interest. The article argues that while super-recognition is appropriate in the context of a traditional partnership, it is not appropriate in the context of the typical family limited partnership formed for estate planning purposes.

The second problem relates to the return-to-sender exception, which permits a partnership to distribute property back to the contributing partner without forcing the contributing partner to recognize gain under these rules. Regulations expressly extend the return-to-sender exception to a contributing partner's assignee for purposes of §704(c)(1)(B), but the regulations are ominously quiet as to whether assignees of a contributing partner are spared from the other two rules. The article argues that the return-to-sender exception should be extended to the assignees of a contributing partner for all purposes.

Keywords: family limited partnership, liquidation, tax policy, distributions, partnership, estate planning

JEL Classification: H25, H24

Suggested Citation

Donaldson, Samuel A., Super-Recognition and the Return-to-Sender Exception: The Federal Income Tax Problems of Liquidating the Family Limited Partnership. Capital University Law Review, Vol. 35, p. 1, 2006. Available at SSRN: https://ssrn.com/abstract=925991

Samuel Donaldson (Contact Author)

Georgia State University College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States

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