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
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: Suggested Citation