Repeal of technical terminations: What will and will not be missed

By Jose Carrasco, CPA, and Ryan Nodal, CPA, Washington

Editor: Greg A. Fairbanks, J.D., LL.M.

The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, repealed so-called technical terminations under former Sec. 708(b)(1)(B) for partnership tax years beginning after Dec. 31, 2017. This section provided that a partnership shall be considered terminated if within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. As a result, a partnership could terminate for U.S. federal income tax purposes under former Sec. 708(b)(1)(B) but continue, seemingly unchanged, for legal purposes. With the repeal of technical terminations, partnerships can only terminate for U.S. federal income tax purposes if no part of any business, financial operation, or venture continues to be conducted by any of its partners in a partnership (Sec. 708(b)(1), as amended by the TCJA).

If a partnership underwent a technical termination, the following was deemed to occur: The terminating partnership contributed all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership; and, immediately thereafter, the terminated partnership liquidated by distributing interests in the new partnership to the purchaser and the other remaining partners, followed by the continuation of the business by the new partnership or its dissolution and winding up (Regs. Sec. 1.708-1(b)(4)). Given the complexities in the structuring of partnership transactions, technical terminations often created unexpected challenges and, at times, traps for the unwary, yet could also afford potential opportunities for taxpayers and tax practitioners in planning for changes in the ownership of a partnership.

Challenges technical terminations presented

The determination of whether a technical termination was triggered required careful tracking of sales or exchanges of partnership interests. Under Sec. 708(b)(1)(B), partnerships were required to look at consecutive 12-month periods for changes in both capital and profits to determine if a technical termination occurred. This proved to be challenging in years where multiple transfers of interests took place. For example, if the same 49% interest in capital and profits had been transferred multiple times within a 12-month period, then it only counted once and did not cause a technical termination of the partnership. However, if a 20% interest in profits and capital was transferred and six months later another 35% interest (no part of which is made up of the interest in the earlier transfer) was transferred, the partnership would have terminated under former Sec. 708(b)(1)(B).

Upon a technical termination, a partnership was required to file two short-year returns, the first being a final return for the terminating partnership and the second an initial return for the new partnership (Notice 2001-5). This became a common trap for the unwary partnership that did not timely determine that a technical termination occurred. Penalties, including those for late-filed partnership returns or failure to file a partnership return, could arise.

The determination of a partnership's taxable income for each short period in a technical termination year could also prove challenging. Regs. Sec. 1.708-1(b)(3) states that a partnership tax year closes for all partners on the date on which the partnership terminates. This resulted in the closing-of-the-books approach being required to be applied to bifurcate the income, gain, deductions, and losses between the terminating partnership and the new partnership. The proration method was not available in this case, which burdened the partnership with an additional closing of the books and records to account for the technical termination.

Technical terminations could cause unanticipated issues within tiered partnerships. Regs. Sec. 1.708-1(b)(2) states that if the sale or exchange of an interest in a partnership (upper-tier partnership, or UTP) that holds an interest in another partnership (lower-tier partnership, or LTP) results in a termination of the UTP, then the UTP is treated as exchanging its entire interest in the capital and profits of the LTP. Thus, in situations where the UTP owned 50% or more of capital and profits of the LTP, the technical termination of the UTP would trigger a technical termination of the LTP. An LTP would need to be notified by a UTP of its technical termination so that the LTP could determine whether it had terminated and file the necessary short-period returns.

Issues related to tax accounting also arose in a technical termination. A partnership would need to restart the depreciation of its fixed assets under Sec. 168 upon a technical termination (see Sec. 168(i)(7), prior to amendment by the TCJA). A new recovery period, placed-in-service date, and applicable convention were used to depreciate the remaining adjusted basis of the fixed assets the partnership held. Additionally, revenue a partnership had deferred under Rev. Proc. 2004-34 was accelerated and recognized by the terminating partnership in a technical termination.

Opportunities technical terminations provided

Technical terminations did offer taxpayers benefits that were carefully considered in planning opportunities. The new partnership had the ability to make new decisions about accounting methods, tax years, inventory methods, and elections that differed from those of the terminated partnership. Examples of elections included, but were not limited to, the Sec. 754 election to adjust the basis of partnership property, Sec. 704(c) methods for contributions of property to a partnership and revaluations of partnership property, the election to amortize organizational expenditures under Sec. 709, and the Sec. 461(h)(3) recurring-item exception.

Partnerships that had a valid Sec. 754 election in effect could decide whether to make a new election upon a technical termination. Regs. Sec. 1.754-1(c) provides that after a Sec. 754 election is made, it can only be revoked with the consent of the district director for the IRS district in which the partnership's returns are filed. While a continuing partnership would generally have difficulty revoking a Sec. 754 election, a technical termination would terminate a Sec. 754 election but allow any basis adjustments under Sec. 734(b) and Sec. 743(b) made by the terminating partnership to continue in the new partnership.

Additionally, Regs. Sec. 1.708-1(b)(5) provided that with respect to the incoming partner, the Sec. 754 election made by the terminating partnership would remain in effect. This created a potential benefit to both the new partnership and the incoming partner. For example, if a Sec. 754 election would benefit the incoming partner, the terminating partnership could make the election on its final return and calculate a basis adjustment under Sec. 743(b) for the incoming partner, while the new partnership could choose to not make a Sec. 754 election so that basis adjustments would not be required upon future sales or exchanges of partnership interests or certain distributions by the new partnership. This allowed the incoming partner to continue to receive depreciation or other recovery from the Sec. 743(b) adjustment, while at the same time not burdening the new partnership with new basis adjustment calculations for subsequent events.

A new partnership arising from a technical termination could also choose to select a new Sec. 704(c) method that differed from that of the terminating partnership. For example, if the terminating partnership was using the traditional method under Sec. 704(c) to allocate gains, losses, depreciation, or other recovery deductions with respect to built-in gains or losses of contributed or revalued property, the new partnership could choose to select a new method, such as the remedial method, to take into account the remaining built-in gain or loss following the technical termination. This opportunity was seen to provide a partnership the ability to ease its administrative burden in maintaining Sec. 704(c) built-in gains and losses as well as an opportunity for the partners to adjust the manner and timing in which they take into account the effect of the built-in gains and losses in the allocations of taxable income.

What a technical-termination-free future may hold

As previously mentioned, with the repeal of Sec. 708(b)(1)(B), a partnership can only terminate if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. Historically, the IRS has indicated that a partnership continues for tax purposes even when it retains a nominal amount of the continuing business, financial activity, or assets. While it is still possible to structure transactions to achieve some of the benefits that technical terminations offered, the repeal of technical terminations reduces the instances in which a partnership can terminate since a change of a majority ownership no longer risks a termination.

Partnerships and their partners may have to be more creative in structuring transactions if they choose to seek any of the benefits that technical terminations may have provided. For example, a partnership could simulate the deemed assets-over construct of a technical termination and create a tiered partnership structure that may allow the opportunity for the selection of new Sec. 704(c) methods or a Sec. 754 election in a new partnership. With the repeal of technical terminations, choices that partnerships and partners make about methods, elections, and the structuring of new investments may have a longer-lasting effect as the opportunity to make any changes may be far more limited.


Greg Fairbanks, J.D., LL.M., is a tax managing director with Grant Thornton LLP in Washington..

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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