Checklist for gifts of Limited Partnership Interests

Before accepting a gift of a limited partnership interest (LPI), the charity should examine the partnership agreement carefully.  Each limited partnership agreement, though bearing certain common characteristics, varies with the nature of the partnership.  Although the Revised Uniform Limited Partnership Act (RULPA) limits a limited partner’s liability to outside creditors to his/her investment in the partnership, the charity as potential donee should ask certain questions:

1.  What amount of capital is the donor committed to contribute to the partnership?

2.  Has the donor contributed the full amount for which he/she is committed?

3.  If the donor has not fully contributed, what will the consequences be to the charity?

If the donor has not fully contributed, it may be wise for the charity to ask the donor for an agreement whereby he/she would fund the further contribution when called, perhaps by means of a charitable contribution in the required amount payable by the charity.  An additional possibility is for the charity to request the donor to execute a “hold harmless” agreement for any amounts the charity is required to pay to the partnership under the terms of the partnership agreement.

The charity should also consider whether future amounts may become due and owing because of liquidation or dissolution, bankruptcy, excessive liability claims by outside parties and other claims that may adversely affect the charity.  It is important for the charity to determine that the partnership agreement actually creates the same limits on liability as the RULPA provides.

The charity should receive and review financial statements to determine:

1.  The economic liability of the partnership.

2.  Whether or not it has reached its crossover point.

3.  Whether the income the charity receives will be characterized as unrelated business income (UBI).

To make an accurate determination of the financial status of the partnership, the charity should arrange a discussion with the partnership’s accountant.

If the partnership has reached its crossover point, the distributive share of income to the charity may exceed cash payments to the charity.  If such share is UBI, the charity will be taxed on it regardless of the cash it receives from the partnership.  As to burnt-out tax shelters, the charity may be faced with tax liability close or equal to the cash received.  In the worst case, the distributive share of income may create a tax liability exceeding the cash actually distributed.  Gain, including phantom gain when the charity disposes of the LPI, can also present the charity with tax problems.

Questions to ask the donor:

1.  Is the LPI registered with the Securities and Exchange Commission?  Is the interest considered a capital asset?

2.  What portion of the LPI consists of IRC § 751 items that are carved out and treated under the aggregate approach?

3.  What is the fair market value of the LPI?  What is the donor’s share of partnership liabilities?  Are there any ordinary income amounts allocated to the donor’s share?  What is the donor’s adjusted cost basis?

4.  Is there a IRC § 754 election in effect?

Questions to ask the charitable gift planner:

1.  Regarding the bargain sale treatment, is the allowability test positive?  If positive, what part of the gain is treated as ordinary income?

Comments:

Consistent with the general entity nature of partnerships, the donor’s contribution should be viewed as comprising only two parts:  (1) a gift of IRC § 751 property consisting of three separate items (the accounts, machinery and buildings), gain from which is subject to the ordinary income reduction rules; and (2) a gift of a capital asset consisting of the LPI (into which everything else falls, including the land and inventory).  So the IRC § 751 amounts attributable to the charitable gift portion will have reduced the charitable contribution dollar-for-dollar, leaving all remaining property to be treated as a capital asset subject to the 30% of contribution base limitation.

The charity will take a basis in the LPI equal to the greater of:  (1) the amount realized by the donor, or (2) the donor’s adjusted basis in the interest on the date of the gift.

Therefore, regarding IRC § 754, the charity needs to determine when a IRC § 743(b) basis adjustment would increase or decrease the adjusted basis of partnership property as to the charity.  If the result would be an increase, and if the IRC § 754 election is not in effect, the donor may be able to benefit the charity by persuading the general partner or partners to make the election before the donor makes his/her gift.

July 13, 1995 

Source Unknown