Adding a New Cash Partner to an Operating Partnership.

Extract

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Adding a New Cash Partner to an Operating Partnership.

Originally published in 2002

The contribution of cash to an operating partnership should be a simple event raising only minor tax issues. Alas, that is not to be: the tax issues are many and their resolution often difficult. To be sure, the contribution of cash likely will not be a taxable event to the incoming partner, but in a number of circumstances it can be taxable to one or more of the continuing (or exiting) partners. Tax allocations for the year of the cash infusion can be complex and, in fact, even the tax year itself can be affected by the contribution. And last but not least, the incoming partner must examine the control structure of the partnership to ensure that future partnership events can be anticipated and exit strategies can be implemented.

The contribution of cash to an operating partnership is unlikely to be a taxable event to the contributing partner not because section 721 provides for nonrecognition (which it does) but simply because cash always has an adjusted basis equal to face value and so there is no unrealized gain or loss available for recognition. However, it is worth mentioning that this blanket rule applies only to a taxpayer's functional currency. See s.988(c)(1)(C)(i)(I). For most US taxpayers "functional currency" means US dollars. As a result, a transfer of foreign currency can be treated as the disposition of property and so can result in the recognition.

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