Taxation
Ca. Tax Lawyer 2017, VOLUME 26, NUMBER 1
Content
- Contents
- Legislative Proposal for Infusing Guaranteed Fairness in Tax Administration by Allowing Partial Prepayment Judicial Review of Ftb-proposed Personal Income and Franchise Tax Deficiencies
- Masthead
- Proposal to Permit Liability Netting for Partnerships Subject to Involuntary Conversion
- Bar Business
- Taxation Section 2016-2017 Leadership Directory
- The 2016 Joanne M. Garvey Award Acceptance Speech
- Gap Between Tax and Sanctions Law Blocks Lifesaving Aid
- 2016 Annual Meeting of the California Tax Bar & California Tax Policy Conference Report
- Honorable Marshall Whitley (Ret.) Honored With the 2016 Joanne M. Garvey Award
- Visiting the Committees
- The 2016 Benjamin F. Miller Award Acceptance Speech
- Constructive Receipt Tax Rules Every Lawyer Should Know
- Separation of the Sections from the State Bar
- Message from the Chair
- Nathan Hochman Honored With the 2016 V. Judson Klein Award
- Charles Moll Honored With the 2016 Benjamin F. Miller Award
Proposal to Permit Liability Netting for Partnerships Subject to Involuntary Conversion1
By Veronica Long2
EXECUTIVE SUMMARY
Internal Revenue Code ("IRC") section 1033 provides for the deferral of gain recognition where property is involuntarily converted and the taxpayer reinvests the conversion proceeds in similar replacement property. The purpose of section 1033 is to defer gain recognition when taxpayers use conversion proceeds to replace property, without subjecting them to unanticipated tax liability.
When a partnership uses conversion proceeds to purchase replacement property, there is no gain where the partnership pays off a liability on the converted property and takes out a similar liability on the replacement property. However, under the same facts, Revenue Ruling 81-242 requires partners to recognize gain in an involuntary conversion where their share of liability relief exceeds their basis in the partnership.3 Section 1033 is a gain deferral statute intended to allow taxpayers to put themselves in the same position as they were pre-involuntary conversion, but Revenue Ruling 81-242 conflicts with this purpose by requiring taxpayers to recognize gain and leaving taxpayers with less funds to purchase replacement property. This result is unique to partners because individual taxpayers are not required to recognize gain under the same facts. Additionally, sections 1033 and 1031 are very similar gain deferral provisions, with generally similar results. However, section 1031 allows taxpayers to defer gain under these circumstances while section 1033 does not.