Did a purchase of the other partner's 50% interest through a single-member LLC create a New Hampshire business tax amount from increased basis in partnership assets?

Plain-English summary

The New Hampshire Department of Revenue Administration ruled that A Limited Partnership had to report gain represented by an increase in its underlying assets' basis on its final NH1065, subject to business profits tax (BPT) and business enterprise tax (BET). Jane Doe, a 50% partner, proposed to form a single-member LLC to buy the other partner's 50% interest for an agreed price. The petitioner argued that any basis increase arose only from a deemed federal partnership termination and should not be added to gross business profits under RSA 77-A:4, XIV.

The Department disagreed. It found a sale of a partnership interest and an increase in the basis of underlying assets on the submitted allocation worksheet. It directed comparison of asset basis before and after the transaction under the Internal Revenue Code provisions then applicable, and required the increase to be reported by the partnership on its final return.

What this means for you

A partnership interest buyout can have a New Hampshire entity-level business tax consequence when it increases the basis of underlying assets. The Department did not accept the petitioner's argument that the federal deemed-termination mechanics removed the increase from RSA 77-A:4, XIV. The ruling does not state a dollar amount; it relies on a worksheet submitted by the petitioner.

The PDF says "Effective 2/1/00" but gives no separate signed issue date. The analysis specifies the federal Code as of December 31, 1998, so check current law before applying it.

Common questions

Q: Who had to report the basis-related gain?
A: The Department said A Limited Partnership had to report it on its final NH1065, subject to BPT and BET.

Q: Did the Department accept the argument that there was no relevant basis increase? A: No. It found that the proposed purchase increased the basis of assets underlying the acquired partnership interest.

Q: Did the ruling decide real estate transfer tax?
A: No. Its formal holding concerns the partnership's final business tax return and the asset-basis increase.

Q: Can another taxpayer rely on this ruling?
A: No. The document applies to this petitioner's represented transaction, and the official archive says other taxpayers may not rely on declaratory rulings.

Citations and source limits

The findings apply RSA 77-A:4, XIV and the Internal Revenue Code provisions cited for the basis comparison; the holding cites RSA 77-A:2 and RSA 77-E:2. The discussion cites Bradley Real Estate Trust v. Taylor, 128 N.H. 441 (1986). The PDF supplies an effective date but no separate signed issue date; the source extraction contains apparent typographic errors in names and “partnership.”

Source

• Official archive: New Hampshire declaratory rulings
• Official PDF: Document #7198

Original ruling text

In the Matter of the Petition of Jane Doe for a Declaratory Ruling

Document #7198, Effective 2/1/00

Pursuant to RSA 541-A:1, IV, 541-A:16, II (b) and Rev 209.01 et seq., Petitioner "Jane Doe" petitioned the Department of Revenue Administration for a ruling on the tax consequences with respect to four parties contemplating a transaction involving the purchase/sale of a 50% partnership interest and subsequent liquidation of the partnership, A Limited Partnership, under Federal IRC 708(b)(1)(B).

Determination Requested by Petitioner

Pursuant to RSA 541-A:1, IV, 541-A:16, II (b) and Rev 209.01 et seq., Petitioner Jane Doe petitioned the Department of Revenue Administration for a ruling on the tax consequences with respect to four parties contemplating a transaction involving the purchase/sale of a 50% partnership interest and subsequent liquidation of the partnership, A Limited Partnership, under Federal IRC 708(b)(1)(B).

Facts Presented by the Petitioner

The Petitioner is a 50% partner. Petitioner will form a single member LLC, Jane Doe LLC, to purchase the 50% interest of her associate partner John Doe for an agreed upon amount of money. It is the intent of the parties that the LLC becomes a Substituted Limited Partner with respect to Mr. Doe’s interest.

Revised Statutes Annotated (RSA) at Issue

RSA 77 A:4 XIV

Rules at Issue

N/A

Other Laws or Rules

N/A

Petitioners’ Representations

To the best of the petitioner’s knowledge and belief the issue which is the subject of this petition:

Is not under examination by the Department; or

Has been examined by the Department; or

Is under consideration by the Department in connection with a return of a prior period; or

Is pending in litigation.

Page 2

Petitioner’s Position

Petitioner represents that pursuant to IRC Section 708, the sale of a 50% interest will terminate the partnership. Thus, all of the assets of the partnership would be deemed to have been distributed to Jane Doe for federal income tax purposes. Since the cash received by Jane Doe would not exceed the basis of her partnership interest, no gain would be recognized on the termination distribution.

No adjustment to the basis of partnership assets would need to be reflected on the partnership’s books or in its final return of income. Allocation among the partnership’s assets of the basis of Jane Doe’s partnership interest, reduced by cash received in the liquidation distribution, would be made pursuant to the provisions of IRC Section 732. Thus, there is no "net increase" in the basis of the partnership assets as contemplated by RSA 77A:5 XIV. There is only an allocation of the purchase price among the partnership assets deemed to have been received by Jane Doe as a result of the deemed termination of the partnership pursuant to IRC sections 708 and 732.

Petitioner believes that no addition to gross business profits is appropriate under RSA 77 A:4 XIV because there would be no "net increase in the basis " through the sale ... of the interest." Instead, the net increase in the basis would result solely as a result of the deemed termination of the partnership under federal income tax rules.

Findings

The New Hampshire Supreme Court has stated that the starting point in the interpretation of the business profits tax statute is the language of the statute itself. Bradley Real Estate Trust v Taylor, 128 N.H. 441 (1986). Accordingly, it is appropriate to turn to the relevant statutory and regulatory language to consider the affect of New Hampshire law upon the facts stipulated by the Petitioner.

RSA 77- A: 4, XIV states:

In the case of a business organization where an interest or beneficial interest in the organization has been sold or exchanged;

An addition to gross business profits of an amount equal to the net increase in the basis of all underlying assets transferred or sold through the sale or exchange of the interest; and

The increase in the basis of the assets shall be determined in accordance with the provisions of the Internal Revenue Code as defined by RSA 77-A:1, XX.

The following is an analysis of the statutory requirements:

(a) Sale or Exchange Requirement.

The proposed transaction meets the sale or exchange requirement since it is based upon the sale of limited partner Jonh Doe’s 50% interest to Jane Doe LLC for an agreed upon amount of money.

(b) Increase in Basis of Underlying Assets.

Page 3

This section is best addressed by answering the following question:

Will the proposed transaction result in an increase in the basis of the assets underlying the purchase of John Doe’s 50% limited partnership interest?

Petitioner submitted a cost allocation worksheet as part of her declaratory ruling request. The worksheet is labeled Allocation of Cost of Partnership Interest to be Acquired from John Doe Among Assets Received by Jane Doe at Termination. The worksheet culminates in an allocation of the money in excess of market value over book value of the assets acquired/received by Jane Doe.

The proposed transaction will result in an increase in the basis of the assets underlying the purchase of John Doe’s 50% limited partnership interest and thereby meets the second requirement of the statute.

(c) Determination of the Increase Under the Code.

The increase in the basis of the assets shall be determined in accordance with the provisions of the Internal Revenue Code of 1986 in effect on December 31, 1998. Here it is necessary to calculate the new basis of the assets used by the business organization after the completion of the transaction and compare such basis to the basis of the assets prior to the transaction. To the extent that there is an increase in the basis of the assets, such basis increase falls within the parameters of the statutory language.

Ruling

Based upon the facts as presented by the petitioner and the statutory provisions discussed above, the Department makes the following ruling:

The gain on the proposed transaction as represented by the increase in basis of the assets as determined in accordance with the provisions of the Internal Revenue Code shall be reported by A Limited Partnership, a New Hampshire parnership,on its final NH1065 subject to NHBPT and NHBET pursuant to RSA 77-A:2 and RSA 77-E:2.

Stanley R. Arnold, Commissioner