Kligfeld Holdings, Kligfeld Corporation, Tax Matters Partner - Page 6

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               Under section 708(b)(1),9 the transfer of more than 50                 
          percent of Holdings 1 from Kligfeld to Corporation within a                 
          single 12-month period arguably triggered a statutory                       
          termination, and the creation of a new partnership also named               
          Kligfeld Holdings (Holdings 2).  This new partnership kept the              
          same taxpayer identification number, but Kligfeld now owned only            
          one percent of the partnership, and Corporation owned the                   
          remaining 99 percent.                                                       
               To understand why this termination of Holdings 1 and                   
          creation of Holdings 2 matters, one must first understand the               
          partnership-tax concepts of “inside basis” and “outside basis”.             
          Inside basis is a partnership’s basis in the property which it              
          owns.  For contributed property, the inside basis is initially              
          equal to the contributing partner’s adjusted basis in the                   
          property.  Sec. 723.  Outside basis is an individual partner’s              
          basis in his interest in the partnership itself.  When a partner            
          contributes both cash and property to a partnership, his outside            

               9 SEC. 708(b).  Termination.--                                         
                         (1) General Rule.--For purposes of                           
                    subsection (a), a partnership shall be                            
                    considered as terminated only if--                                
                       *     *     *     *     *     *     *                          
                              (B) within a 12-month period there                      
                         is a sale or exchange of 50 percent or                       
                         more of the total interest in partnership                    
                         capital and profits.                                         

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Last modified: November 10, 2007