Certain Federal Income Tax Matters. The following summary is a general discussion of certain of the federal income tax consequences of a sale of Units pursuant to the Offer. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, and judicial authority, all as of the date of the Offer. All of the foregoing is subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder in light of such Unit Holder's specific circumstxxxxx, nor does it describe any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer may be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS SHOULD CONSULT THEIR RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNIT HOLDER OF SELLING UNITS PURSUANT TO THE OFFER. In general, a Unit Holder will recognize gain or loss on a sale of Units pursuant to the Offer equal to the difference between (i) the Unit Holder's "amount realized" on the sale and (ii) the Unit Holder's adjusted tax basis in the Units sold. The amount of a Unit Holder's adjusted tax basis in a Unit will vary depending upon the Unit Holder's particular circumstances, and it will include the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The "amount realized" with respect to a Unit will be a sum equal to the amount of cash received by the Unit Holder for the Unit pursuant to the Offer (that is, the purchase price), plus the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The gain or loss recognized by a Unit Holder on a sale of a Unit pursuant to the Offer generally will be treated as a capital gain or loss if the Unit was held by the Unit Holder as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary gain or loss. It is possible that the basis allocation rules of Code Section 751 may result in a Unit Holder's recognizing ordixxxx income with respect to the portion of the Unit Holder's amount realized on the sale of a Unit that is attributable to such items while recognizing a capital loss with respect to the remainder of the Unit. Capital losses are deductible only to the extent of capital gains, except that taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-forward period is five years and an individual taxpayer can carry forward such losses indefinitely). Under Code Section 469, individuals, S corporations and certain closely-held corporations generally are able to deduct "passive activity losses" in any year only to the extent of the person's passive activity income for that year. Substantially all post-1986 losses of Unit Holders from the Partnership are passive activity losses. Unit Holders may have "suspended" passive activity losses from the Partnership (i.e., post-1986 net taxable losses in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder sells less than all of its interest in the Partnership pursuant to the Offer, a passive loss recognized by that Unit Holder can be currently deducted (subject to the other applicable limitations) to the extent of the Unit Holder's passive income from the Partnership for that year plus any other net passive activity income for that year, and any gain recognized by a Unit Holder upon the sale of Units can be offset by the Unit Holder's current or "suspended" passive activity losses (if any) from the Partnership and other sources. If, on the other hand, a Unit Holder sells 100 percent of its interest in the Partnership pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of the Units will be offset first against any net passive activity income from the Unit Holder's other passive activity investments, and the balance of any net passive activity losses attributable to the Partnership will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder from its other "ordinary" income (subject to any other applicable limitations). If more than 1,180 Units are Properly Tendered, some tendering Unit Holders may not be able to sell 100 percent of their Units pursuant to the Offer because of proration of the number of Units to be purchased by the Purchaser, unless the Purchaser amends the Offer to increase the number of Units to be purchased.
Appears in 1 contract
Certain Federal Income Tax Matters. The following summary is a general discussion of certain of the federal income tax consequences of a sale of Units pursuant to the Offer. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, and judicial authority, all as of the date of the Offer. All of the foregoing is are subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder Unitholder in light of such Unit HolderUnitholder's specific circumstxxxxxcircumstances or to certain types of Unitholders subject to special treatment under the federal income tax laws (for example, foreign persons, dealers in securities, banks, insurance companies and tax-exempt organizations), nor (except as otherwise expressly indicated) does it describe any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer may will be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS UNITHOLDERS SHOULD CONSULT THEIR 19 24 RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNIT HOLDER EACH SUCH UNITHOLDER OF SELLING UNITS PURSUANT TO THE OFFER. In general, a Unit Holder Unitholder will recognize gain or loss on a sale of Units pursuant to the Offer equal to the difference between (i) the Unit HolderUnitholder's "amount realized" on the sale and (ii) the Unit HolderUnitholder's adjusted tax basis in the Units sold. The amount of a Unit HolderUnitholder's adjusted tax basis in a Unit such Units will vary depending upon the Unit HolderUnitholder's particular circumstances, and it will include the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The "amount realized" with respect to a Unit will be a sum equal to the amount of cash received by the Unit Holder for Unitholder of the Unit pursuant to the Offer (that is, the purchase pricePurchase Price), plus the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The gain or loss recognized by a Unit Holder Unitholder on a sale of a Unit pursuant to the Offer generally will be treated as a capital gain or loss if the Unit was held by the Unit Holder Unitholder as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term That capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary long-term capital gain or loss. It is possible that loss if the basis allocation rules of Code Section 751 may result in a Unit Holdertendering Unitholder's recognizing ordixxxx income with respect to the portion of holding period for the Unit Holder's amount realized on exceeds one year. Under current law, long-term capital gains of individuals are taxed at a maximum marginal federal income tax rate of 28 percent, whereas the sale maximum marginal federal income tax rate for ordinary income of a Unit that such persons is attributable to such items while recognizing a capital loss with respect to the remainder of the Unitapproximately 39.6 percent. Capital losses are deductible only to the extent of capital gains, except that individual taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-forward period is five years and an individual taxpayer can carry forward such losses indefinitely). If any portion of the amount realized by a Unitholder is attributable to "unrealized receivables" (which includes depreciation recapture) or "substantially appreciated inventory" as defined in Code Section 751, then a portion of the Unitholder's gain or loss may be ordinary rather than capital. A tendering Unitholder will be allocated a pro rata share of the Partnership's taxable income or loss for the year of the sale with respect to the Units sold in accordance with the provisions of the Partnership Agreement concerning transfers of Units. Such allocation and any cash distributed by the Partnership to the Unitholder for that year will affect the Unitholder's adjusted tax basis in Units and, therefore, the amount of such Unitholder's taxable gain or loss upon a sale of Units pursuant to the Offer. Under Code Section 469, individuals, S corporations individuals and certain closely-held types of corporations generally are able to deduct "passive activity losses" in any year only to the extent of the person's passive activity income for that year. Substantially all post-1986 losses of Unit Holders Unitholders from the Partnership are passive activity losses. Unit Holders Unitholders may have "suspended" passive activity losses from the Partnership (i.e., post-1986 net taxable losses in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder Unitholder sells less than all of its interest in the Partnership Units pursuant to the Offer, a passive loss recognized by that Unit Holder Unitholder can be currently deducted (subject to the other applicable limitations) to the extent of the Unit HolderUnitholder's passive income from the Partnership for that year plus any other net passive activity income for that year, and any a gain recognized by a Unit Holder Unitholder upon the sale of Units can be offset by the Unit Holder's Unitholders' current or "suspended" passive activity losses (if any) from the Partnership and other sources. If, on the other hand, a Unit Holder Unitholder sells 100 percent of its interest in the Partnership Units pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of the Units will be offset first against any other net passive gain to the Unitholder from the sale of the Units and any other net passive activity income from the Unit Holder's other passive activity investments, and the balance of any "suspended" net passive activity losses attributable to from the Partnership Units will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder Unitholder from its other "ordinary" income (subject to any other applicable limitations). If Section 708(b) of the Code (and related Treasury Department regulations) provides that a partnership terminates for federal income tax purposes if there is a sale or exchange of 50 percent or more than 1,180 Units are Properly Tenderedof the total interests in the partnership capital and profits within a twelve-month period. Accordingly, some tendering Unit Holders may not be able to sell 100 percent of their Units it is possible that transfers made pursuant to the Offer because of proration combined with others transfers within a twelve-month period could cause a termination of the number Partnership for income tax purposes. In the event of Units a termination, the Partnership would 20 25 be treated for income tax purposes as if it had made a liquidating distribution of its assets to be purchased the remaining partners and the new partners, followed by a recontribution of the assets to a "new" partnership. The Purchaser believes that this distribution and recontribution of assets should not result in the recognition of current gain or loss by the Purchaserpartners. A partner receiving a liquidating distribution from a partnership recognizes gain only to the extent that the cash distributed to such partner exceeds the tax basis that the distributee partner has in its partnership interest. The "new" partnership created upon the deemed recontribution of assets by the partners would be treated as having acquired its assets on the date of the deemed recontribution. A new depreciation recovery period would begin on such date, unless and the Purchaser amends Partnership would be required to depreciate its properties over a greater period of time than is currently being used; accordingly, the Offer aggregate present value of the Partnership's future depreciation deductions would be reduced. In addition, a Section 708(b) termination of the Partnership could require the Partnership to increase make certain complex allocations (pursuant to Sections 737 and 704(c) of the number Code) of Units future Partnership income and loss to be purchased.take into account the amount of gain or loss inherent in each Partner's share of each asset that is deemed to have been recontributed to the Partnership following the Section 708(b)
Appears in 1 contract
Certain Federal Income Tax Matters. The following summary is a general discussion of certain of the federal income tax consequences of a sale of Units pursuant to the Offer. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, and judicial authority, all as of the date of the Offer. All of the foregoing is are subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder in light of such Unit Holder's specific circumstxxxxxcircumstances, nor does it describe any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer may will be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS SHOULD CONSULT THEIR RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNIT HOLDER OF SELLING UNITS PURSUANT TO THE OFFER. .. In general, a Unit Holder will recognize gain or loss on a sale of Units pursuant to the Offer equal to the difference between (i) the Unit Holder's "amount realized" on the sale and (ii) the Unit Holder's adjusted tax basis in the Units sold. The amount of a Unit Holder's adjusted tax basis in a Unit will vary depending upon the Unit Holder's particular circumstances, and it will include the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The "amount realized" with respect to a Unit will be a sum equal to the amount of cash received by the Unit Holder for the Unit pursuant to the Offer (that is, the purchase pricePurchase Price), plus the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The gain or loss recognized by a Unit Holder on a sale of a Unit pursuant to the Offer generally will be treated as a capital gain or loss if the Unit was held by the Unit Holder as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary gain or loss. It is possible that the basis allocation rules of Code Section 751 may result in a Unit Holder's recognizing ordixxxx income with respect to the portion of the Unit Holder's amount realized on the sale of a Unit that is attributable to such items while recognizing a capital loss with respect to the remainder of the Unit. Capital losses are deductible only to the extent of capital gains, except that taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-forward period is five years and an individual taxpayer can carry forward such losses indefinitely). Under Code Section 469, individuals, S corporations and certain closely-held corporations generally are able to deduct "passive activity losses" in any year only to the extent of the person's passive activity income for that year. Substantially all post-1986 losses of Unit Holders from the Partnership are passive activity losses. Unit Holders may have "suspended" passive activity losses from the Partnership (i.e., post-1986 net taxable losses in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder sells less than all of its interest in the Partnership pursuant to the Offer, a passive loss recognized by that Unit Holder can be currently deducted (subject to the other applicable limitations) to the extent of the Unit Holder's passive income from the Partnership for that year plus any other net passive activity income for that year, and any gain recognized by a Unit Holder upon the sale of Units can be offset by the Unit Holder's current or "suspended" passive activity losses (if any) from the Partnership and other sources. If, on the other hand, a Unit Holder sells 100 percent of its interest in the Partnership pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of the Units will be offset first against any net passive activity income from the Unit Holder's other passive activity investments, and the balance of any net passive activity losses attributable to the Partnership will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder from its other "ordinary" income (subject to any other applicable limitations). If more than 1,180 Units are Properly Tendered, some tendering Unit Holders may not be able to sell 100 percent of their Units pursuant to the Offer because of proration of the number of Units to be purchased by the Purchaser, unless the Purchaser amends the Offer to increase the number of Units to be purchased.
Appears in 1 contract
Samples: Offer to Purchase (Everest Tax Credit Investors LLC)
Certain Federal Income Tax Matters. The following summary is a general discussion of certain of the federal income tax consequences of a sale of Units pursuant to the Offer. The This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, practice and procedures and judicial authority, all as of the date of the Offer. All of the foregoing is are subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder Limited Partner in light of such Unit HolderLimited Partner's specific circumstxxxxxcircumstances or to certain types of Limited Partners subject to special treatment under the federal income tax laws (for example, foreign persons, dealers in securities, banks, insurance companies and tax-exempt organizations), nor (except as otherwise expressly indicated) does it describe any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer will be taxable transactions for federal income tax purposes, and also may be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS LIMITED PARTNERS SHOULD CONSULT THEIR RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNIT HOLDER EACH SUCH LIMITED PARTNER OF SELLING UNITS PURSUANT TO THE OFFER. In general, a Unit Holder Limited Partner will recognize gain or loss on a sale of Units pursuant to the Offer equal to the difference between (i) the Unit HolderLimited Partner's "amount realized" on the sale and (ii) the Unit HolderLimited Partner's adjusted tax basis in the Units sold. The amount of a Unit HolderLimited Partner's adjusted tax basis in a Unit such Units will vary depending upon the Unit HolderLimited Partner's particular circumstances, and it will include the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The "amount realized" with respect to a Unit will be a sum equal to the amount of cash received by the Unit Holder Limited Partner for the Unit pursuant to the Offer (that is, the purchase price), Purchase Price) plus the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The gain or loss recognized by a Unit Holder Limited Partner on a sale of a Unit pursuant to the Offer generally will be treated as a capital gain or loss if (as is generally expected to be the case) the Unit was held by the Unit Holder Limited Partner as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term That capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary long-term capital gain or loss if the tendering Limited Partner's holding period for the Units exceeds 18 months. If the tendering Limited Partner's holding period for the Units exceeds one year but not more than 18 months, the capital gain or loss will be treated as mid-term capital gain or loss. It Under current law, long-term and mid-term capital gains of individuals and other non-corporate taxpayers are taxed at marginal federal income tax rates of 20% and 28%, respectively, whereas the maximum marginal federal income tax rate for ordinary income of such persons is possible that the basis allocation rules of Code Section 751 may result in a Unit Holder's recognizing ordixxxx income with respect to the portion of the Unit Holder's amount realized on the sale of a Unit that is attributable to such items while recognizing a capital loss with respect to the remainder of the Unit39.6%. Capital losses are deductible only to the extent of capital gains, except that non-corporate taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-carry forward period is five years and an individual a non- corporate taxpayer can carry forward such losses indefinitely); in addition, a corporation is permitted to carry back excess capital losses to the three preceding taxable years, provided the carryback does not increase or produce a net operating loss for any of those years. If any portion of the amount realized by a Limited Partner is attributable to "unrealized receivables" (which includes depreciation recapture) or "inventory" as defined in Code Section 751, then a portion of the Limited Partner's gain or loss may be ordinary rather than capital. A tendering Limited Partner will be allocated a pro rata share of the Partnership's taxable income or loss for the year of sale with respect to the Units sold in accordance with the provisions of the Partnership Agreement concerning transfers of Units. Such allocation and any cash distributed by the Partnership to the Limited Partner for that year will affect the Limited Partner's adjusted tax basis in Units and, therefore, the amount of such Limited Partner's taxable gain or loss upon a sale of Units pursuant to the Offer. Under Code Section 469, individuals, S corporations and certain closelya non-held corporations corporate taxpayer or personal service corporation generally are able to can deduct "passive activity losses" in any year only to the extent of the person's passive activity income for that year. Closely held corporations may not offset such losses against so-called "portfolio" income. Substantially all post-1986 losses of Unit Holders Limited Partners from the Partnership are passive activity losses. Unit Holders Limited Partners may have "suspended" passive activity losses from the Partnership (i.e., post-1986 net taxable losses in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder Limited Partner sells less than all of its interest in the Partnership his Units pursuant to the Offer, a passive loss recognized by that Unit Holder Limited Partner can be currently deducted (subject to the other applicable limitations) to the extent of the Unit HolderLimited Partner's passive income from the Partnership for that year plus any other net passive activity income for that year, and any a gain recognized by a Unit Holder Limited Partner upon the sale of Units can be offset by the Unit HolderLimited Partner's current or "suspended" passive activity losses (if any) from the Partnership and other sources. If, on the other hand, a Unit Holder Limited Partner sells 100 percent 100% of its interest in the Partnership his Units pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of the Units will be offset first against any other net passive gain to the Limited Partner from the sale of the Units and any other net passive activity income from the Unit Holder's other passive activity investments, and the balance of any "suspended" net passive activity losses attributable to from the Partnership Units will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder Limited Partner from its his other "ordinary" income (subject to any other applicable limitations). If more A tendering Limited Partner must sell all of his Units to receive these tax benefits. Because the Offer is being made for less than 1,180 all of the outstanding Units, there can be no assurance that a Limited Partner which tenders all of his Units are Properly Tendered, some tendering Unit Holders may not be able to will in fact sell 100 percent all of their his Units pursuant to the Offer because of proration Offer. Limited Partners (other than tax-exempt persons, corporations and certain foreign persons) who tender Units may be subject to 31% backup withholding unless those Limited Partners provide a taxpayer identification number ("TIN") and certify that the TIN is correct or properly certify that they are awaiting a TIN. A Limited Partner may avoid backup withholding by properly completing and signing the Substitute Form W-9 included as part of the number Assignment of Partnership Interest. If a Limited Partner who is subject to backup withholding does not properly complete and sign the Substitute Form W-9, the Purchaser will withhold 31% from payments to such Limited Partner. A Limited Partner who tenders Units must file an information statement with his federal income tax return for the year of the sale which provides the information specified in Treasury Regulation Section 1.751-1(a)(3). The selling Limited Partner also must notify the Partnership of the date of the transfer and the names, addresses and TINs of the transferor and transferee within 30 days of the date of the transfer (or, if earlier, by January 15 of the following calendar year). Xxxx realized by a foreign Limited Partner on the sale of a Unit pursuant to the Offer will be purchased subject to federal income tax. Under Code Section 1445, the transferee of an interest held by a foreign person in a partnership which owns United States real property generally is required to deduct and withhold a tax equal to 10% of the Purchaseramount realized on the disposition. In order to comply with this requirement, the Purchaser will withhold 10% of the amount realized by a tendering Limited Partner unless the Purchaser amends Limited Partner properly completes and signs the Offer to increase FIRPTA Affidavit included as part of the number Assignment of Units to Partnership Interest certifying the Limited Partner's TIN, that such Limited Partner is not a foreign person and the Limited Partner's address. Amounts withheld would be purchasedcreditable against a foreign Limited Partner's federal income tax liability and, if in excess thereof, a refund could be obtained from the Internal Revenue Service by filing a U.S. income tax return.
Appears in 1 contract
Samples: Offer to Purchase (American Real Estate Holdings L P)
Certain Federal Income Tax Matters. The following summary is a general discussion of certain of the federal income tax consequences of considerations that should be relevant to you in connection with a sale of Units pursuant to the Offerunits in our offer. The This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, practice and procedures and judicial authority, all as of the date of the Offerour offer. All of the foregoing is are subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder you in light of such Unit Holder's your specific circumstxxxxxcircumstances or to certain types of investors subject to special tax rules (for example, dealers in securities, banks, insurance companies and, except as discussed below, foreign and tax-exempt investors), nor does it describe discuss any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer units in our offer will be taxable transactions for federal income tax purposes, and may also be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS Your resulting tax consequences will depend, in part, on your personal tax situation. YOU SHOULD CONSULT THEIR RESPECTIVE YOUR OWN TAX ADVISORS ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES CONSEQUENCES, INCLUDING STATE AND LOCAL TAX CONSEQUENCES, TO THE UNIT HOLDER YOU OF SELLING UNITS PURSUANT TO THE IN OUR OFFER. In general, a Unit Holder You will recognize gain or loss on a sale of Units pursuant to the Offer units in our offer equal to the difference between (i) the Unit Holder's your "amount realized" on the sale and (ii) the Unit Holder's your adjusted tax basis in the Units units sold. The amount of a Unit Holder's your adjusted tax basis in a Unit will vary depending upon the Unit Holder's your particular circumstances, but generally will equal your cash investment in your units, increased by your share of your partnership's income and it will include the amount gain and decreased by your share of the Partnershipyour partnership's liabilities allocable to the Unit (as determined under Code Section 752)losses and distributions. The "amount realized" with respect to a Unit unit sold will be a sum equal to the amount of cash received by the Unit Holder you for the Unit pursuant to the Offer (that is, the purchase price), unit plus the amount of the Partnershipyour partnership's liabilities that are allocable to the Unit (as determined under Code Section 752)unit. The You will be allocated a share of your partnership's taxable income or loss with respect to the units sold by you in accordance with the provisions of your partnership's limited partnership agreement concerning transfers of units. Such allocations and any cash distributed by your partnership to you or for your benefit will affect your adjusted tax basis in your units and, therefore, your taxable gain or loss recognized upon a sale of units in our offer. In this regard, if you tender your units, you will be allocated a pro rata share of taxable income (or loss) with respect to your units sold in our offer through the effective date of such sale, but we will receive (or reduce the purchase price for) all future distributions made with respect to your units. Based on the results of your partnership's operations through June 30, 1999, and without giving effect to any partnership transactions or any distributions thereafter, we estimate that if you sell your units to us and you acquired your units in your partnership's original offering, you will recognize a loss for federal income tax purposes of ($111) per unit sold. The table appearing in the section headed "Establishment of Purchase Price" provides estimates for a unit acquired in your partnership's original offering of the net after-tax benefit (cost) of accepting our offer. The table also provides estimates of the present value (utilizing discount rates of 12% for the initial terms) of the net after-tax benefit (cost) of holding a unit through the end of the initial terms of the leases encumbering your partnership's properties followed by a Unit Holder sale of the property. The tax estimates in the table utilize federal income tax rates of 25% on long-term capital gain and 39.6% on other income, assumes that your tax loss on a sale of your units in our offer can be used to offset capital gain otherwise taxable at a federal income tax rate of 20%, and do not give effect to any state or local taxes. OUR ESTIMATES OF THE ANNUAL TAXABLE INCOME (LOSS), FEDERAL INCOME TAX BENEFIT (COST) AND CASH DISTRIBUTIONS PER UNIT OVER THESE PERIODS ARE AVAILABLE UPON REQUEST. Your gain or loss on a sale of a Unit pursuant to the Offer unit in our offer generally will be treated as a capital gain or loss if you held the Unit was held by the Unit Holder unit as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term Your capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary long-term capital gain or lossloss assuming your holding period for the unit exceeds 12 months. It is possible that Under current law, capital gains and losses of individuals and non-corporate taxpayers are taxed under tax rules different from the basis allocation rules applicable to corporations. Long-term capital gains of Code Section 751 may result in individuals and other non-corporate taxpayers are taxed at a Unit Holder's recognizing ordixxxx maximum federal income with respect to the portion tax rate of the Unit Holder's amount realized on the sale of a Unit that is 20%; however, their gain attributable to straight-line depreciation deductions is taxed at a federal income tax rate of 25%. The maximum federal income tax rate for other income of such items while recognizing a capital loss with respect to the remainder of the Unitpersons is 39.6%. Capital losses are deductible only to the extent of capital gains, except that non-corporate taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against their ordinary income. An individual's long-term capital losses in excess of his long-term capital gains can offset his short-term capital gains on which he would otherwise be subject to tax at the same federal income tax rates as his ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-forward carryforward period is five years and an individual a non-corporate taxpayer can carry forward such losses indefinitely); in addition, corporations, but not non-corporate taxpayers, are allowed to carry back excess capital losses to the three preceding taxable years. Under Code Section 469, individuals, S corporations and certain closely-held corporations generally are able special tax rules applicable to deduct "passive activity losses," in any year only if you are a non-corporate taxpayer or closely held corporation, you generally cannot use your losses from your partnership to the extent of the person's offset your non-passive activity income for that yearincome. Substantially all post-1986 losses of Unit Holders from the Partnership are passive activity losses. Unit Holders As a result, if you did not acquire your units in your partnership's original offering, you may have "suspended" suspended passive activity losses from the Partnership (i.e.your partnership. However, post-1986 net taxable losses if you sell all your units in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder sells less than all of its interest in the Partnership pursuant to the Offerour offer, a passive loss recognized by that Unit Holder can be currently deducted (subject to the other applicable limitations) to the extent of the Unit Holder's passive income from the Partnership for that year plus any other net passive activity income for that year, and any gain recognized by a Unit Holder upon the sale of Units can be offset by the Unit Holder's current or "suspended" then your suspended passive activity losses (if any) from the Partnership and other sources. Ifyour partnership, as well as any loss you recognize on the other hand, a Unit Holder sells 100 percent of its interest in the Partnership pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of your units in our offer, generally could be deducted by you in the Units will be offset first against any net passive activity income from the Unit Holder's other passive activity investments, and the balance year of any net passive activity losses attributable to the Partnership will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder from its other "ordinary" income sale (subject to any other applicable limitations). If more than 1,180 Units you recognize a loss on the sale of your units in our offer but do not sell all of your units, then your loss on the sale and your suspended passive activity losses (if any) from your partnership would be deductible by you only to the extent of your passive activity income from your partnership or from other sources. If you recognize a gain on the sale of your units in our offer but do not sell all of your units, then any suspended passive activity losses from your partnership in excess of your gain recognized on the sale could not be deducted by you (except to the extent of your passive activity income from other sources) until your remaining units are Properly Tenderedsold. In order to avoid liability for federal estimated tax penalties, some tendering Unit Holders an individual generally is required to make quarterly estimated tax payments on account of his annual tax liability. Penalties generally may not be avoided by the individual's paying at least 90% of his taxes due for the current year or a percentage of his prior year's tax equal to 105% if the preceding tax year is 1998, 106% if the preceding tax year is 1999 or 2000, 112% if the preceding tax year is 2001 and 110% if the preceding tax year is 2002 or thereafter. Accordingly, if you are an individual and you elect to pay estimated taxes for 1999 equal to 105% of your tax liability for 1998, you would be able to defer payment of taxes associated with a sale of your units until April, 2000, whereas if you elect to pay estimated taxes for 1999 equal to 90% of your estimated tax liability for 1999, you will have to make quarterly estimated tax payments on account of your tax liability on a sale of your units in 1999. Your partnership's properties are debt-financed. Accordingly, even if you are a tax-exempt investor and your units are not subject to acquisition indebtedness incurred by you, a sale of your units in our offer at a gain (as determined for income tax purposes) may result in your recognition of unrelated business taxable income. If you sell 100 percent your units in our offer at a loss, you may be entitled to offset a portion of their Units pursuant your loss against your capital gain unrelated business taxable income (if any) from other sources subject to other applicable limitations (including, if you are not a corporation or are closely held, the Offer because passive activity loss limitation described above). You should consult with your own professional tax advisor concerning the tax results to you of proration selling your units in our offer. In addition to federal income tax, you may be subject to state and local taxes on your gain (if any) on a sale of the number your units in our offer. You should consult with your own professional tax advisor concerning your state and local tax consequences on a sale of Units to be purchased by the Purchaser, unless the Purchaser amends the Offer to increase the number of Units to be purchasedyour units.
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Certain Federal Income Tax Matters. The following summary is a general discussion of certain of the federal income tax consequences of a sale of Units pursuant to the Offer. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations thereunder, administrative rulings, and judicial authority, all as of the date of the Offer. All of the foregoing is subject to change, and any such change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular Unit Holder in light of such Unit Holder's specific circumstxxxxx, nor does it describe any aspect of state, local, foreign or other tax laws. Sales of Units pursuant to the Offer may be taxable transactions under applicable state, local, foreign and other tax laws. UNIT HOLDERS SHOULD CONSULT THEIR RESPECTIVE TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNIT HOLDER OF SELLING UNITS PURSUANT TO THE OFFER. In general, a Unit Holder will recognize gain or loss on a sale of Units pursuant to the Offer equal to the difference between (i) the Unit Holder's "amount realized" on the sale and (ii) the Unit Holder's adjusted tax basis in the Units sold. The amount of a Unit Holder's adjusted tax basis in a Unit will vary depending upon the Unit Holder's particular circumstances, and it will include the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The "amount realized" with respect to a Unit will be a sum equal to the amount of cash received by the Unit Holder for the Unit pursuant to the Offer (that is, the purchase price), plus the amount of the Partnership's liabilities allocable to the Unit (as determined under Code Section 752). The gain or loss recognized by a Unit Holder on a sale of a Unit pursuant to the Offer generally will be treated as a capital gain or loss if the Unit was held by the Unit Holder as a capital asset. Gain with respect to Units held for more than one year will be taxed, for federal income tax purposes, at a maximum long-term capital gain rate of 15 percent. Gain with respect to Units held one year or less will be taxed at ordinary income rates. It should also be noted that the Taxpayer Relief Act of 1997 imposed depreciation recapture of previously deducted straight-line depreciation with respect to real property at a rate of 25 percent (assuming eligibility for long-term capital gain treatment). A portion of the gain realized by a Unit Holder with respect to a disposition of the Units may be subjected to this 25 percent rate to the extent that the gain is attributable to depreciation recapture inherent in the properties of the Partnership. If any portion of the amount realized by a Unit Holder is attributable to such Unit Holder's share of "unrealized receivables" or "substantially appreciated inventory items" as defined in Code Section 751, a corresponding portion of such Unit Holder's gain or loss will be treated as ordinary gain or loss. It is possible that the basis allocation rules of Code Section 751 may result in a Unit Holder's recognizing ordixxxx income with respect to the portion of the Unit Holder's amount realized on the sale of a Unit that is attributable to such items while recognizing a capital loss with respect to the remainder of the Unit. Capital losses are deductible only to the extent of capital gains, except that taxpayers who are natural persons may deduct up to $3,000 per year of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years (a "C" corporation's carry-forward period is five years and an individual taxpayer can carry forward such losses indefinitely). Under Code Section 469, individuals, S corporations and certain closely-held corporations generally are able to deduct "passive activity losses" in any year only to the extent of the person's passive activity income for that year. Substantially all post-1986 losses of Unit Holders from the Partnership are passive activity losses. Unit Holders may have "suspended" passive activity losses from the Partnership (i.e., post-1986 net taxable losses in excess of statutorily permitted "phase-in" amounts and which have not been used to offset income from other passive activities). If a Unit Holder sells less than all of its interest in the Partnership pursuant to the Offer, a passive loss recognized by that Unit Holder can be currently deducted (subject to the other applicable limitations) to the extent of the Unit Holder's passive income from the Partnership for that year plus any other net passive activity income for that year, and any gain recognized by a Unit Holder upon the sale of Units can be offset by the Unit Holder's current or "suspended" passive activity losses (if any) from the Partnership and other sources. If, on the other hand, a Unit Holder sells 100 percent of its interest in the Partnership pursuant to the Offer, any "suspended" passive activity losses from the Partnership and any passive activity losses recognized upon the sale of the Units will be offset first against any net passive activity income from the Unit Holder's other passive activity investments, and the balance of any net passive activity losses attributable to the Partnership will no longer be subject to the passive activity loss limitation and, therefore, will be deductible by such Unit Holder from its other "ordinary" income (subject to any other applicable limitations). If more than 1,180 1,140 Units are Properly Tendered, some tendering Unit Holders may not be able to sell 100 percent of their Units pursuant to the Offer because of proration of the number of Units to be purchased by the Purchaser, unless the Purchaser amends the Offer to increase the number of Units to be purchased.
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