A partnership terminates when one of the following events takes
place.
- All its operations are discontinued and no part of any
business, financial operation, or venture is continued by any of its
partners in a partnership.
- At least 50% of the total interest in partnership capital
and profits is sold or exchanged within a 12-month period, including a
sale or exchange to another partner.
See section 1.708-1(b)(1) of the regulations for more
information on the termination of a partnership. For special rules
that apply to a merger, consolidation, or division of a partnership,
see section 1.708-1(b)(2) of the regulations.
Date of termination.
The partnership's tax year ends on the date of termination. For the
event described in (1), earlier, the date of termination is the date
the partnership completes the winding up of its affairs. For the event
described in (2), earlier, the date of termination is the date of the
sale or exchange of a partnership interest that, by itself or together
with other sales or exchanges in the preceding 12 months, transfers an
interest of 50% or more in both capital and profits.
Short period return.
If a partnership is terminated before the end of the tax year, Form
1065 must be filed for the short period, which is the period from the
beginning of the tax year through the date of termination. The return
is due the 15th day of the fourth month following the date of
termination. See Partnership Return (Form 1065), later, for
information about filing Form 1065.
Conversion of partnership into limited liability company
(LLC).
The conversion of a partnership into an LLC classified as a
partnership for federal tax purposes does not terminate the
partnership. The conversion is not a sale, exchange, or liquidation of
any partnership interest, the partnership's tax year does not close,
and the LLC can continue to use the partnership's taxpayer
identification number.
However, the conversion may change some of the partners' bases in
their partnership interests if the partnership has recourse
liabilities that become nonrecourse liabilities. Because the partners
share recourse and nonrecourse liabilities differently, their bases
must be adjusted to reflect the new sharing ratios. If a decrease in a
partner's share of liabilities exceeds the partner's basis, he or she
must recognize gain on the excess. For more information, see
Effect of Partnership Liabilities under Basis of
Partner's Interest, later.
The same rules apply if an LLC classified as a partnership is
converted into a partnership.
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