Reorganisation tax legislation – Reversal of negative supplementary partner tax accounts when a partner leaves
In cases of reorganisations or contributions of assets at partnerships, upon application, the acquired business assets can be recognised at their book values. Accordingly, no realisation and taxation of hidden reserves takes place. In this connection, a distinction has to be made between the gross and net methods.
If the gross method is used then, in the joint partnership accounts, the assets are recognised at their fair market value. At the level of the contributing partner, a negative supplementary partner tax account is created in the amount of the unrealised hidden reserves. In the case of the net method, the assets are recognised at their book values in the joint partnership accounts. A positive supplementary tax account has to be created for the partner who has made a capital contribution and, for the partner who has made a contribution in kind, a negative supplementary partner tax account.
In a case that the tax court of Lower Saxony ruled on, the incoming partner initially contributed cash in return for admission into an existing KG and, a few years later, she withdrew from the KG in return for the payment of a financial settlement. Her positive supplementary partner tax account was quite rightly reversed in the course of her departure. However, the previous partners continued to maintain their negative supplementary partner tax accounts.
The tax court, in its decision of 9.9.2019 (case reference: 3 K 52/17), accepted the argument made by the tax office according to which a negative supplementary partner tax account should not only be reversed accordingly when assets are removed from the joint partnership accounts, but also in those cases where the corresponding positive supplementary tax account of the other partner is reversed in the income statement due to the partner’s exit from the partnership. Consequently, the tax audit resulted in amendments to the tax assessments and increased the profits due to the elimination of the negative supplementary partner tax accounts. An appeal against the tax court’s ruling has been lodged with the Federal Fiscal Court (case reference: IV R 27/19).
Please note: If the gross method is selected then it is likely that there would be no such realisation and taxation of the hidden reserves because of the lack of corresponding positive and negative supplementary partner tax accounts.