Assignee

Under a typical limited partnership agreement, before a transferee can be admitted as a substituted limited partner with full voting and other partner rights (rather than merely holding the assignor's economic interest), which of the following is generally required?

1. A.Approval of the transfer by the Securities and Exchange Commission.Wrong. The SEC does not approve individual transfers of partnership interests; substitution is governed by the partnership agreement.
2. B.Listing of the transfer on FINRA's automated quotation system.Wrong. DPP interests are not listed or quoted on a FINRA trading system; there is no such listing step.
3. C.Consent of the general partner as specified in the partnership agreement.Correct. Substitution as a full limited partner is conditioned on the general partner's consent under the terms the partnership agreement sets out.
4. D.Unanimous consent of every other limited partner in the program.Wrong. Partnership agreements typically vest the consent decision in the general partner, not in a unanimous vote of the other limited partners.

Why: Partnership agreements condition full substitution on the consent of the general partner as specified in the agreement. Until that consent is given, a transferee typically holds only an assignee interest entitled to economic distributions, not the full rights of a limited partner.

An individual purchases a limited partnership interest on the secondary market but has not yet been formally admitted as a substituted limited partner under the partnership agreement's admission procedures; she holds only an assignee interest with an economic right to the income but without full voting or management rights. Does she still receive a Schedule K-1 and report her share of the partnership's tax items?

1. A.Yes -- tax allocation generally follows economic entitlement to the partnership's items, so an assignee with a genuine economic interest in the partnership's income still receives a K-1 and reports her allocable share, even without formal admission as a full partner.Correct. Tax allocation follows economic entitlement, so an assignee with a genuine economic interest still receives K-1 allocations.
2. B.No -- only a formally admitted, substituted limited partner under the partnership agreement's procedures can be allocated any tax items; an assignee has no reportable income until formal admission is complete.Wrong. Formal admission under the partnership agreement is a separate matter from tax allocation, which follows economic entitlement.
3. C.Yes, but only half of her economic share is reportable until formal admission is complete, with the other half deferred to a later year.Wrong. There is no such 50 percent deferral rule tied to formal admission status.
4. D.No -- the seller who transferred the interest to her continues to be allocated and taxed on the income for as long as her admission remains incomplete, regardless of who now holds the economic interest.Wrong. Once the economic interest has genuinely transferred, tax allocation follows the new economic holder, not the prior holder.

Why: Tax allocation generally follows economic entitlement to the partnership's items, so an assignee with a genuine economic interest in the partnership's income still receives a K-1 and reports her allocable share, even without formal admission as a full partner.

A limited partner gives his units in an oil and gas program to his adult daughter. The partnership agreement conditions any transfer on the general partner's consent. The general partner consents to the transfer of the economic interest but does not admit the daughter as a substituted limited partner. What is her position?

1. A.The gift is ineffective and record ownership stays with the father until she is formally admitted.Wrong. The economic interest can be assigned; admission is a further step, not a condition of the assignment.
2. B.She is an assignee entitled to the distributions and the tax allocations, but without limited partner voting rights.Correct. Economic rights travel with the assignment while governance rights travel only with admission.
3. C.She holds full limited partner status, because a gift is not a sale and the restriction reaches only sales.Wrong. Transfer provisions are written to reach any change of ownership, gratuitous or not.
4. D.The general partner must repurchase the units from the father at the most recently stated value.Wrong. Declining to substitute an assignee creates no obligation on the sponsor to buy anything back.

Why: A partnership agreement usually separates two acts: assigning the economic interest, and admitting the assignee as a substituted limited partner. An assignee receives the cash distributions and the allocated income, loss and credits, but the voting rights reserved to limited partners travel only with admission. Those rights are the ones that matter when the partners want to replace the general partner, approve a sale of substantially all the assets, or amend the agreement. Had the general partner also admitted her, she would hold the interest with those rights attached.