Partnership conversion continues without termination or recognition

Plain-English summary

A disregarded limited partnership owned an interest in another partnership. After a new investor exchanged its interest in the lower-tier partnership for an interest in the upper-tier entity, the lower-tier partnership became disregarded and the upper-tier entity became a partnership, effectively converting one partnership into the other. Later interest sales during the 12-month period totaled less than 50 percent. The IRS ruled that the resulting partnership was a continuation and had not terminated under section 708. Except for sold interests and possible section 752 effects, the conversion caused no gain or loss, did not close the partnership's taxable year, preserved holding periods and asset bases, required no new taxpayer identification number, and did not constitute asset contributions or distributions.

Ruling snapshot

• Question: Does the conversion and related ownership change terminate the partnership or trigger tax consequences?
• Outcome: Approved; the partnership continued without termination, general gain or loss recognition, a taxable-year closing, or a new taxpayer identification number.
• Key authorities: IRC §§ 706, 708, 721, 741, 752, and 1001; Rev. Rul. 84-52; Rev. Rul. 95-37

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201605004                                              Third Party Communication: None
Release Date: 1/29/2016                                        Date of Communication: Not Applicable
Index Number: 708.00-00
                                                               Person To Contact:
------------------------------------------                     -----------------------------, ID No. -------------
---------------------------------------------------            ------------------
------------------------------                                 Telephone Number:
--------------------------------------                         ----------------------
 ----------------------------------                            Refer Reply To:
                                                               CC:PSI:01
                                                               PLR-114201-15
                                                               Date:
                                                               October 19, 2015


Legend

PRS 1         =         ---------------------------------------------------------------------------------------------
                        -----------------------------------
PRS 2         =         ---------------------------------------------------------------------------------------------
                        --------------------------------
PRS 3         =         ---------------------------------------------------------------------------------------------
                        ---------------------------------
PRS 4         =         ---------------------------------------------------------------------------------
PRS 5         =         ------------------------------
State         =         --------------
Date 1        =         --------------------
Date 2        =         --------------------------
Date 3        =         -------------------
a             =         ----
b             =         ----
c             =         ----


Dear ---------------:

      This letter responds to your letter dated April 15, 2015, and subsequent
correspondence submitted on behalf of PRS 1 requesting rulings concerning the
conversion of PRS 1 and PRS 3.

                                                      FACTS

       According to the information submitted, PRS 1 is a limited partnership organized
under the laws of State on Date 1, PRS 2, through disregarded entities, owned all of
the general and limited partnership interests in PRS 1. PRS 1 was classified as a
PLR-114201-15                                2

disregarded entity for federal income tax purposes. PRS 1 owned a a% interest in
PRS 3, a State limited partnership.

       On Date 2, PRS 4 acquired an interest in PRS 3. Also on Date 2, PRS 4
exchanged its interest in PRS 3 for an interest in PRS 1, causing PRS 3 to become a
disregarded entity and PRS 1 to become a partnership for federal income tax
purposes. Effectively PRS 3 was converted into PRS 1. On Date 3, PRS 4 sold its b%
interest in PRS 1 and PRS 2 sold a c% interest in PRS 1 to PRS 5. The transfer of
interests in PRS 1 during the 12-month period was less than 50%.

                                    LAW & ANALYSIS

       Section 708 provides that a partnership is considered to be continuing if it is not
terminated. A partnership is terminated only if (1) no part of any business, financial
operation, or venture of the partnership continues to be carried on by any of its partners
in a partnership, or (2) 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.

       Section 1.708-1(b)(1)(ii) of the Income Tax Regulations provides, in part, that a
contribution of property to a partnership does not constitute a sale or exchange for
purposes of § 708.

        Section 721(a) provides that no gain or loss is recognized by a partnership or any
of its partners upon the contribution of property to the partnership in exchange for an
interest therein.

       Rev. Rul. 84-52, 1984-1 C.B. 157, considers the federal income tax
consequences of the conversion of a general partnership interest into a limited
partnership interest in the same partnership. In Rev. Rul. 84-52, X was formed as a
general partnership with equal partners A, B, C, and D. The partners propose to convert
the general partnership into a limited partnership, with A and B as limited partners, and
C and D as both general partners and limited partners. Each partner's total percent
interest in the partnership's profits, losses, and capital will remain the same when the
general partnership is converted into a limited partnership. The general partnership's
business will continue after the conversion.

        Rev. Rul. 84-52 treats the conversion as an exchange under § 721 and holds, in
part, that because the business of X will continue after the conversion and because
under § 1.708-1(b)(1)(ii), a transaction governed by § 721 is not treated as a sale or
exchange for purposes of § 708, X will not be terminated under § 708. Rev. Rul. 84-52
also provides that if the partners' shares of the partnership's liabilities do not change,
there will be no change in the adjusted basis of any partner's interest in the partnership.
PLR-114201-15                                3

        Rev. Rul. 95-37, 1995-1 C.B. 130, examines the conversion of a domestic
partnership into a domestic LLC classified as a partnership for federal tax purposes.
Rev. Rul. 95-37 holds that the federal income tax consequences described in Rev. Rul.
84-52 apply to the conversion of a domestic partnership into a domestic LLC that is
classified as a partnership for federal tax purposes. The revenue ruling explains that
these federal tax consequences are the same whether the resulting LLC is formed in
the same state or in a different state than the converting domestic partnership.

      Rev. Rul. 95-37 also holds that the taxable year of the converting domestic
partnership does not close with respect to all the partners or with respect to any partner
and the resulting domestic LLC does not need to obtain a new taxpayer identification
number. The revenue ruling further concludes that its holdings apply regardless of the
manner in which the conversion is achieved under state law.

                                     CONCLUSION

        Based on the representations and the facts submitted, we conclude that PRS 1
will be considered a continuation of the partnership, PRS 3, and there was no
termination of the partnership under § 708. Other than with respect to the sale of the
partnership interests sold, the conversion of PRS 3 into PRS 1 did not cause the
partners in PRS 3 or PRS 1 to recognize gain or loss under §§ 741 or 1001, except as
provided in § 752. The holding period of the partners’ interests in PRS 1 includes the
period of time during which those interests were held as partners in PRS 3. The
conversion of PRS 3 into PRS 1 did not cause the taxable year of the partnership to
close under § 706. PRS 1 does not need to obtain a new taxpayer identification
number. The basis of the assets held by PRS 1 is the same as the basis of the assets
in the hands of PRS 3 prior to the conversion. Finally, the conversion PRS 3 into PRS 1
did not result in the assets of the partnership being contributed or distributed to the
partners of the partnership.

       Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under any other provision of the
Internal Revenue Code and the regulations thereunder.
PLR-114201-15                               4

       This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent. In accordance with the
power of attorney on file with this office, copy of this letter is being sent to PRS 1’s
authorized representatives.



                                     Sincerely,


                                     David R. Haglund
                                     David R. Haglund
                                     Branch Chief, Branch 1
                                     (Passthroughs & Special Industries)


Enclosures (2)
 Copy of this letter
 Copy for 6110 purposes