Partnership-interest transfers do not trigger the investment company exception

Plain-English summary

Taxpayers owned interests in three partnerships that held operating assets and conducted several redacted business activities. They planned to form a company that would elect corporate and real estate investment trust status. Partnership owners would transfer their interests to the new company for shares, cash, or both, while private investors would contribute cash and a related corporation would merge into a disregarded subsidiary. The IRS addressed only the discrete section 351 issue presented. It ruled that the transfers of partnership interests in exchange for company shares would not be treated as transfers to an investment company under section 351(e).

Ruling snapshot

• Question: Will exchanging partnership interests for shares in the new company be treated as a transfer to an investment company under § 351(e)?
• Outcome: Approved.
• Key authorities: IRC § 351(e); Rev. Proc. 2015-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201622001 Third Party Communication: None
Release Date: 5/27/2016 Date of Communication: Not Applicable
Index Number: 351.13-00
Person To Contact:
------------------- -----------------------, ID No. ------------
------------------------------------------------------------ Telephone Number:
----- ------------------
-------------------------------- Refer Reply To:
------------------------------------ CC:CORP:5
---------------------------- PLR-105576-16
Date:
February 26, 2016

Taxpayers = ------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------

P1 = -------------------------------------------

P2 = --------------------------------------------------

P3 = -----------------------------------------------

AssetsX = ------------------------------------------------------------------------------------------
-------------------------------

AssetsY = ----------------------------------------------

AssetsZ = ------------------------------------------------------------------------------------------
--------

BOP1 = -----------------------------------------------------------------------------------------

BOP2 = ------------------------------------------------------------------------------------------

BOP3 = --------------------------------------

BOP4 = ------------------------------------------------------------------------------------------
--------------------------------------------------------

CY = -----------------------------------

StateX = ------------
PLR-105576-16 2

CZ = ------------------------------

ServicesX = ---------------------------------------------------------------------

TaxpayerX = --------------------------------

Date1 = --------------------------

Year1 = ------

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

This is in response to the letter dated September 3, 2015, requesting a ruling on a
significant issue presented under section 351 of the Internal Revenue Code (the
“Code”). The information provided in that request and in subsequent correspondence is
summarized below.

This letter is issued pursuant to section 6.03 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1,
regarding one or more significant issues under sections 332, 351, 355, 368, or 1036 of
the Code. The ruling contained in this letter only addresses one discrete legal issue
involved in the transactions described in this letter. This Office expresses no opinion as
to the overall tax consequences of these transactions or as to any issue not specifically
addressed by the ruling below.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayers and accompanied by “penalties of perjury” statements
executed by an appropriate party. This Office has not verified any of the materials
submitted in support of the ruling request. Verification of the facts, representations, and
other information may be required as part of the audit process.

FACTS

Taxpayers are limited liability companies (“LLCs”) that are treated as partnerships for
federal income tax purposes. Taxpayers and other persons own interests in LLCs that
are each treated as a partnership for federal income tax purposes: P1, P2, and P3
(collectively, “the Partnerships”).

The significant assets of the Partnerships consist of: (i) AssetsX, (ii) AssetsY, and (iii)
AssetsZ.

The business operations of the Partnerships consist of: (i) BOP1, (ii) BOP2, (iii) BOP3,
and (iv) BOP4.
PLR-105576-16 3

The Partnerships own all of their assets and conduct their business operations directly
or through wholly-owned LLCs, with the exception that P2 conducts its BOP2 and BOP3
through its wholly owned subsidiary, CY, a StateX LLC which has elected to be taxed as
a corporation for federal income tax purposes.

CZ, a StateX corporation that has elected to be taxed as a subchapter S corporation for
federal income tax purposes, provides ServicesX for the Partnerships.

Taxpayers intend to engage in a series of transactions that will include the following
steps.

(a) TaxpayerX will form a StateX LLC (the “Company”). The Company will elect to be
taxed as a corporation for federal income tax purposes. The Company also will elect to
be taxed as a real estate investment trust for (“REIT”) federal income tax purposes
commencing with its taxable year ending on Date1.

(b) On a date to be determined in Year1, the following events will occur simultaneously:

  (i) One or more private institutional investors will contribute cash to the
  Company in exchange for stock in the Company (“Shares”). The
  proceeds from that private offering will be applied to pay transaction
  expenses, purchase interests in the Partnerships from owners who elect
  to receive cash rather than Shares in the exchange (described in (ii)
  below), and possibly to acquire additional AssetsY (having a similar risk
  profile as those in the Partnerships) and establish reserves for working
  capital.

  (ii) The owners of interests in the Partnerships will transfer their interests
  in the Partnerships to the Company in exchange for Shares and/or cash.

  (iii) CZ will merge with a StateX LLC that is wholly-owned by the
  Company, and which will be treated as a disregarded entity for federal
  income tax purposes. The shareholders of CZ will receive Shares in
  exchange for their stock in CZ.

RULING

The transfers of interests in the Partnerships to the Company in exchange for Shares
will not be treated as a transfer to an investment company within the meaning of section
351(e).
PLR-105576-16 4

CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the proposed transactions under any provision of the Code and
regulations or the tax treatment of any condition existing at the time of, or effects
resulting from, the proposed transactions that is not specifically covered by the above
ruling. This includes expressing no opinion on whether the Company will qualify as a
REIT under Part II of Subchapter M of Chapter 1 of the Code.

PROCEDURAL STATEMENTS

This ruling is directed only to the taxpayers 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, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                   Sincerely,


                                     T. Ian Russell
                                   T. Ian Russell
                                   Branch Chief, Branch 6
                                   Office of Associate Chief Counsel (Corporate)

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