Rev. Rul. 86-101

1986-2 C.B. 94, 1986-35 I.R.B. 5.

PARTNERSHIPS; CONVERSION OF A GENERAL PARTNERSHIP INTEREST INTO A LIMITED

PARTNERSHIP INTEREST UPON DEATH OF GENERAL PARTNER

Published: September 2, 1986

Section 706.-Taxable Year of Partner and Partnership, 26 CFR 1.706-1: Taxable years of partner and partnership

  Partnerships; conversion of a general partnership interest into a limited partnership interest upon death of general partner. Conversion does not constitute disposition of partnership interest that closes the partnership year with respect to the deceased partner.

ISSUE

  If a partnership agreement provides that, upon the death of a general partner, the partner's interest converts into that of a limited partner, does the partnership taxable year close with respect to a deceased partner under section 706 of the Internal Revenue Code?

FACTS

  A, B, and C were general partners in LP, a limited partnership. The partnership agreement provided that, upon the death of any general partner, that partner's interest would be automatically converted into a limited partnership interest. All three general partners, as well as LP, were calendar year taxpayers. A died on July 1, and under the partnership agreement, A's interest automatically became that of a limited partner.

LAW AND ANALYSIS

  Section 706(c)(1) of the Code provides that, except in the case of a termination of a partnership and except as provided in section 706(c)(2), the taxable year of a partnership shall not close as the result of the death of a partner or the sale or exchange of a partner's interest in the partnership.

  Section 706(c)(2)(A)(i) of the Code provides that the taxable year of a partnership shall close with respect to a partner who sells or exchanges the partner's entire interest in the partnership.

  Section 706(c)(2)(B) of the Code provides that, other than at the end of the partnership's taxable year, the taxable year of a partnership shall not close with respect to a partner who sells or exchanges less than the partner's entire interest in the partnership.

  Section 1.706-1(c)(3)(i) of the Income Tax Regulations provides that if a deceased partner's estate or other successor sells or exchanges its entire interest in the partnership or if its entire interest is liquidated, the partnership's taxable year with respect to the estate or other successor shall close on the date of the sale or exchange, or on the date of the completion of the liquidation.

  Section 1.706-1(c)(3)(iv) of the regulations provides that if, under the terms of an agreement existing on the date of death of a partner, a sale or exchange of the decedent partner's interest in the partnership occurs upon that date, then the taxable year of the partnership with respect to the decedent partner shall close upon the date of death.

  Rev. Rul. 84-52, 1984-1 C.B. 157, holds that, for purposes of section 721 of the Code, the conversion of a general partnership interest into a limited partnership interest is treated as a contribution to the partnership of the general partnership interest in exchange for the limited partnership interest.

  The legislative history of section 706(c)(2) of the Code indicates that Congress did not intend to close the taxable year of a partnership with respect to a partner whose interest is liquidated, sold or exchanged to an outsider unless the partner no longer retains any interest in the partnership. If the partner's interest is merely reduced, the partnership year remains open with respect to the partner. H.R. Rep. No. 1337, 83d Cong., 2d Sess. A226 (1954); S. Rep. No. 1622, 83d Cong., 2d Sess. 386 (1954).

  In the present case, since A's successor continued to hold an interest in the partnership, the conversion is not an exchange of the partner's entire partnership interest for purposes of section 706(c)(2)(A) of the Code or section 1.706-1(c)(3)(iv) of the regulations. Consequently, the general rule under section 706(c) applies and the partnership year as to A remains open.

HOLDING

  A conversion of a general partnership interest into a limited partnership interest is an exchange that does not result in a disposition of the converting partner's entire partnership interest, and, therefore, the taxable year of the partnership is not closed under section 706(c)(2)(A) of the Code or section

1.706-1(c)(3)(iv) of the regulations.

Rev. Rul. 86-101, 1986-2 C.B. 94, 1986-35 I.R.B. 5.