REVENUE RULE 95-37

1995-17 I.R.B. 10

PARTNERSHIPS; LIMITED LIABILITY COMPANIES; CONVERSION OF A PARTNERSHIP INTO A LIMITED LIABILITY COMPANY

Published: April 24, 1995

Section 706. - Taxable Years of Partner and Partnership

Section 708. - Continuation of Partnership, 26 CFR 1.708-1: Continuation of partnership.

(See Also §§706, 721, 722, 731, 733, 741, 752, 1001, 1223.)

Conversion of an interest in a domestic partnership into an interest in a domestic limited liability company that is classified as a partnership.

Partnerships; limited liability companies; conversion of a partnership into a limited liability company. The federal income tax consequences of the conversion of an interest in a domestic partnership into an interest in a domestic LLC that is classified as a partnership are discussed. Rev.Ruls. 84-52 and 86-111 amplified.

ISSUES

(1) Do the federal income tax consequences described in Rev. Rul. 84-52, 1984-1 C.B. 157, apply to the conversion of an interest in a domestic partnership into an interest in a domestic limited liability company (LLC) that is classified as a partnership for federal tax purposes?

(2) Does the taxable year of the converting domestic partnership close with respect to all the partners or with respect to any partner?

(3) Does the resulting domestic LLC need to obtain a new taxpayer identification number?

LAW AND ANALYSIS

In Rev. Rul. 84-52, a general partnership formed under the Uniform Partnership Act of State M proposed to convert to a limited partnership under the Uniform Limited Partnership Act of State M. Rev. Rul. 84-52 generally holds that (1) under s 721 of the Internal Revenue Code, the conversion will not cause the partners to recognize gain or loss under §§741 or 1001, (2) unless its business will not continue after the conversion, the partnership will not terminate under s 708 because the conversion is not treated as a sale or exchange for purposes of s 708, (3) if the partners' shares of partnership liabilities do not change, there will be no change in the adjusted basis of any partner's interest in the partnership, (4) if the partners' shares of partnership liabilities change and cause a deemed contribution of money to the partnership by a partner under s 752(a), then the adjusted basis of such a partner's interest will be increased under s 722 by the amount of the deemed contribution, (5) if the partners' shares of partnership liabilities change and cause a deemed distribution of money by the partnership to a partner under s 752(b), then the basis of such a partner's interest will be reduced under s 733 (but not below zero) by the amount of the deemed distribution, and, gain will be recognized by the partner under s 731 to the extent the deemed distribution exceeds the adjusted basis of the partner's interest in the partnership, and (6) under s 1223(1), there will be no change in the holding period of any partner's total interest in the partnership.

The conversion of an interest in a domestic partnership into an interest in a domestic LLC that is classified as a partnership for federal tax purposes is treated as a partnership-to-partnership conversion that is subject to the principles of Rev. Rul. 84-52.

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

Section 706(c)(2)(A)(i) provides that the taxable year of a partnership closes with respect to a partner who sells or exchanges the partner's entire interest in a partnership. Section 706(c)(2)(A)(ii) provides that the taxable year of a partnership closes with respect to a partner whose interest is liquidated, except that the taxable year of a partnership with respect to a partner who dies does not close prior to the end of the partnership's taxable year.

In the present case, the conversion of an interest in a domestic partnership into an interest in a domestic LLC that is classified as a partnership for federal tax purposes does not cause a termination under s 708. See Rev. Rul. 84-52. Moreover, because each partner in a converting domestic partnership continues to hold an interest in the resulting domestic LLC, the conversion is not a sale, exchange, or liquidation of the converting partner's entire partnership interest for purposes of s 706(c)(2)(A). See Rev. Rul. 86-101, 1986-2 C.B. 94 (the taxable year of a partnership does not close with respect to a general partner when the partnership agreement provides that the general partner's interest converts to a limited partnership interest on the general partner's death because the decedent's successor continues to hold an interest in the partnership). Consequently, the conversion does not cause the taxable year of the domestic partnership to close with respect to all the partners or with respect to any partner.

Because the conversion of an interest in a domestic partnership into an interest in a domestic LLC that is classified as a partnership for federal tax purposes does not cause a termination under s 708, the resulting domestic LLC does not need to obtain a new taxpayer identification number.

HOLDINGS

(1) The federal income tax consequences described in Rev. Rul. 84-52 apply to the conversion of an interest in a domestic partnership into an interest in a domestic LLC that is classified as a partnership for federal tax purposes. The 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.

(2) The taxable year of the converting domestic partnership does not close with respect to all the partners or with respect to any partner.

(3) The resulting domestic LLC does not need to obtain a new taxpayer identification number.

The holdings contained herein would apply in a similar manner if the conversion had been of an interest in a domestic LLC that is classified as a partnership for federal tax purposes into an interest in a domestic partnership. The holdings contained herein apply regardless of the manner in which the conversion is achieved under state law.

This revenue ruling does not address the federal tax consequences of a conversion of an organization that is classified as a corporation into an organization that is classified as a partnership for federal tax purposes. See, e.g., §§336 and 337.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 84-52 and Rev. Rul. 86-101 are amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is D. Lindsay Russell of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Russell on (202) 622-3050 (not a toll-free call).

Rev. Rul. 95-37, 1995-17 I.R.B. 10