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Partnership's formless conversion.

Rev. Rul. 2(]04-59 explains the tax treatment when an unincorporated state law entity classified as a partnership for Federal tax purposes converts to a state law corporation under a state statute that does not require an actual transfer of the unincorporated entity's assets or interests (a state formless conversion statute).

Facts: On Jan. 1, 2003, A is organized in a state as an unincorporated entity classified as a partnership for Federal tax purposes. A elects to convert under a state formless conversion statute into a state law corporation, effective Jan. 1, 2004; as a result, A is classified as a corporation for Federal tax purposes.

Background: The term "corporation" includes (1) an association under Sec. 7701(a)(3), and (2) a business entity organized under a Federal or state statute if the statute describes or refers to the entity as incorporated or as a corporation, body corporate or body politic. If an eligible entity classified as a partnership elects under Regs. Sec. 301.7701-3(c)(1)(i) to be classified as an association, the following is deemed to occur: the partnership contributes all its assets and liabilities to the association in exchange for association stock and, immediately thereafter, the partnership liquidates, distributing the stock of the association to its partners; see Regs. Sec. 301.7701-3(g)(1)(i).

Rev. Rul. 84-111 describes the tax consequences when steps are taken as part of a plan to transfer partnership operations to a corporation organized for valid business reasons. However, it does not apply for partnership conversions into a corporation under a state formless conversion statute.

Tax treatment of formless conversions: Under Rev. Rul. 2004-59, the IRS will treat a partnership that converts to a corporation under a state law formless conversion statute in the same manner as one that makes an election to be treated as an association under Regs. Sec. 301.7701-3(c)(1)(i). Thus, when unincorporated entity A converts, under state law, to A Corp, the following steps are deemed to occur: unincorporated entity A contributes an of its assets and liabilities to A Corp. in exchange for stock in A Corp. and, immediately thereafter, unincorporated entity A liquidates, distributing the stock of A Corp. to its partners.
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Title Annotation:From The IRS
Author:Laffie, Lesli S.
Publication:The Tax Adviser
Date:Aug 1, 2004
Previous Article:Clarification.
Next Article:Transfer of NQSOs in divorce.

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