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Rev. Rul. 95-37 - conversion of a partnership into an LLC interest.

Rev. Rul. 95-37 addresses the following three issues:

* Do 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 limited liability company (LLC) classified as a partnership for Federal tax purposes?

* Does the tax year of the converting domestic partnership close with respect to any or all the partners?

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

Rev. Rul. 84-52 addressed the tax ramifications of five issues involving the income tax consequences of the conversion of a general partnership interest into a limited partnership interest in the same partnership. First, the ruling stated that such conversions were governed by Sec. 721, and no gain or loss would be recognized by the partners under Sec. 741 or 1001. Sec. 721 provides that no gain or loss is recognized by either the contributing partner or the partnership on a contribution of capital in return for a partnership interest. Therefore, no gain or loss was recognized in connection with a conversion of one interest for another in the same partnership.

Second, Regs. Sec. 1.708-1(b)(1)(ii) states that a contribution of property to a partnership under Sec. 721 is not an exchange giving rise to a termination under Sec. 708; therefore, no termination resulted on conversion of a general partner interest into a limited partner interest, regardless of whether more than 50% of the partnership interest was converted within a 12-month period (provided the partnership business continues after the conversion).

Third, pursuant to Regs. Sec. 1.752-1(e), the adjusted basis of a converting partner was not affected by the conversion unless the partner changed its share of partnership liabilities.

Fourth, a shift in partnership liabilities, as a result of the conversion, created a deemed distribution of money to the partner under Sec. 752(b); if it exceeded the adjusted basis of the partner's interest, gain would be recognized to the partner under Sec. 731(a)(1). In addition, if the shift in partnership liabilities created a deemed contribution under Sec. 752(a), the partner's adjusted basis would be increased under Sec. 722.

Fifth, there was no change in a converting partner's holding period for his partnership interest under Sec. 1223(1).

Rev. Rul. 95-37 indicates that the conversion of an interest in a domestic partnership into an interest in a domestic LLC classified as a partnership for Federal tax purposes is treated as a partnership-to-partnership conversion subject to the principles of Rev. Rul. 84-52.

The tax year of the converting partnership does not close with respect to all or any partner who was a partner of the converting partnership that became a member of the LLC. The tax year of the partnership does not close, except as provided by Sec. 706(c)(2), and for partnership terminations, on the death of a partner, the entry of a new partner or on the liquidation, sale or exchange of a partner's interest in the partnership. Sec. 706(c)(2) states that the partnership's tax year closes with respect to the partner's year-end for the sale, exchange or liquidation of the partner's interest.

Because the conversion of an interest in a domestic partnership into a domestic LLC taxed as a partnership is not a termination pursuant to Sec. 708, the partnership's tax year does not close and the LLC does not need to obtain a new TIN.

From Michael J. Crowley, Rudolf, Cinnamon [4] Calafato, P.A., Ocean, N.J.
COPYRIGHT 1995 American Institute of CPA's
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Title Annotation:limited liability company
Author:Crowley, Michael J.
Publication:The Tax Adviser
Date:Sep 1, 1995
Previous Article:Who can file combined state income tax returns?
Next Article:Lobbying expenditures of trade associations.

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