RESULTING PARTNERSHIP DOES NOT TERMINATE AFTER MERGED PARTNERSHIPS MAKE LIQUIDATING DISTRIBUTIONS OF HALF OF NEW PARTNERSHIP'S CAPITAL.

Rev. Rul. 90-17

ISSUE

If a partnership resulting from a partnership merger is considered a continuation of one of the merging partnerships under section 708(b)(2)(A) of the Internal Revenue Code, do liquidating distributions by the other merging partnerships of 50 percent or more of the capital and profits interests in the resulting partnership cause the resulting partnership to terminate under section 708(b)(1)(B) because of the application of section 761(e)?

FACTS

A and B each owned a 50 percent interest in RP, a partnership having assets worth $500x. B and C each owned a 50 percent interest in MP1, a partnership having assets worth $400x. D and E each owned a 50 percent interest in MP2, a partnership having assets worth $100x. For business reasons independent of federal income tax consequences, the parties agreed to merge RP, MP1, and MP2. The merger was effected by each merging partnership contributing its assets to the resulting partnership in exchange for an interest in the resulting partnership. With respect to the interests in the resulting partnership RP received 50 percent, MP1 received 40 percent, and MP2 received 10 percent. The interests in the resulting partnership were then distributed proportionately to the respective partners of RP, MP1 and MP2. After the merger transaction, the interests in the resulting partnership were held, 25 percent by A, 45 percent by B, 20 percent by C, and 5 percent each by D and by E.

LAW AND ANALYSIS

Section 708(a) of the Code provides that an existing partnership shall be considered as continuing until such time as it is deemed terminated under section 708(b).

Section 708(b)(1) of the Code provides rules of general application governing the termination of partnerships. Section 708(b)(1)(B) provides that a partnership shall be considered terminated if, within a 12-month period, there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.

Section 708(b)(2) of the Code provides rules of special application governing the termination of partnerships involved in mergers, consolidations, and divisions. Section 708(b)(2)(A) provides that, in the case of a merger or consolidation of two or more partnerships, the resulting partnership shall be a continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the resulting partnership.

Section 1.7081(b)(2)(i) of the Income Tax Regulations provides that, if a resulting partnership can, under section 708(b)(2)(A) of the Code, be considered a continuation of more than one of the merging or consolidating partnerships, it shall be considered the continuation of the partnership that is credited with the contribution of the greatest dollar value of assets to the resulting partnership. Any other merging or consolidating partnership shall be considered as terminated.

Section 761(e) of the Code, which was added by the Tax Reform Act of 1984, section 75(b), 1984-3 C.B. (Vol. 1) 1, 102, provides that, except as otherwise provided in regulations, for purposes of section 708, any distribution of an interest in a partnership (not otherwise treated as an exchange) shall be treated as an exchange.

In Rev. Rul. 68-289, 1968-1 C.B. 314, three partnerships, P1, P2, and P3 are merged. All three partnerships have the same partners and, therefore, under section 708(b)(2)(A) of the Code, the partnership resulting from the merger could be treated as the continuations of either P1, P2 or P3. However, because P3 contributes the greatest dollar value of assets, the resulting partnership is considered the continuation of P3. P1 and P2 are treated as having first transferred their assets and liabilities to P3 in exchange for partnership interests and then as having distributed the P3 interests in liquidation.

Rev. Rul. 77-458, 1977-2 C.B. 220, considers the proposed merger of ten partnerships, P1 -- P10. These partnerships all have the same equal partners, A and B. Under the plan of merger P2 -- P10 will transfer all of their assets and liabilities to P1 (the largest partnership by dollar value of assets) in exchange for partnership interests in P1. P2 -- P10 will then distribute their interests in P1 to A and B. Rev. Rul. 77-458 concludes that the partnership resulting from the merger of P1 -- P10 will be considered the continuation of P1 because P1 will contribute the greatest dollar value of assets to the resulting partnership.

Under section 708(b)(2)(A) of the Code, the partnership resulting from the merger of RP, MP1, and MP2 can be considered the continuation of either RP or MP1. This is because both the members of RP (A and B) and the members of MP1 (B and C) become the owners of more than 50 percent of the capital and profits interests in the resulting partnership. In accordance with section 1,708-1(b)(2)(i) of the regulations, however, the resulting partnership is the continuation of RP, the partnership that contributes the greatest dollar value of assets ($500x).

Consistent with the analysis in Rev. Rul. 68-289, MP1 and MP2 are considered to have contributed their assets to RP in exchange for ownership interests in RP. MP1 and MP2 then liquidate and distribute their assets, the RP interests, to their partners. Because the RP partnership interests are received 40 percent by MP1 and 10 percent by MP2, a total of 50 percent of the RP interests is distributed in the course of the merger. If section 761(e) of the Code causes the distributions to be treated as exchanges to which section 708(b)(1)(B) applies, RP will terminate.

The question thus presented is whether sections 761(e) and 708(b)(1)(B) of the Code have the effect of adding an additional requirement to section 708(b)(2)(A), namely, that fewer than 50 percent of the interests in the resulting partnership are distributed in the merger.

Section 708(b)(2)(A) of the Code applies only to mergers and consolidations. Together with section 1.708-1(b)(2)(i) of the regulations, it provides the exclusive means for deciding whether a partnership involved in a merger will terminate. Section 708(b)(2)(A) does not define the term "merger." However, as illustrated in Rev. Rul. 68-289 and Rev. Rul. 77-458, a merger includes the distribution by the terminating partnerships of interests in the resulting partnership. Thus, section 708(b)(2)(A) is a statute that creates a specific rule for a particular transaction, a merger, and that transaction includes the distribution of resulting partnership interests.

Paragraphs (1) and (2) of section 708(b) set forth, respectively, a general rule on the termination of partnerships and specific rules on partnership terminations where a partnership merger, consolidation, or division is involved. The specific rules are clearly exceptions to the general rule and intended to override the general rule in the limited circumstances to which they apply. Even if this relationship were not clear from the provisions themselves, a basic principle of statutory construction is that a specific statutory provision, like section 708(b)(2), is not controlled or nullified by a more general one, like section 708(b)(1), unless that result is clearly intended. Bulova Watch Co. v. United States, 365 U.S. 753 (1961).

The legislative history of section 708(b)(1)(B) neither states nor implies a congressional intent that the provisions of section 708(b)(1)(B) take precedence over the partnership merger rules under section 708(b)(2)(A). See S. Rep. No. 1622, 83d Cong., 2d Sess. 388 (1954), and H.R. Rep. No. 2543, 83d Cong., 2d Sess. 61 (1954). Nor does the legislative history of section 761(e) state or imply a congressional intent to change the relationship between the provisions of sections 708(b)(1)(B) and 708(b)(2)(A). See H.R. Rep. No. 432, 98th Cong., 2d Sess. 1225-27 (1984), S. Prt. No. 169 (Vol. 1), 98th Cong., 2d Sess. 236-38 (1984), and H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 863-65 (1984), 1984-3 C.B. (Vol. 2) 1, 117-19.

In other words, the purpose of the exception contained in section 708(b)(2)(A) of the Code and section 1.708-1(b)(2)(i) of the regulations is to provide for the continuation of one of the merging partnerships as the resulting partnership if the 50 percent test of those provisions is met, notwithstanding the provisions of the general rule of section 708(b)(1). Consistent with this purpose, a resulting (continuing) partnership in a merger to which section 708(b)(2)(A) applies is, as to the elements of the merger itself, excepted from the application of the termination provisions of section 708(b)(1).

Since section 761(e) of the Code cannot cause a termination of a partnership except through its effect on the term "exchange" in section 708(b)(1)(B), and since a resulting partnership in a merger to which section 708(b)(2)(A) applies is excepted from the application of section 708(b)(1) as to the elements of the merger itself, section 761(e) cannot cause the termination of the resulting partnership merely by virtue of its section 708(b)(2) merger.

Thus, the distribution of a total of 50 percent of the RP interests by MP1 and MP2 during the course of the merger will not cause a termination of RP under section 708(b)(1)(B) of the Code.

HOLDING

In a partnership merger, if the resulting partnership is considered a continuation of one of the merging partnerships under section 708(b)-(2)(A) of the Code, liquidating distributions by the other merging partnerships of 50 percent or more of the capital and profits interest in the resulting partnership do not cause the resulting partnership to terminate under section 708(b)(1)(B).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 68-289 and Rev. Rul. 77-458 are clarified.

DRAFTING INFORMATION

The principal author of this revenue ruling is David R. Haglund of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact David R. Haglund on (202) 343-8459 (not a toll-free call).