PTP'S GENERAL PARTNER MAY ACQUIRE OUTSTANDING UNITS TAX-FREE; SURRENDER OF PTP UNITS WILL BE TAXABLE.

UIL Number(s) 0708.00-00, 7704.01-00, 0469.07-00, 0706.05-00

                                             Date: February 7, 1994

This responds to a letter dated February 2, 1994, and prior correspondence, submitted on behalf of Partnership A, regarding the federal income tax consequences of a proposed transaction in which a newly organized limited partnership is merged with and into an existing publicly traded partnership.

The information submitted discloses that X is a corporation organized under the laws of state Y. X is the common parent of an affiliated group of corporations that files a consolidated return. X stock is widely held and publicly traded.

M is a corporation organized under the laws of state Y. M, which is wholly owned by X and a member of the affiliated group, owns 100 percent of the stock of a group of subsidiaries (the Subsidiaries). The Subsidiaries are also part of the affiliated group.

Partnership A is a publicly traded partnership organized under the laws of state Y. M, the sole general partner of Partnership A, owns an a percent interest in the profits, losses and capital of Partnership A. As of the merger date, the limited partnership interests in Partnership A will total b units, as follows: c units will be owned by the Subsidiaries and d units will be owned by the public and by certain employees of M and its affiliates. The d units will be referred to as "publicly traded units."

M will create New L.P., a limited partnership to be organized under the laws of state Y. New L.P. will be formed solely to engage in the proposed transaction. New L.P. will be owned e percent by M which, as general partner, will contribute g dollars toward New L.P.'s formation, and f percent by one of the Subsidiaries (the Subsidiary) which, as limited partner, will contribute h dollars.

Prior to the merger, M will make a capital contribution to Partnership A in return for an additional interest in the capital (but not profits and losses) of Partnership A. Consequently, the combined interests of M and the Subsidiaries in Partnership A capital will exceed 50 percent of the entire capital interest in Partnership A. Correspondingly, the total capital interest of the holders of publicly traded units will decrease to less than 50 percent of the entire capital interest in Partnership A.

New L.P. will be merged with and into Partnership A under the laws of state Y. As a result of the merger, each publicly traded unit in Partnership A will be exchanged with M for cash. M will pay the cash directly to the holders of publicly traded units. M will succeed to the interest in Partnership A represented by the publicly traded units, including the total capital interest represented by the publicly-traded units, and other attendant rights and obligations. M will continue to hold its general partner interest in Partnership A. M will receive back the g dollars that it had contributed to New L.P. and will have no further interest in New L.P.

The Subsidiary will receive back h dollars and will have no further interest in New L.P. The Subsidiaries that own units in Partnership A will continue to own those units.

REPRESENTATIONS

At all times since their respective organizations, Partnership A, New L.P., and the Other Partnerships have been properly classified as partnerships for federal income tax purposes.

For each of Partnership A's taxable years, 90 percent or more of the gross income of Partnership A has been "qualifying income" within the meaning of section 7704(d) of the Internal Revenue Code. In addition, Partnership A is an "existing partnership" within the meaning of section 10211(c) of the Revenue Act of 1987 (Pub. L. No. 100-203). Since December 17, 1987, a substantial new line of business has not been added with respect to Partnership A.

The books of account for Partnership A are maintained, and Partnership A's federal income tax returns are filed, on a calendar year basis using the accrual method of accounting.

With the exception of o units transferred to certain employees under incentive compensation arrangements, during the twelve months preceding the merger, there will have been no sale or exchange, within the meaning of section 708(b)(1)(B), of any Partnership A units held by M or the Subsidiaries.

During the twelve months preceding the merger, there will have been no sale or exchange, within the meaning of section 708(b)(1)(B), of any interest in any of the Other Partnerships.

With respect to the holders of publicly traded units, distributive shares of Partnership A's and the Other Partnerships' items described in section 702(a) will be computed through a pro rata allocation of the amount that those unitholders would have included in their taxable income had they held those units until the end of the taxable year.

After the merger, Partnership A and the Other Partnerships will continue to carry on their respective businesses, financial operations, and ventures. M will own all the interest in Partnership A represented by the publicly traded units and will remain Partnership A's sole general partner. The publicly traded units will be delisted, and M does not intend to trade any of the publicly traded units on any exchange or an equivalent.

Partnership A and the Other Partnerships have made elections under section 754 to have the basis of their property adjusted in accordance with sections 734 and 743.

Certain holders of publicly traded units in Partnership A have incurred losses that constitute suspended passive losses under section 469.

LAW AND ANALYSIS

A. CONTINUATION OF THE PARTNERSHIP

Section 708(a) states that for purposes of subchapter K, an existing partnership is considered as continuing if it is not terminated. A partnership is considered terminated if within a twelve-month period there is a sale or exchange of fifty percent or more of the total interest in partnership capital and profits. Section 708(b)(1)(B). A property contribution to a partnership is not a sale or exchange for purposes of section 708(b)(1)(B). Section 1.708-1(b)(1)(ii) of the Income Tax Regulations.

In the present case, as a result of the merger, a greater than 50 percent interest in Partnership A profits will be sold or exchanged within a twelve-month period. However, a less than 50 percent interest in Partnership A capital will be sold or exchanged within that same twelve-month period. Therefore, the exchange of interests during the merger will not result in Partnership A's termination under section 708(b)(1)(B).

In the case of a merger of two or more partnerships, the resulting partnership will, for purposes of section 708, be considered the continuation of any merging partnership whose members own an interest of more than fifty percent in the capital and profits of the resulting partnership. Section 708(b)(2)(A). If the resulting partnership can be considered a continuation of more than one merging partnership, it will, unless the Commissioner permits otherwise, be considered the continuation of that partnership credited with the contribution of the greatest dollar value of assets to the resulting partnership. Any other merging partnerships are considered as terminated. Section 1.708-1(b)(2)(i).

As a result of the merger, Partnership A will be considered the "resulting partnership" within the meaning of section 1.708- 1(b)(2)(i), because (1) pre-merger members of Partnership A will own an interest of more than fifty percent in the capital and profits of the resulting partnership, and (2) Partnership A will contribute the greatest dollar value of assets to the resulting partnership.

The net effect of the proposed transaction for federal income tax purposes is a direct acquisition by M of the publicly traded units from the holders of these units in exchange for cash. Therefore, New L.P.'s transitory existence, and its subsequent merger with and into Partnership A, will be disregarded for federal income tax purposes. See Rev. Rul. 79-273, 1979-2 C.B. 125; Rev. Rul. 73-427, 1973-2 C.B. 301.

B. ALLOCATION OF PARTNERSHIP ITEMS

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

Section 1.706-1(c)(2)(ii) provides that in the case of a sale, exchange, or liquidation of a partner's entire interest in a partnership, the partner includes in his taxable income for his taxable year within or with which his membership in the partnership ends, his distributive share of items described in section 702(a) and any guaranteed payments under section 707(c), for his partnership taxable year ending with the date of such sale, exchange, or liquidation. In order to avoid an interim closing of the partnership books, the partner's distributive share of items described in section 702(a) may, by agreement among the partners, be estimated by taking his pro rata part of the amount of the items he would have included in his taxable income had he remained a partner until the end of the partnership taxable year. The proration may be based on the portion of the taxable year that has elapsed prior to the sale, exchange, or liquidation, or may be determined under any other reasonable method. The partnership taxable year closes with respect to a partner who sells or exchanges his entire interest in a partnership at the time the interest is sold or exchanged.

If (A) during any taxable year of the partnership there is a change in any partner's interest in the partnership (the "upper tier partnership"), and (B) that partnership is a partner in another partnership (the "lower tier partnership"), then (except to the extent provided in regulations) each partner's distributive share of any item of the upper tier partnership attributable to the lower tier partnership is determined by assigning the appropriate portion (determined by applying principles similar to the principles of section 706(d)(2)(C) and (D)) of each item to the appropriate days during which the upper tier partnership is a partner in the lower tier partnership and by allocating the portion assigned to any of those days among the partners in proportion to their interests in the upper tier partnership at the close of that day. Section 706(d)(3).

C. RECOGNITION OF GAIN OR LOSS

Section 1001(a) provides that the gain from the sale or other disposition of property is the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss is the excess of the adjusted basis provided in such section for determining loss over the amount realized.

Section 1001(b) states that the amount realized from the sale or other disposition of property is the sum of any money received plus the fair market value of the property (other than money) received.

Section 1.1002-1(a) provides that the general rule with respect to gain or loss realized upon the sale or exchange of property as determined under section 1001 is that the entire amount of the gain or loss is recognized except in cases where specific provisions of subtitle A of the Code provide otherwise. Section 1.1002-1(c) cites to sections 351(a), 354, 361(a), 371(a)(1), 371(b)(1), 721, 1031, 1035, and 1036 as examples of exceptions to the general rule.

Section 741 requires a transferor partner to recognize gain or loss in the case of a sale or exchange of that partner's interest in a partnership. The gain or loss is considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751.

Section 751(a) states that the amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of the partnership interest, attributable to: (1) unrealized receivables of the partnership, or (2) inventory items of the partnership that have appreciated substantially in value, is considered as an amount realized from the sale or exchange of property other than a capital asset.

Section 1.1012-1(a) provides that, in general, the basis of property is its cost. The cost is the amount paid for property in cash or other property.

Section 1221 defines capital asset as property held by the taxpayer (whether or not connected with his trade or business). Subsections 1221(1) through 1221(5) set forth specific exceptions to the definition of capital asset.

Section 1222 defines certain terms relating to capital gains and losses.

In the instant situation, there are no nonrecognition provisions applicable to the exchange of publicly traded units in Partnership A for cash. Rather, section 741 requires a holder of publicly traded units to recognize gain or loss on the sale or exchange of that unitholder's interest in Partnership A. Accordingly, section 1001 will control in determining the proper tax treatment of the exchange.

If a holder of a publicly traded unit in Partnership A holds that unit as a capital asset (as that term is defined in section 1221), the gain or loss recognized upon the sale or exchange of that unit will be treated as either gain or loss from the sale or exchange of a capital asset, except to the extent any money or the fair market value of property received by the holder of a publicly traded unit on the sale or exchange of that unit is attributable to unrealized receivables in Partnership A or inventory items of Partnership A that have appreciated substantially in value. Section 751(a).

D. DISPOSITION OF INTEREST IN PASSIVE ACTIVITY

Section 469(a)(1)(A) provides that if for any taxable year the taxpayer is described in section 469(a)(2), the passive activity loss for the year is not allowed. In general, any loss from an activity that is disallowed under section 469(a) is treated as a deduction allocable to the activity in the next taxable year. Section 469(b).

Section 469(g) provides rules for the situation where, during the taxable year, a taxpayer disposes of his entire interest in a passive activity. If all gain or loss realized on complete disposition of an interest in a passive activity is recognized, the excess of (i) the sum of (I) any loss from the activity for the taxable year (determined after application of section 469(b)) plus (II) any loss realized from the disposition over (ii) net income or gain for the taxable year from all passive activities (determined without regard to losses described in section 469(g)(1)(A)(i)) is treated as a loss that is not from a passive activity. Section 469(g)(1)(A). If the taxpayer and the person acquiring the interest bear a relationship to each other described in sections 267(b) or 707(b)(1), however, section 469(g)(1)(A) does not apply to any loss of the taxpayer until the taxable year in which that interest is acquired in a transaction described in section 469(g)(1)(A) by another person who does not bear that relationship to the taxpayer. Section 469(g)(1)(B).

Section 469(k)(3) provides that for purposes of section 469(g), a taxpayer is not treated as having disposed of the taxpayer's entire interest in an activity of a publicly-traded partnership until the taxpayer disposes of the taxpayer's entire interest in that publicly traded partnership.

E. PUBLICLY TRADED PARTNERSHIP

Section 7704(b) of the Code provides that the term "publicly traded partnership" means any partnership if (1) interests in the partnership are traded on an established securities market, or (2) interests in the partnership are readily tradable on a secondary market (or a substantial equivalent thereof).

CONCLUSIONS

Based solely on the facts submitted and the representations set forth above, this office concludes as follows:

1. New L.P.'s formation and subsequent merger with and into Partnership A will be disregarded for federal income tax purposes. The merger will be treated as a purchase by M of publicly traded units in Partnership A from the holders of those units in exchange for cash. No gain or loss will be realized by New L.P., Partnership A, or any of the Other Partnerships as a result of the merger. The Other Partnerships will not terminate as a result of the merger.

2. Gain or loss will be realized and recognized by the holders of publicly traded units in Partnership A upon the exchange of those units for cash in the merger. The amount of the gain or loss will be equal to the difference, if any, between (a) the amount of cash received and (b) the adjusted tax basis of the publicly traded units exchanged. Except as provided in section 751(a), if a person holds a publicly traded unit as a capital asset, any gain recognized will be gain from the sale or exchange of a capital asset, within the meaning of section 1222. Except as provided in section 751(a), if a person holds a publicly traded unit as a capital asset, any loss so recognized will be loss from the sale or exchange of a capital asset, within the meaning of section 1222.

3. The amount of cash received by the holders of publicly traded units attributable to Partnership A's unrealized receivables (as defined in section 751(c)) or inventory items that have appreciated substantially in value (within the meaning of section 751(d)) will be considered as an amount realized from the sale or exchange of property other than a capital asset.

4. The holders of publicly traded units will be allocated their respective distributive shares of the items listed in section 702(a), with respect to Partnership A, for the period beginning on the first day of the taxable year in which the merger occurs and ending on the day of the merger. Partnership A's distributive shares of those items attributable to the Other Partnerships will be allocated to the holders of publicly traded units as provided in section 706(d)(3).

5. Provided that a holder of publicly traded units disposes of that unitholder's entire interest in Partnership A, the exchange of publicly traded units in Partnership A for cash will be a disposition by the unitholder of an entire interest in a passive activity in a fully taxable transaction. Unless a holder of publicly traded units has a relationship to M described in Section 267(b) or 707(b)(1), the excess of (i) the sum of (I) any Partnership A loss allocated to that unitholder with respect to the period beginning with that unitholder's entry into Partnership A and ending on the date of merger (including any previously disallowed loss determined under section 469(b)) and (II) any loss realized on the exchange, over (ii) any net income or gain for the taxable year of the merger (determined without regard to the losses described in clause (i)) will be treated as a loss that is not from a passive activity.

6. The transfer of publicly traded units to M in exchange for cash will not terminate Partnership A under section 708(b)(1)(B), provided that immediately prior to the merger, the holders of publicly traded units own a less than 50 percent interest in either the capital or the profits of Partnership A.

7. Provided that Partnership A interests cease to be traded on an established securities market or cease to be readily tradable on a secondary market (or the substantial equivalent of a secondary market), for its first taxable year beginning after the merger and for later years, Partnership A will cease to be a publicly traded partnership within the meaning of section 7704.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the above-described facts under any other provision of the Code. In particular, no opinion is expressed concerning whether Partnership A, New L.P., or any of the Other Partnerships is classified as a partnership under section 7701.

Pursuant to a power of attorney on file with this office, copies of this letter are being sent to your authorized representatives.

                                   Sincerely yours,