CONVERSIONS OF PARTNERSHIPS DO NOT TERMINATE PARTNERSHIPS.

Index Nos.: 0708.00-00, 0721.00-00, 1001.00-00, 7701.02-03

Refer Reply to: CC:IND:I:2:1

August 28, 1984

X was formed as a general partnership in 1977 under the laws of S. X owns the beneficial interest in an apartment complex and related facilities. X also owns personal property related to the use of its real property. The partners of X are A, B, C, D, E, F, and G. Such partners' interests in X range from 5 percent to 38 percent.

The partners have amended and restated the partnership agreement to convert X, a general partnership, into a limited partnership under the S Uniform Limited Partnership Act, a statute that materially corresponds to the Uniform Limited Partnership Act. Under the limited partnership agreement, the general partners of X, subsequent to the conversion, will be B and Corporation; Corporation is wholly owned by B. The transfer of part of B's interest in X to Corporation will take place prior to the conversion. B will also be a limited partner, along with the remaining partners in X. Each partner will have the same interest in partnership profits, losses, and capital as such partner had in X prior to the conversion. The business of X will continue to be carried on after the conversion.

With regard to X after the conversion, X will have associates and an objective to carry on a business and to divide the gains therefrom. Section 301.7701 - 2(a)(2) of the Procedure and Administration Regulations. Therefore, in order to be classified as a partnership, X must lack at least two of the following corporate characteristics: continuity of life, centralization of management, limited liability, and free transferability of interests. Section 301.7701 - 2(a)(3) of the regulations.

Because X will be organized under a statute corresponding to the Uniform Limited Partnership Act, X will lack the corporate characteristic of continuity of life. Section 301.7701 - 2(a)(5) and 301.7701 - 2(b)(3) of the regulations.

Provided that B and Corporation, the general partners of X, have and maintain substantial assets that could be reached by the creditors of X, then X will lack the corporate characteristic of limited liability. In determining whether B and Corporation have substantial assets with regard to a particular partnership, B's and Corporation's interests in that partnership will be disregarded. Section 301.7701 - 2(d)(2) of the regulations.

Therefore, provided that X will be organized and operated in accordance with applicable state statutes pertaining to limited partnerships, X will be classified as a partnership for federal income tax purposes.

Rev. Rul. 84-52, 1984 - 15 I.R.B. 16, considers the federal income tax consequences of the conversion of a general partnership interest into a limited partnership interest in the same partnership. Each partner's total percent interest in the partnership's profits, losses, and capital remained the same after the conversion. Further, the business of the general partnership continued to be carried on after the conversion.

The revenue ruling concludes that (1) except as provided below, pursuant to section 721 of the Code, no gain or loss would be recognized by the partners under sections 741 or 1001 of the Code as a result of the conversion, (2) because the partnership's business would continue after the conversion and because, under section 1.708 - 1(b)(1)(ii) of the Income Tax Regulations, a transaction governed by section 721 of the Code is not treated as a sale or exchange for purposes of section 708 of the Code, X would not be terminated under section 708 of the Code, (3) if, as a result of the conversion, there were no change in the partners' shares of the partnership's liabilities under section 1.752 - 1(e) of the regulations, there would be no change to the adjusted basis of any partner's interest in the partnership, and (4) if, as a result of the conversion, there were a change in the partners' shares of the partnership's liabilities under section 1.752 - 1(e) of the regulations, and such change caused a deemed contribution of money to the partnership by a partner under section 752(a) of the Code, then the adjusted basis of that partner's interest would, under section 722 of the Code, be increased by the amount of such deemed contribution. If the change in the partners' shares of the partnership's liabilities caused a deemed distribution of money by the partnership to a partner under section 752(b) of the Code, then the basis of that partner's interest would, under section 733 of the Code, be reduced (but not below zero) by the amount of such deemed distribution, and gain would be recognized by that partner under section 731 of the Code to the extent the deemed distribution exceeds the adjusted basis of that partner's interest in the partnership.

Based upon the information submitted, and the authorities cited above, the following rulings are provided:

(1) The conversion of X into a limited partnership will not result in the sale or exchange by the partners of any of their interests in X.

(2) Except as provided in ruling 4 below, no gain or loss will be recognized by any partner by reason of the conversion of X to a limited partnership.

(3) X will not be terminated under section 708(b) of the Code by reason of X's conversion to a limited partnership.

(4)(a)If, as a result of the conversion, there is no change in the partners' shares of X's liabilities under section 1.752 - 1(e) of the regulations, there will be no change to the adjusted basis of any partner's interest in X.

(5) If, as a result of the conversion, there is a change in the partners' shares of X's liabilities under section 1.752 - 1(e) of the regulations, and such change causes a deemed contribution of money to X by a partner under section 752(a) of the Code, then the adjusted basis of that partner's interest will be increased by the amount of such deemed contribution. If the change in the partners' shares of X's liabilities causes a deemed distribution of money by X to a partner under section 752(b) of the Code, then the basis of that partner's interest will be reduced (but not below zero) by the amount of such deemed distribution, and gain will be recognized by that partner under section 731 of the Code to the extent the deemed distribution exceeds the adjusted basis of that partner's interest in X.

This ruling is subject to the requirements set forth in Rev. Proc. 74-17, 1974 - 1 C.B. 438. If any of these requirements fail to be met at any time, this ruling will have no force or effect retroactive to the date of its issuance.

Except as specifically ruled upon above, no opinion is expressed as to the federal income tax consequences of the transaction described above under any other provision of the Internal Revenue Code.

A copy of this ruling should be attached to the next information return filed for X.

In accordance with a power of attorney on file, we are sending a copy of this ruling to X's authorized representative.

This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) of the Code provides that a ruling may not be used or cited as precedent.

Sincerely yours,