PARTNERSHIP MAY REORGANIZE AS AN LLC WITHOUT ADVERSE TAX CONSEQUENCES.

UIL Number(s) 7701.02-00, 0708.00-00

                                             Date: March 26, 1992

This is in response to a letter dated November 18, 1991, submitted on behalf of P requesting rulings concerning P's conversion to a limited liability company.

P is a State A general partnership comprised of approximately b partners. P has been in existence for over c years.

P is currently managed by an executive committee comprised of d of the partners. The executive committee and the partners have decided for business reasons to convert the partnership to a limited liability company to be organized under the State B Limited Liability Company Act.

The partners will organize an LLC under the State B Act by filing articles of organization (the Articles) with the State B Division. Upon the filing of the Articles with the Division, the LLC will come into existence. The partners will contribute their interests in P to the LLC in exchange for all of the ownership interest in the LLC. All of the partners of P will become members of the LLC and will own their interests in the LLC in the same proportions as they owned their interests in P.

Following the contribution of the partners' interests to the LLC, P will dissolve and distribute all of its assets to the LLC. The LLC will assume all of the recourse obligations of P and take the assets subject to all of the nonrecourse obligations of P. The LLC will then own all of the assets that were previously owned by P and will be liable for all of the obligations of P.

The partners will also execute an operating agreement for the LLC (the Operating Agreement). The Operating Agreement will provide for the organization, governance, and dissolution of the LLC. The Articles and the Operating Agreement are the only documents necessary for the formation and operation of the LLC.

The members of the LLC will elect managers who will serve as the Executive Committee to manage the LLC. The Executive Committee will make the decisions regarding the operations of the LLC, and under the Operating Agreement there will always be an Executive Committee to make the management decisions. All of the managers will be members of the LLC.

The State B Act provides that a limited liability company is dissolved upon the death, retirement, resignation, expulsion, bankruptcy or dissolution of a member or upon the occurrence of any other event that terminates the continued eligibility of a member for membership in the limited liability company, unless the business of the limited liability company is continued by the consent of the remaining members entitled to receive a majority of the capital of the limited liability company under a right to do so stated in the articles of organization or operating agreement within 90 days after the event of termination.

Subsection 1.5(c) of the Operating Agreement provides, in part, that the LLC shall continue until e, unless sooner dissolved by the death, retirement, resignation, expulsion, bankruptcy or dissolution of a member or the occurrence of any other event that terminates the continued membership of a member in the LLC. Section 1.6 of the Operating Agreement provides that notwithstanding the foregoing provisions of section 1.5, upon the occurrence of an event described in Subsection 1.5(c), if there are at least two remaining members, the remaining members have the right to continue the business of the LLC. Such right can be exercised only by the unanimous consent of all of the remaining managers (the members then comprising the Executive Committee) and by the affirmative consent of a majority of the members (in number and voting interest). These consents must be given, if at all, within 90 days after the occurrence of an event described in Subsection 1.5(c). If such consents are not timely given, the right of the members to continue the business of the LLC will expire and the LLC's affairs will be wound up as provided in Article 12 of the Operating Agreement.

Subsection 6.1(a) of the Operating Agreement provides that the LLC shall be managed by managers who shall be an Executive Committee and an Administrative Member. Subsection 6.1(b) provides that the Executive Committee shall establish all polices of the LLC, except for certain matters to be determined by the members (generally consisting of issues internal to the LLC).

Section 7701 of the Internal Revenue Code sets forth definitions to be used in determining the classification of an organization for federal tax purposes. Organizations are classified as associations taxable as corporations, as partnerships, or as trusts. The classification of any particular organization is determined under the tests and standards set out in sections 301.7701-2, 301.7701-3, and 301.7701-4 of the Procedure and Administration Regulations.

Section 301.7701-2(a)(1) of the regulations sets forth six characteristics ordinarily found in a pure corporation which, taken together, distinguish it from other organizations. These are: (1) associates, (2) an objective to carry on business and divide the gains therefrom, (3) continuity of life, (4) centralization of management, (5) liability for corporate debts limited to corporate property, and (6) free transferability of interests.

Section 301.7701-2(a)(2) of the regulations provides that characteristics common to partnerships and corporations are not material in attempting to distinguish between an association and a partnership. Because associates and an objective to carry on a business and divide the gains therefrom are generally common to corporations and partnerships, an organization that has such characteristics will be classified as a partnership if it lacks at least two of the remaining characteristics. Section 301.7701-2(a)(3) of the regulations.

Section 301.7701-2(b)(1) of the regulations provides that an organization has continuity of life if the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member will not cause a dissolution of the organization. On the other hand, if the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member will cause a dissolution of the organization, continuity of life does not exist. If the retirement, death, or insanity of a general partner of a limited partnership causes a dissolution of the partnership, unless the remaining general partners agree to continue the partnership or unless all remaining members agree to continue the partnership, continuity does not exist.

The Operating Agreement for the LLC requires the unanimous consent of all remaining managers and the consent of a majority of the remaining members (in number and by voting interest whichever is greater) to continue the LLC after the occurrence of an event of dissolution. Accordingly, LLC will lack the corporate characteristic of continuity of life. See, Rev. Rul. 88-79, 1988-2 C.B. 361.

The State B Act provides that the interest of a member in a limited liability company may be adjusted, transferred, or assigned as provided in the operating agreement. However, if the nontransferring members entitled to receive a majority of the nontransferred profits of the limited liability company do not consent to the proposed transfer or assignment, the transferee of the interest of the member has no right to participate in the management of the business and affairs of the limited liability company or to become a member. In that event, the transferee is entitled to receive only the share of profits or other compensation by way of income and the return of contributions which that member would otherwise be entitled.

Section 4.8 of the Operating Agreement provides that a member may not transfer, assign, pledge, or otherwise encumber the member's interest in the LLC.

Section 301.7701-2(e)(1) of the regulations provides that an organization has the corporate characteristic of free transferability of interests if each of its members or those members owning substantially all of the interests in the organization have the power, without the consent of other members, to substitute for themselves in the same organization a person who is not a member of the organization. In order for this power of substitution to exist in the corporate sense, the member must be able, without consent of other members, to confer upon his or her substitute all of the attributes of his her [sic] interest in the organization. Thus, the characteristic of free transferability of interests does not exist in a case in which each member can, without the consent of other members, assign only his or her rights to share in profits but cannot assign his or her rights to participate in the management of the organization.

Because a member's interest is not assignable, the LLC will not have the corporate characteristic of free transferability of interest.

LLC has associates and an objective to carry on business and divide the gains therefrom. However, because LLC will not possess the corporate characteristics of continuity of life and free transferability of interests, it will be classified as a partnership for federal tax purposes.

Section 721(a) of the Code provides that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.

Rev. Rul. 84-52, 1984-1 C.B. 157, considers the federal income tax consequences of the conversion of a general partnership into a limited partnership. Each partner's total percentage 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 treats the conversion as an exchange under section 721 of the Code. Because the business of the general partnership will continue after the conversion and because, under section 1.708-1(b)(1)(ii) of the regulations, a transaction governed by section 721 is not treated as a sale or exchange for purposes of section 708, the revenue ruling concludes that the general partnership is not terminated.

This situation is directly analogous to the situation covered by Rev. Rul. 84-52. Assuming that P is properly classified as a partnership, the conversion of P into LLC will not result in a termination of P under section 708(b) of the Code. P's business will be continued and the partners' interests in capital, profits, and losses will remain the same after the conversion transaction.

Based on the information submitted we conclude:

1. The LLC will be classified as a partnership for federal tax purposes.

2. No gain or loss will be recognized by the members, the LLC or P upon the transfer of the interests in P to the LLC and upon the liquidation of P, except as provided in section 752 of the Code.

3. The LLC will be considered a continuation of the partnership, P, and the conversion of P into the LLC will not result in a termination of P under section 708 of the Code.

Except as specifically ruled upon above, no opinion is expressed concerning the federal income tax consequences of this transaction under any other provisions of the Code or regulations.

A copy of this letter should be attached to the first tax return filed by LLC.

This ruling is subject to the requirements of Rev. Proc. 89-12, 1989-1 C.B. 798, to the extent applicable. If the requirements of Rev. Proc. 89-12 fail to be met at any time, this ruling will be void.

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

In accordance with a power of attorney filed with this office, a copy of this letter is being sent to your authorized representatives.

                                   Sincerely yours,