CONVERSION FROM GENERAL TO LIMITED PARTNERSHIP WILL NOT CLOSE YEAR WITH RESPECT TO PARTNERS.

Index Nos.: 0706.05-00, 0708.01-00, 7701.02-03

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

July 23, 1985

P was organized in 1973 as a general partnership. Effective January 1, 1985, the partnership agreement was amended to convert the general partnership into a limited partnership under the Uniform Limited Partnership Act of State S, a statute that materially corresponds to the Uniform Limited Partnership Act. Prior to the conversion, P engaged in the business of farming and was composed of six general partners, A, B, C, D, E and F. The business of the general partnership has continued to be carried on by the limited partnership, and A, B, C, D, E and F have maintained their status as general partners.

At the time of the conversion of P to a limited partnership, a bank holding company made a capital contribution to P of x dollars in exchange for a y percent interest in P as a limited partner. It is represented that the x dollars paid to P is not less than the fair market value of the y percent interest in P. It is further represented that no partner has given up any part of his right to be paid his contributions in favor of the limited partner as compensation for past or future services of G, a wholly owned subsidiary of the limited partner.

Based upon the information submitted, we conclude as follows:

P has associates and an objective to carry on a business and 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, P 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 P is organized and operated under a statute corresponding to the Uniform Limited Partnership Act, P lacks the corporate characteristic of continuity of life. Section 301.7701 - 2(b)(3) of the regulations.

Provided that A, B, C, D, E and F, the general partners of P, have and maintain substantial assets (other than their interests in P) that could be reached by the creditors of P, P will lack the corporate characteristic of limited liability. Section 301.7701 - 2(d)(2) of the regulations.

Therefore, provided that P will be organized and operated in accordance with applicable state statutes pertaining to limited partnerships, P will be classified as a partnership from the date of this ruling letter for federal income tax purposes.

Section 721 of the Internal Revenue 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.

Section 708 of the Code provides that a partnership shall be considered as continuing if it is not terminated. A partnership is terminated only if (1) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or (2) 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 1.708 - 1(b)(1)(ii) of the Income Tax Regulations provides that a contribution of property to a partnership does not constitute a sale or exchange for purposes of section 708 of the Code.

In Rev. Rul. 84-52, 1984 - 1 C.B. 157, the Service considers a situation in which the partners of partnership X amend the partnership agreement to convert the general partnership into a limited partnership. The business of the general partnership will be carried on after the conversion. The revenue ruling provides that although the partners have exchanged their interests in the general partnership X for interests in the limited partnership X, under section 721 of the Code, gain or loss will not be recognized by any of the partners of X except as provided in section 731 of the Code. Rev. Rul. 84-52 further provides that because the business of X will continue after the conversion and because, under section 1.708 - 1(b)(1)(ii) of the 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 will not be terminated under section 708 of the Code.

A, B, C, D, E and F have contributed their interests in general partnership P in exchange for their interests in limited partnership P, a transaction governed by section 721 of the Code. The entry of the limited partner into the partnership is also a transaction governed by section 721. Accordingly, because the business of P has continued after the conversion, and because, under section 1.708 - 1(b)(1)(ii) of the 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, neither the conversion of P into a limited partnership nor the admission of the limited partner caused a termination of the partnership.

Section 706(c)(2)(A)(i) of the Code provides that the taxable year of a partnership shall close with respect to a partner who sells or exchanges his entire interest in the partnership. Section 706(c)(2)(B) provides that the taxable year of a partnership shall not close with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner's interest, gift, or otherwise).

The legislative history of section 706(c)(2) of the Code indicates that section 706(c)(2)(A) was meant to apply only when a partner no longer retains any interest in the partnership. H.R.Rep. No. 1337, 83d Cong., 2d Sess. A226 (1954). Thus, only a transfer that completely disassociates the partner from the partnership will cause the partnership year to close with respect to the transferor.

A, B, C, D, E and F have exchanged their interests in general partnership P for interests in limited partnership P. However, the exchange has not caused any of the partners to completely disassociate from the partnership. Accordingly, the conversion of the general partnership into a limited partnership did not cause the taxable year of the partnership to close with respect to any of the partners. In addition, pursuant to section 706(c)(2)(B) of the Code, the entry of the limited partner into the partnership did not cause the taxable year of the partnership to close with respect to any of the partners.

This ruling is subject to the requirements set forth in Rev. Proc. 74-17, 1974 - 1 C.B. 438. If the requirements of Rev. Proc. 74-17 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 Code.

A copy of this letter should be attached to the next tax return filed by P. A copy is enclosed for that purpose.

In accordance with the power of attorney on file, we are sending a copy of this letter to your authorized representative.

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.

Sincerely yours,