Rev. Rul. 84-115

ISSUE

Will income be recognized under section 751 of the Internal Revenue Code when an investor contributes to a limited partnership an interest in another limited partnership, under the circumstances described below.

FACTS

A, an individual, owned 4 units of P1, a limited partnership that provides janitorial services. In order to become a partner in a real estate limited partnership, A contributed A's interest in P1 to P2 in exchange for 1 unit of P2. At the time of the contribution, P1 had performed services, the payment for which had not been includible in income under P1's method of accounting. Thus, P1 had assets described in section 751(c)(2) of the Code. P1 did not have any liabilities at the time of the contribution. The transaction was entered into primarily for business purposes and was not part of a step transaction to avoid ordinary income tax treatment under section 751 of the Code.

LAW AND ANALYSIS

Section 721(a) of the Code provides that no gain or loss shall be recognized when a partner contributes property to a partnership in exchange for a partnership interest.

Section 741 of the Code provides that, in the case of sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner. The gain or loss shall be considered as a gain or loss from the sale of a capital asset except as otherwise provided in section 751.

Section 751(a) of the Code provides that the fair market value of any property received by a transferor partner in exchange for all or part of the partner's interest in a partnership attributable to unrealized receivables or substantially appreciated inventory items of the partnership will be considered as an amount realized from the sale or exchange of property other than a capital asset.

Section 751(c)(2) of the Code provides that the term unrealized receivable includes, to the extent not previously includible in income under the method of accounting used by the partnership, the right to payment for services rendered.

Generally, a transferor must recognize gain or loss upon the exchange of a partnership interest. However, A's exchange of A's interest in P1 was a contribution of property by A to P2 in exchange for a partnership interest in P2. The specific nonrecognition provision of section 721 supersedes the provisions of sections 741 and 751.

HOLDING

A will not recognize any income or loss under sections 741 and 751 of the Code as a result of a contribution of A's limited partnership interest in P1 to limited partnership P2 in exchange for a limited partnership interest in P2. This holding assumes that the transfer of P's unrealized receivables was not an assignment of income.