KPMG Recommends Changes to Proposed Regs on Partnership Mergers and Divisions

They also recommend clarifying (1) the treatment of the interests-over form of partnership incorporations before January 11, 2000; (2) the tax treatment of the merger of a partnership into a single member LLC; (3) the application of the exception to the disguised sale rules in an assets-over merger; and (4) the effect of indirect ownership percentages in determining continuation.

[1] On January 11, 2000, the Internal Revenue Service ("IRS") and the Department of Treasury ("Treasury") issued proposed regulations under section 708 and other sections of the Internal Revenue Code ("Code"). The proposed regulations specify the tax treatment of partnership mergers and divisions. Generally, the proposed regulations provide reasonable, workable, and much needed guidance regarding these issues. Therefore, we commend the IRS and Treasury for their publication. However, there are certain aspects of the regulations that we believe require further clarification, illustration, or consideration. Therefore, we respectfully request that Treasury and the IRS consider the following comments prior to finalizing the regulations.

BACKGROUND

[2] Section 708(b)(2)(A) provides that in the case of a merger or consolidation of two or more partnerships, the resulting partnership is, for purposes of section 708, considered the continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the resulting partnership. Section 1.708-1(b)(2)(i) of the Income Tax Regulations provides that if the resulting partnership can be considered a continuation of more than one of the merging partnerships, the resulting partnership is the continuation of the partnership that is credited with the contribution of the greatest dollar value of assets to the resulting partnership. If none of the members of the merging partnerships own more than a 50 percent interest in the capital and profits of the resulting partnership, all of the merged partnerships are considered terminated, and a new partnership results. The taxable years of the merging partnerships that are considered terminated are closed under section 706(a).

[3] Section 708(b)(2)(B) provides that, in the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting partnership the members of which had an interest of 50 percent or less in the capital and profits of the prior partnership) are considered a continuation of the prior partnership. Section 1.708-1(b)(2)(ii) provides that any other resulting partnership is not treated as a continuation of the prior partnership. Instead, it will be considered a new partnership. If the members of none of the resulting partnerships owned an interest of more than 50 percent in the capital and profits of the prior partnership, the prior partnership is terminated. Where a member of a partnership that has been divided does not become a member of a resulting partnership that is considered a continuation of the prior partnership, that partner's interest is considered liquidated as of the date of the division.

[4] As stated in the preamble to the proposed regulations, neither section 708 nor the regulations thereunder prescribe a form for either a partnership merger or a division. Instead, in the case of mergers, taxpayers generally followed the guidance contained in Rev. Rul. 68-289 and Rev. Rul. 77-458 (both providing that partnership mergers follow the Assets-Over Form (discussed below)). However, in the absence of published guidance in the partnership division context, taxpayers generally adopted the Assets-Over Form or the Assets-Up Form (also discussed below).

[5] Prior to the issuance of the proposed regulations, the IRS had issued guidance treating a partnership merger as an Assets-Over Form transaction. Under the Assets-Over Form, the prior partnership transfers assets to a resulting partnership in exchange for interests in the resulting partnership. Immediately thereafter, the prior partnership distributes interests in the resulting partnership to the partners who are designated to receive those interests. In the proposed regulations, Treasury and the IRS recognize that many taxpayers accomplish partnership mergers by undertaking transactions in accordance with jurisdictional laws that follow a form other than the Assets-Over Form. For example, the terminating partnership could liquidate by distributing its assets and liabilities to its partners, who then contribute the assets and liabilities to the resulting partnership (Assets-Up Form). Similarly, the partners in the terminating partnership could transfer their terminating partnership interests to the resulting partnership in exchange for resulting partnership interests followed by the liquidation of the terminating partnership ("Interest-Over Form"). Furthermore, the laws of some states allow one partnership to merge with another in a completely formless transaction. Depending upon the fact situation, different tax consequences could arise depending upon the form of the merger.

[6] Similarly, in the division context, a partnership could divide in an Assets-Over transaction. Under the Assets-Over Form, the prior partnership transfers certain assets to a resulting partnership in exchange for interests in the resulting partnership. Immediately thereafter, the prior partnership distributes interests in the resulting partnership to the partners who are designated to receive those interests. Under the Assets-Up Form, the prior partnership distributes certain assets to some or all of its partners who then contribute those assets to a resulting partnership in exchange for interests in the resulting partnership. As with partnership mergers, the IRS and Treasury recognize that different tax results can arise depending upon the form of the division.

COMMENTS

[7] For the reasons set forth in detail below, we make the following recommendations with respect to the proposed regulations:

1. Do Not Apply McCauslen v. Commissioner and Rev. Rul. 99-6 to

1. Do Not Apply McCauslen and Rev. Rul. 99-6 to Nonrecognition Transactions

[8] From the preamble to the proposed regulations it appears that the government intends to apply the analysis contained in McCauslen v. Commissioner ¹ and Rev. Rul. 99-6 ² to nonrecognition transactions. Doing so could cause adverse tax consequences, including gain recognition, on what appears to the relevant parties to be a nontaxable transaction. For several reasons, we believe that doing so is inappropriate.

[9] In Rev. Rul. 99-6, the IRS discussed the federal tax consequences arising from the conversion of an LLC classified as a partnership to a single member LLC that is disregarded as an entity separate from its owner for federal income tax purposes. The ruling describes two possible methods for the conversion. The first method is the purchase by one member of the LLC of the remaining ownership interests; the second method is the purchase of 100% of the ownership interests in an LLC by a third party. In both situations, the ruling applies a bifurcated approach for purposes of determining the federal tax consequences to the seller and the buyer.

[10] Relying on the Tax Court decision in McCauslen, the IRS concluded that, for purposes of determining the tax consequences to the seller, the sale would be treated as a sale of a partnership interest. For purposes of determining the tax consequences to the buyer, however, different rules apply. From the buyer's perspective, the partnership terminates by making deemed liquidating distributions of its assets to all partners holding an interest prior to the sale. Following this distribution, the purchasing partner is treated as acquiring the assets that were deemed distributed to the seller.

[11] In McCauslen, Edwin McCauslen purchased his partner's interest in a two partner partnership following the death of his partner. Less than six months later, McCauslen realized a gain on the sale of some of the former partnership's assets. The sole issue before the court was whether gain recognized on the sale of the assets was long-term or short-term. The resolution of this issue turned upon whether McCauslen was entitled to include the partnership's holding period with respect to the properties sold. The Tax Court ultimately concluded that McCauslen was not entitled to a carryover holding period with respect to the portion of the partnership's assets relating to the purchased partnership interest.

[12] In reaching its decision, the Tax Court concluded that section 735(b) could not be construed as permitting the purchaser to tack on the partnership's holding period with respect to the selling partner's share of the partnership assets. Doing so would have permitted McCauslen to purchase assets belonging to another with a built-in holding period. Because the court felt this would lead to an incorrect result and because McCauslen's purchase of the decedent partner's partnership interest resulted in a termination of the partnership, the court was of the view that the transaction should be treated as a purchase by McCauslen of the assets relating to the decedent partner's interests in the partnership. Under this analysis, McCauslen was not entitled to long term capital gain treatment with respect to the portion of the assets relating to his partner's interest in the partnership.

[13] The McCauslen case and Rev. Rul. 99-6 both involved taxable exchanges of partnership interests. As mentioned above, the only question at issue in McCauslen was the purchaser's holding period. The analysis clearly indicates the court's intention to prevent the abuse of the capital gain rules by claiming a carryover holding period. While the issue of holding period is relevant when a partnership terminates under section 708(b)(1)(A) as a result of a taxable transaction or transactions, the issue of holding period is irrelevant in carryover basis transactions. Consider the following example:

Example 1: X, a corporation, owns 100 percent of Y, also a

[15] Now, assume that McCauslen and Rev. Rul. 99-6 do not apply to nonrecognition transactions. Under this analysis, Y would take the interest in Z with a holding period equal to X's holding period in the Z interest. Thereafter, the partnership would be deemed to liquidate into Y, with Y taking a holding period in the assets equal to the partnership's holding period in the assets. Under this scenario, Y would have a holding period equal to Z's holding period with respect to the assets.

[16] Under this fact pattern (or any other fact pattern in which a partnership terminates under section 708(b)(1)(A) as a result of a nonrecognition transaction), applying a McCauslen analysis does not affect the ultimate result with respect to the holding period for the partnership's assets. Therefore, the factor driving the Tax Court's analysis in McCauslen is not present in these types of transactions.

[17] Unfortunately, the application of McCauslen and Rev. Rul. 99-6 to nonrecognition transactions raises a host of other, practical issues that have not been addressed by the courts, the IRS, or the Treasury. For example, what if sections 704(c)(1)(B) and 737 apply upon the deemed liquidation. ³

[18] Generally, section 704(c)(1)(B) triggers gain to a partner when section 704(c) property contributed to the partnership by that partner is distributed to another partner within seven years of its contribution to the partnership. Five years is substituted for seven years for property contributed to the partnership before June 9, 1997. Section 704(c) property is property contributed to a partnership at a time when the fair market value of the property differs from its basis.

[19] If sections 704(c)(1)(B) and 737 do apply, Y could realize gain on the contribution in the example above. In addition, the effect on Y's basis in the assets deemed distributed to X in situations in which section 704(c)(1)(B) would apply to an actual distribution to that partner are unclear. Example 2 illustrates this problem.

Example 2: Assume the same facts as in Example 6, except that

[21] In contrast, not applying McCauslen and Rev. Rul. 99-6 to this nonrecognition transaction leads to a different result. If the two do not apply, Y would assume X's basis in the partnership interest contributed. Upon the liquidation of the partnership under section 708(b)(1)(A), Y would receive all of the assets of the partnership. As a whole, those assets would assume Y's basis in its partnership interest (including the increase in basis with respect to the partnership interest contributed by X). That basis would be allocated among the assets in accordance with section 732(c). Under this analysis, the built-in gain inherent in both partnership interests is preserved in the assets held by Y.

[22] Now assume that X would have recognized gain on the deemed distribution because the cash distributed exceeded its basis in its Z interest. As a result, X would have had a zero basis in any other property distributed in the same transaction if the distribution had actually occurred. In this situation, does Y take a zero basis in the assets it receives in the deemed contribution by X? If so, this basis would differ from the carryover basis that X took in its Y stock as a result of the contribution.

[23] The partners might have some protection against the application of sections 704(c)(1)(B) and 737 because the transaction arguably qualifies as the incorporation of a partnership. Presumably, sections 704(c)(1)(B) and 737 would not apply to this type of partnership incorporation. ⁴ Application of this exception would be less clear if Y had liquidated into X.

[24] There may also be some self-help measures available to partnership. For instance, assume that Z's partnership agreement provided that, in an actual liquidation, each partner would first receive property that the partner contributed to the partnership (to the extent the distribution is consistent with section 704(b)). Arguably, the IRS should consider such a provision in determining the tax consequences of a deemed liquidation. If the IRS and Treasury choose to provide guidance respecting this type of provision, the guidance should specify whether and when a partnership's agreement could be amended to add such a provision.

[25] Ironically, if such a provision protects the partner from gain under sections 704(c)(1)(B) and 737, it could increase the likelihood of gain under section 751(b). Section 751(b) provides that a distribution to a partner of partnership property that is an unrealized receivable (as defined in section 751(c)) or substantially appreciated inventory (as defined in sections 751(b)(3) and 751(d)) in exchange for all or part of the partner's interest in partnership property other than unrealized receivables and inventory or vice versa will be treated as a sale or exchange of the property between the distributee and the partnership. Under this rule, Y and/or the partnership could recognize capital gain or ordinary income to the extent the amendment of the partnership agreement causes it to receive one of these classes of property in exchange for the other. Even assuming that the provisions discussed above do not result in gain, Y could recognize gain if any money (including, in some cases, marketable securities) deemed distributed to Y exceeds Y's basis in its partnership interest.

[26] These are just a few of the many problems that arise when McCauslen and Rev. Rul. 99-6 are applied to nonrecognition transactions that result in the termination of a partnership under section 708(b)(1)(A). As discussed above, the very issue that drove the Tax Court to reach the McCauslen decision is irrelevant in nonrecognition transactions.

[27] We, therefore, recommend that the IRS and Treasury revise the position indicated in the preamble and take a further look at the issues raised by the application of McCauslen to nonrecognition transactions. After further review, the IRS and Treasury could issue separate and more complete guidance concerning the proper treatment of these transactions for federal income tax purposes.

[28] While we believe our recommendation on this issue should be adopted for the reasons stated above, we also recognize the reasoning behind the current position. If our recommendation is not adopted, we ask that the IRS and Treasury include in the final regulations exceptions to the application of sections 704(c)(1)(B) and 737 to section 708(b)(1)(A) terminations occurring as a result of nonrecognition transactions.

2. Treatment of Interests-Over Form of Partnership Incorporations Prior to Proposed Regulations

[29] As stated above, from the preamble to the proposed regulations it appears that the government intends to apply the McCauslen case to nonrecognition transactions. We have already presented our comments regarding that proposal. More troubling, however, is a statement made about the application of Rev. Rul. 84- 111 ⁵ to Interest Over Form incorporations of partnership interests.

[30] Rev. Rul. 84-111 provides examples of three possible forms of partnership incorporations. Those forms are identical to the forms available for partnership mergers. Rev. Rul. 84-111 has generally been understood to stand for the proposition that the form undertaken for a partnership incorporation will be respected for federal income tax purposes, provided that the taxpayer actually undertakes all the steps of one of the three forms set forth in the ruling. However, the preamble to the proposed regulations states that ". . . with respect to the Interest-Over Form, the revenue ruling respects only the transferors' conveyances of partnership interests, while treating the receipt of the partnership interests by the transferee corporation as the receipt of the partnership's assets (i.e., the Assets-Up Form)." In other words, the preamble states that Rev. Rul. 84-111 applied a McCauslen/Rev. Rul. 99-6 type analysis to a nonrecognition transaction, i.e., a partnership incorporation.

[31] At best, the language in the Rev. Rul. 84-111 is misleading. ⁶ In fact, the language of the ruling could be read as implying the opposite result. In analyzing the basis consequences of the Interest-Over Form partnership incorporation, the ruling provides that the corporation's basis for the assets received in the exchange equals the basis of the partners in their partnership interests allocated in accordance with section 732(c). This statement could reasonably be interpreted as indicating that the liquidation of the incorporating partnership occurred at a time when the corporation held all of the interests in the partnership. Under that analysis, the corporation would receive the contributed partnership interests with a basis equal to the basis of the partners in those interests immediately prior to their contribution. Thereafter, the corporation would receive the partnership's assets in liquidation of the contributed partnership interests. In that case, the corporation's basis in the assets would be allocated in accordance with section 732(c).

[32] We do recognize that the government mentioned the application of the McCauslen/Rev. Rul. 99-6 analysis to an Interest- Over Form incorporation in at least two GCMs prepared by the IRS in contemplation of Rev. Rul. 84-111. ⁷ In fact, the draft of the revenue ruling attached to GCM 38144 explicitly stated that the McCauslen analysis applied to these transactions. The failure to include such reference to McCauslen in the final version of the ruling implies that the government had concluded that the case did not apply.

[33] While the "bad" consequences of applying a McCauslen/Rev. Rul. 99-6 analysis to an Interest-Over partnership incorporation are limited, ⁸ many taxpayers may have made basis calculations and filed tax returns based upon a reasonable interpretation of Rev. Rul. 84-111. Therefore, if our previous request (i.e., that McCauslen and Rev. Rul. 99-6 not be applied to nonrecognition transactions) is not granted, we recommend that the final regulations provide that the McCauslen/Rev. Rul. 99-6 analysis will not apply to Interest-Over Form partnership incorporations occurring prior to the date of publication of the proposed regulations.

3. Clarify the Tax Treatment of the Merger of a Partnership into a Single-Member LLC

[34] Section 708(b)(2)(A) and the proposed regulations only provide guidance with respect to the merger of one partnership into another. Neither the statute nor any published guidance address the merger of a partnership into a single member LLC or other disregarded entity. However, this type of merger is allowed under some state statutes. Consider the following examples:

Example 3: X, a partnership owned equally by A and B, plans to

[36] First, taxpayers could treat the merger as a contribution of the partnership's assets to the single member entity in exchange for an interest therein followed by a distribution by the partnership of those interests to its partners. Under this view, the disregarded entity would become a partnership because it has more than one member. As a result, the entire transaction would be treated as the formation of a new partnership governed by Rev. Rul. 99-5. ⁹ Under this characterization, X would contribute its assets to Y in exchange for an interest therein. Immediately thereafter X would liquidate, distributing its interests in Y to A and B. It is unclear whether Y would be treated as a continuation of X.

[37] Alternatively, taxpayers could treat the merger of a partnership into a disregarded entity owned by one of the partnership's partners as the conversion of the first partnership into a new partnership. This conversion would be tax-free to the partners, provided that their respective shares of partnership liabilities do not shift as a result of the conversion. ¹⁰ The conversion would be followed by a deemed contribution by B of the assets of the disregarded entity to the partnership. It is unclear whether this type of analysis could apply in situations where Y is owned by a person that is not a member of X. In this case, Y would be treated as a continuation of X for federal income tax purposes. Guidance with respect to this issue would provide practitioners with much needed certainty.

Example 4: Assume the same facts as in Example 3, except that Y

[39] In the fact situation above, the transaction represents nothing more than a mere change in identity, form, or place of organization of a partnership. We recommend that the IRS provided guidance on this issue. This guidance could address the issue of whether this type of transaction is treated as a partnership merger and which, if any, entity would be treated as the surviving entity for federal income tax purposes.

4. Clarify the Tax Treatment of Other Partnership Transactions That Arguably Constitute Mergers or Divisions

[40] The proposed regulations do not contain a definition of a partnership merger. In practice, certain transactions that do not appear to be partnership mergers from a business perspective arguably constitute a merger for federal income tax purposes. For example, consider the following situations:

Example 5: A owns 70 percent and B owns 30 percent of the

[42] The contribution of the Y interest to X and the resulting liquidation of Y could also be treated as a merger of X and Y. If the transaction is treated as a merger and the proposed regulations apply, the transaction would be treated as an Assets-Over Form merger. As a result, X would take all of the assets of Y with a basis equal to the partnership's basis in those assets. In addition, sections 704(c)(1)(B) and 737 would not apply to the transaction. Therefore, the tax consequences of the transaction could be drastically different in certain fact patterns.

Example 6: A owns 30 percent and B owns 70 percent of the

[44] The odd nature of the previous characterization would not be eliminated by respecting the transaction as nothing more than a simple liquidation of Y if the analysis of Rev. Rul. 99-6 applies to this type of transaction. Under this characterization, solely from Y's perspective, the transaction would be treated as a liquidation. From X's perspective, however, different rules would apply. The transaction would be treated as though Z liquidated, distributing all of its assets (presumably pro rata) to both Y and X. Thereafter, X would be treated as receiving the portion of Z's assets distributed to Y in a liquidating distribution of its interest in Y. Under this analysis, X would take a 50 percent interest in each of Z's assets with a basis equal to X's basis in its Z interest immediately prior to the distribution. Because the remaining 50 percent of the assets are treated as being received in a deemed distribution from Y, those assets would assume X's basis in its Y interest.

[45] We do not recommend one position over the other with respect to these transactions. However, we do recommend that the IRS and Treasury provide guidance as to the proper tax treatment of these and other, similar transactions. In considering the proper treatment of these transactions, note that the "taxpayer favorable" characterization of each of these transactions will depend upon the facts and circumstances of an individual situation.

5. Clarify the Application of the Exception to the Disguised Sale Rules in An Assets-Over Form Merger

[46] In the merger context, a partner in the terminating partnership may not want to become a partner in the resulting partnership or may want to reduce its interest in the partnership. Instead, that partner may want money or other property in lieu of an interest in the resulting partnership. Under the Assets-Over Form, however, the transfer of cash by the resulting partnership to the terminating partnership to facilitate the buyout could cause the terminating partnership to be treated as selling a portion of its property to the resulting partnership under the disguised sale rules of section 707(a)(2)(B). If so characterized, any gain or loss recognized by the terminating partnership could be allocated to all of the partners in the terminating partnership even though only the exiting partner received consideration.

[47] In the preamble to the proposed regulations, the IRS and Treasury recognize that this result would be inappropriate in certain circumstances. Accordingly, Prop. Reg. section 1.708-1(c)(3) provides that, in a transaction characterized under the Assets-Over Form, a sale of an interest in the terminated partnership to the resulting partnership that occurs as part of a merger or consolidation under section 708(b)(2)(A) will be respected as a sale of a partnership interest if the merger agreement (or similar document) specifies that the resulting partnership is purchasing interests from a particular partner in the merging or consolidating partnership and the consideration that is transferred for each interest sold. We believe that this rule provides useful guidance to taxpayers and reaches the correct result from an economic standpoint. Therefore, we support the regulatory provision as drafted. We believe, however, that language in the preamble to the proposed regulation, creates an undesirable ambiguity with respect to this rule.

[48] As noted above, the language of section 1.708-1(c)(3) of the proposed regulations indicates that, as long as the merger agreement reflects the intent of the parties to treat a transfer of cash by the resulting partnership to the terminating partnership as a sale of a partnership interest, the transaction will be treated as a sale of the interest (as opposed to the sale of a portion of the terminating partnership's assets). The regulatory language does not appear to limit the application of this rule to the sale of the partner's entire interest in the terminating partnership. Rather, the agreement could specify that the transfer of cash equal to 50 percent of the value of a particular partner's interest in the terminating partnership was to be treated as the sale of one half of that partner's interest in the terminating partnership and that partner would calculate gain on the 50 percent interest under section 741. In other words, the partner receiving the cash would not have to sell his entire interest in the terminating partnership in order for the exception to the disguised sale rules to apply.

[49] In contrast to the regulatory language, the preamble language appears to imply that the exception to the disguised sale rules applies only to situations in which the partner receiving the cash receives no interest in the resulting partnership. We recommend that the final regulations clarify that the exception applies to the sale of less than 100 percent of a particular partner's interest in the terminating partnership.

6. Clarify the Effect of Indirect Ownership Percentages in Determining Continuation

[50] Sections 708(b)(2)(A) and (b)(2)(B) provide rules for determining whether a partnership will be treated as a continuation of a merged or divided partnership. In the case of a merger, the resulting partnership will be considered the continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the resulting partnership. In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting partnership the members of which had an interest of 50 percent or less in the capital and profits of the prior partnership ) will be considered a continuation of the prior partnership. One unanswered question is whether indirect interests in a partnership will be considered in making either of these determinations.

[51] Consider the following fact pattern:

Example 7: A and B each own a fifty percent interest in X, a

[53] The resolution of this issue will be based on a determination of whether a partnership is more properly treated as an aggregate or an entity for purposes of sections 708(b)(2)(A) and (b)(2)(B). For simplicity purposes, we believe the entity approach should apply for this purpose. Treating the partnership as an entity under these rules would be consistent with the treatment of partnerships under section 708(b)(1)(B). We recommend that the IRS and Treasury provide guidance indicating that the entity approach will apply.

7. Provide an Example of a Situation the Substance of Which Is Inconsistent with Following the Prescribed Form for a Partnership Division

[54] The proposed regulations provide that if a merger is part of a larger series of transactions, and the substance of the larger series of transactions is inconsistent with following the prescribed form of the merger, the form may not be respected. The proposed regulations provide an example of the application of the rule. The proposed regulations provide that a similar recast may be applied if a partnership division is part of a larger series of transactions and the substance of the series of transactions is inconsistent with the form prescribed by the proposed regulations. However, the proposed regulations do not provide an example illustrating a fact situation to which the IRS and Treasury believe this recast should apply.

[55] We recommend that the IRS and Treasury provided one or more examples of the situations intended to be addressed by this provision. In addition, examples showing common situations to which the rule does not apply would provide helpful guidance for taxpayers in planning for partnership divisions.

[56] We appreciate the opportunity to provide comments on the proposed regulations. As previously stated, we commend the IRS and Treasury for undertaking this project and providing useful guidance. If you have any questions regarding these comments, please do not hesitate to contact Deanna Walton at (202) 533-4156.

Respectfully submitted,

² 1999-6 I.R.B. 8.

³ Note that if section 704(c)(1)(B) applies to a pro rata liquidation, the contributing partner should be protected from triggering gain under section 737 as a result of the increase in the partner's basis in its partnership interest. However, we raise both sections to make the IRS and the Treasury aware of the need for an exception to both sections.

⁴ See, section 1.704-4(c)(5) and section 1.737-2(c). Each of these sections provides that the relevant Code section does not apply to an incorporation of a partnership by any method of incorporation (other than a method involving an ACTUAL distribution of partnership property to the partners followed by a contribution of that property to a corporation), provided that the partnership is liquidated as part of the transaction (emphasis added).

⁵ 1984-2 C.B. 88.

⁶ See McKee, Nelson, and Whitmire, Federal Taxation of Partnerships and Partners 17.03[4].

⁷ See, GCM 37540 and GCM 38144.

⁸ Taxpayers should be protected from the application of both section 704(c)(1)(B) and section 737 by section 1.704-4(c)(5) and section 1.737-2(c), respectively.

⁹ 1999-6 I.R.B. 7.

¹⁰ See, Rev. Rul. 84-52, 1984-1 C.B. 157 and Rev. Rul. 95-37, 1995-1 C.B. 130.

¹¹ Id.