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Pope & Talbot and a Slippery Slope: Distributions of Partnership Equity

Posted on Nov. 15, 2021
[Editor's Note:

This article originally appeared in the November 15, 2021, issue of Tax Notes Federal.

]
Robert M. Kane Jr.
Robert M. Kane Jr.

Robert M. Kane Jr. is an associate in the tax and benefits department of Ropes & Gray LLP in Boston. He thanks his colleague Jay Milkes for his comments on this article.

In this article, Kane examines Pope & Talbot and argues that the IRS has inappropriately relied on that case in two rulings addressing the calculation of section 311 gain on distributions of partnership equity.

Copyright 2021 Ropes & Gray LLP.
All rights reserved.

At some point in the life of a portfolio company, a tax adviser will be asked to review a proposed restructuring. The adviser will be concerned with whether the restructuring results in gain recognition for the client. If the restructuring involves a distribution from a corporation, the tax adviser will need to consider whether there could be gain under section 311. This question initially appears straightforward, but like other matters that intersect subchapter C and subchapter K, complexity arises when the property to be distributed by the corporation is partnership equity.

A tax adviser who performs a cursory reading of section 311 might conclude that the section 311 gain on a distribution of partnership equity is calculated based on the fair market value of the partnership equity and the corporation’s basis in the partnership equity. However, rulings issued by the IRS applying Pope & Talbot1 have reached a different conclusion, creating doubt about how the section 311 gain is calculated on a distribution of partnership equity. This article reviews Pope & Talbot and the rulings issued by the IRS applying that decision to partnership equity distributions.

I. Section 311

Section 311(a) provides the general rule that no gain or loss shall be recognized by a corporation upon a nonliquidating distribution of property “with respect to” its stock. However, section 311(b)(1) creates an exception when a corporation distributes property in a distribution to which subpart A of Part I of subchapter C applies2 and the FMV of the property exceeds its adjusted basis in the hands of the corporation.3 In that case, the distributing corporation recognizes gain as if it sold the distributed property to the distributee at its FMV. Losses on those distributions would remain unrecognized under section 311(a). Section 311(b) was added to the code to ensure that the distributing corporation would not achieve a different tax result than if it sold the appreciated property and distributed the proceeds to its shareholders.4

If a corporation distributes two assets, one with a basis exceeding its FMV and the other with an FMV exceeding its basis, the corporation cannot offset the loss from the net loss asset against the gain from the net gain asset under section 311. Instead, the corporation would recognize gain on the net gain asset but not recognize loss on the net loss asset. However, to use the tax benefit from the net loss asset, the corporation could contribute both assets to a partnership and distribute partnership equity. This would allow the corporation to use the loss on the net loss asset that is otherwise prohibited under section 311(a).5 Section 311(b)(3), added to the code in 1988,6 authorizes Treasury to promulgate regulations to provide that in the case of a distribution of partnership equity, the amount of gain recognized under section 311(b)(1) is computed without regard to any loss attributable to property contributed to the partnership for the principal purpose of recognizing that loss on the distribution. Those regulations to prohibit the partnership distribution strategy have not yet been issued.

II. Pope & Talbot

In Pope & Talbot, the taxpayer (Parent) was a publicly traded corporation that operated in the timber, land development, and resort businesses in Washington state. In October 1985 Parent’s board of directors approved a plan to distribute some of its timber and land development properties, known as the Washington properties, to a newly formed limited partnership that would be owned by Parent’s shareholders. The plan was approved by the shareholders December 4, 1985, and a Delaware limited partnership was formed to receive the assets. The partnership initially had two partners — Pope MGP Inc., the managing general partner, and Pope EGP Inc., the standby general partner — which had exclusive authority for managing the partnership. Each partner was initially owned equally by two of Parent’s principal shareholders.

On December 20, 1985, in accordance with the plan, Parent transferred the Washington properties to the partnership. Notably, the partnership paid no consideration to Parent for the Washington properties, and Parent never became a partner of the partnership. Instead, the partnership issued units to Pope MGP, which on that same date distributed the units to all of Parent’s shareholders. The units gave a holder only limited voting rights and no management rights.

On December 6, 1985, before the transaction, the units began trading on a when-issued basis7 on the Pacific Stock Exchange. The average trading price of the units between December 6, 1985, and January 7, 1996, was $11.50.

When Parent filed its 1985 tax return, it calculated the gain it recognized under section 311(b)(1) based on the aggregate FMV of all units distributed to the shareholders, using the average trading price of $11.50 per unit for a total value of $40,325,775. Parent argued to the Tax Court that the FMV of the property distributed should be determined by reference to the value of the units received by each shareholder. In contrast, the IRS determined that the FMV of the Washington properties was $115,610,385, and that Parent’s gain under section 311(b) should be based on the FMV of the properties and not the FMV of the units that were distributed to the shareholders by Pope MGP. This was an issue of first impression for the Tax Court, which had to decide what property interest was to be valued for purposes of section 311 when an asset left the corporate solution but a different asset was received by the shareholders.

The Tax Court noted that it was not clear under section 311(b) whether property in this case meant the Washington properties or the units. Reviewing the legislative history of section 311, the court determined that section 311(b) was enacted to tax the appreciation that occurred while the distributing corporation held the property and to prevent the corporation from avoiding tax on the inherent gain by distributing that property to the shareholders. In its opinion, the Tax Court noted that Parent was never a partner in the partnership and that it did not receive any units. The Tax Court held that under section 311(b), Parent’s gain was to be determined as if it had sold its interest in the Washington properties at their FMV on the date of distribution.8

Parent appealed to the Ninth Circuit, which affirmed the Tax Court in a split decision. Parent argued that section 311(b) must be read symmetrically with sections 301 and 302 such that the FMV of the property distributed by a corporation must equal the FMV of the property in the form it is received by the shareholders. The Ninth Circuit rejected that argument, in particular noting that if, as was the case for this transaction, a corporation distributes one form of property and the shareholders receive another, there cannot be symmetry between section 311(b)(1) and sections 301 and 302. The court of appeals specifically noted that Parent did not distribute units to the shareholders.9

III. IRS Rulings

This section examines the rulings issued by the IRS that apply Pope & Talbot.

A. TAM 200239001

In TAM 200239001 a corporation (TV Parent) was owned by three trusts whose beneficiaries consisted of the families of the company’s founder. TV Parent indirectly owned a subsidiary (TV Subsidiary) that operated a television station. The families wanted to sell the television station but were unable to execute a sale. Because TV Subsidiary was unable to sell the television station, the families had TV Subsidiary contribute substantially all its assets (television assets) to a joint partnership in exchange for a majority interest in the partnership.10 The two families that were the beneficiaries of the trusts each formed a partnership (together, the family partnerships), and those family partnerships contributed cash to the joint partnership in exchange for minority limited partnership interests.

The exam agent determined that the value of the joint partnership interests received by the family partnerships exceeded the amount of cash contributions by those partnerships, while the value of the assets contributed by TV Subsidiary exceeded the value of the joint partnership interests it received. In other words, the family partnerships received value in excess of their contributions, which came at the expense of the partnership interests granted to TV Subsidiary. The exam agent concluded that under section 311(b) there was a deemed distribution of appreciated property by TV Subsidiary, through TV Parent, to the trusts and their beneficiaries, which then contributed the distributed property to the joint partnership through the family partnerships. The taxpayer argued that if there was a section 311(b) distribution, it should be characterized as a distribution of either a minority partnership interest in the joint partnership or a minority partial interest in the television assets, and that the amount of the gain should take into account appropriate discounting for minority interest and marketability. Relying on Pope & Talbot, the exam agent asserted that the gain under section 311(b) should be calculated based on the full FMV of the property distributed, without a discount for minority interest or lack of marketability.

The taxpayer argued that Pope & Talbot was distinguishable because in that case the corporation distributed 100 percent of its interest in the property whereas TV Parent distributed an indivisible minority interest in the television assets. However, the IRS noted that the legislative history of section 311(b) reveals that one of its purposes was to tax the appreciation in value that accrued while the distributing corporation held the property and to prevent the corporation from avoiding tax on the inherent gain by distributing that property to its shareholders. Therefore, the IRS ruled that even though only an indivisible minority interest in the television assets had been distributed, it is the full appreciation in the value attributable to that distributed interest that must be taxed, without a discount for lack of control or marketability.11

The IRS concluded that the amount of the deemed distribution under section 311(b) was the amount by which the value of the television assets contributed by TV Subsidiary exceeded the value of the joint partnership interests it received.12 This amount was deemed contributed by the families to the family partnerships and then further contributed to the joint partnership. If the IRS had characterized the transaction as a distribution of joint partnership interests, it would be unnecessary to deem the family partnerships as making a contribution to the joint partnership. Describing the deemed distribution in this manner indicates that the IRS viewed the distribution of property by TV Parent as a distribution of a minority interest in the television assets, and not as a distribution of joint partnership interests.

The conclusion in TAM 200239001 was likely influenced by the fact that TV Parent, just like the company in Pope & Talbot, did not actually distribute partnership interests.

B. Cox Enterprises

The issue raised in TAM 200239001 appears to have been litigated by that taxpayer in Cox Enterprises.13 In response to informal discovery requests, the IRS stated that the property distributed was the joint partnership interests but that the property to be valued in determining the section 311(b) gain was the television assets. Relying on Pope & Talbot, the IRS argued that in valuing the property under section 311(b), the FMV would be the same whether the property deemed distributed was the television assets or joint partnership interests. However, the Tax Court did not address that issue. Instead, it noted that the only issue in dispute for purposes of the taxpayer’s motion for summary judgment was whether there was a distribution of property under section 311(b), not the identity or value of the transferred property. The Tax Court held that the assumed transfer did not constitute a distribution that was subject to tax under section 311(b); therefore, it did not need to rule on how the section 311(b) gain on that distribution should have been calculated.14

C. TAM 200443032

In TAM 200443032 an S corporation and its shareholders decided to transfer the company’s manufacturing operations to various limited partnerships. The S corporation formed the limited partnerships and contributed real estate, inventory, accounts receivable, and operating capital to them in exchange for limited partner and general partner interests.15 The shareholders contributed cash to the limited partnerships in exchange for limited partner interests. At an unspecified date later in that tax year, the S corporation distributed its limited partner interests to its shareholders while retaining the general partner interests.

The S corporation obtained an appraisal of the limited partner interests for purposes of reporting gain on the distribution. The valuations were based on the value of the businesses underlying the interests but were discounted to reflect that they were noncontrolling interests and that there was no public market for them. On audit the IRS relied on Pope & Talbot to assert that the gain under section 311(b) should be determined based on the FMV of the assets transferred to the limited partnerships rather than the FMV of the limited partner interests.

The S corporation sought to distinguish its case from the distribution in Pope & Talbot on the basis that the company in Pope & Talbot never received or distributed the partnership interests, whereas the S corporation actually received the limited partner interests and distributed them to its shareholders.16 The IRS characterized this as a distinction without a difference because the Tax Court treated the company in Pope & Talbot as if it distributed the partnership interests directly to its shareholders. To support this assertion, the IRS cited a footnote in the Tax Court’s Pope & Talbot opinion stating, “It is clear that a conveyance of property to a partnership on behalf of a shareholder falls within the ambit of section 311(b).”

However, the beginning of the footnote stated that no argument was made that section 311 should not apply because the Washington properties were not conveyed directly to the shareholders.17 The purpose of the footnote was to signal that the Tax Court would have rejected that argument. It does not support the IRS’s assertion that the Tax Court treated the company in Pope & Talbot as if it distributed the partnership interests directly to its shareholders. Instead, the footnote highlights that a corporation cannot escape section 311(b) by conveying property to a third party on behalf of a shareholder.18 Moreover, the IRS’s assertion ignored that the Ninth Circuit found significant the fact that the company in Pope & Talbot never received the partnership interests and could not have distributed them to the shareholders.19 After making this assertion, TAM 200443032 cited a portion of the Ninth Circuit’s opinion in which the court explicitly noted that the company in Pope & Talbot distributed the Washington properties to the partnership and that the property received by the shareholders was different from the Washington properties. It is clear from the Tax Court and Ninth Circuit opinions that the company never owned the units, was never a partner in the partnership, and did not actually distribute the units. The footnote cited by the IRS fails to support its assertion, and therefore, the IRS’s position in this technical advice memorandum should not be considered authoritative on this question.

The IRS ultimately concluded that the S corporation’s gain under section 311(b) was to be determined as if it sold the assets contributed to the limited partnerships at their FMV on the date of the distribution.

D. LTR 200934013

LTR 200934013 involved an S corporation that owned all the membership interests of a limited liability company that was a disregarded entity for tax purposes. The LLC held a diversified portfolio of investment assets. At an unspecified time before the submission of the private letter ruling request, one of the shareholders of the S corporation (Shareholder A) contributed cash to the LLC in exchange for newly issued nonvoting preferred interests in the LLC. The S corporation represented that the principal purpose of Shareholder A’s contribution was to allow him to invest his excess cash directly in a diversified pool of investment assets. The IRS ruled that the admission of Shareholder A to the LLC caused it to convert to a partnership for tax purposes under Rev. Rul. 99-5, 1999-1 C.B. 434.

In the ruling request, the S corporation proposed that it would distribute some, but not all, of the LLC membership interests to its shareholders pro rata. The operating agreement of the LLC would then be amended to give the S corporation a share of the LLC’s profits that were disproportionate to its capital in exchange for the S corporation continuing to provide management services to the LLC. The S corporation represented that the proposed distribution was for valid business reasons, including to provide increased liability protection to the investment portfolio from the ongoing business operations of the S corporation and to facilitate continued co-investment among the owners outside the S corporation. The S corporation also represented that Shareholder A’s contribution to the LLC did not depend on the consummation of the proposed transaction.

The IRS ruled that the distribution of the LLC interests to the shareholders would cause the S corporation to recognize gain under section 311(b). Interestingly, the S corporation cited Pope & Talbot and represented that in measuring the gain to the S corporation under section 311(b), the distributed LLC interests would be valued as a percentage of the value of the assets held by the LLC instead of the value of the LLC membership interests.20 Although the S corporation made this representation, the private letter ruling did not discuss this issue or section 311 in its legal analysis. It is not known whether the taxpayer voluntarily made this representation or if the IRS insisted that it be made.

IV. A Slippery Slope

Pope & Talbot was rightly decided. However, in TAM 200443032 and LTR 200934013, the IRS inappropriately applied Pope & Talbot to rule that the gain recognized under section 311 by a corporation that distributes partnership equity is based on the FMV of the partnership’s assets rather than the partnership equity. This section discusses why the application of Pope & Talbot in those two rulings was inappropriate.

A. Pope & Talbot Distributing Assets, Not Partnership Equity

Pope & Talbot was correctly decided based on the facts of that case. The opinions of the Tax Court and Ninth Circuit were in part based on the facts that the corporation did not distribute the partnership equity to its shareholders; the asset that actually left the corporation was the Washington properties; and the corporation never owned the partnership equity.21 Because both courts highlighted that the asset transferred by the corporation was the Washington properties and not the partnership equity, it is difficult to imagine how they could have held that the property on which to calculate the section 311(b)(1) gain should be the partnership equity.22 Because the corporation in Pope & Talbot did not actually distribute partnership equity, the IRS’s reliance on that case to support its position in TAM 200443032 and LTR 200934013 that gain under section 311 should be determined based on the FMV of the partnership’s assets when the corporation retains economic or control rights in the partnership is misplaced.23 Accordingly, those rulings should not be considered authoritative on this point.

B. Retention of Economic or Control Rights

One interpretation of Pope & Talbot is that the form of the distribution is not determinative for purposes of section 311. Instead, one could view Pope & Talbot as standing for the proposition that a corporation cannot discount the value of the property it distributes under section 311 when it ultimately distributes 100 percent of its rights and interests in the property. In Pope & Talbot, the corporation transferred all its interests in the property, including any control rights, to a partnership. It did not retain any rights or interests in the property or the partnership. If a corporation distributes all its interests and rights in the property, as the corporation did in Pope & Talbot, the gain under section 311 should be based on the entire value of the property held by the corporation before the distribution, without any discount from dividing the property into pieces through a contribution to a partnership immediately before the distribution.

In contrast to the situation in Pope & Talbot, the corporation in TAM 200443032 retained general partner interests of the distributed partnerships. Because control rights, in the form of the retained general partnership interests, were not distributed, it is inappropriate for the section 311(b) gain to be determined based on 100 percent of the value of the assets held by the partnerships. There should have been a lack-of-control discount applied to the value of the distributed partnership interests.24 If a subsequent buyer wanted to purchase the partnership, it would need to purchase the general partner interests held by the corporation.

The corporation in LTR 200934013 retained an economic interest in the LLC. Further, the LLC’s operating agreement was amended to give the corporation an enhanced entitlement to profits because the corporation would provide future management services to the LLC. A subsequent purchaser of the distributed LLC interests would value those interests with a discount to reflect the corporation’s enhanced economic rights. Accordingly, it was inappropriate for the IRS to value the distributed LLC interests based on the value of the assets held by the LLC without any discount for the enhanced economic rights retained by the corporation.

Pope & Talbot could be read to stand for the proposition that a corporation cannot discount the value of the property it distributes under section 311 for lack of control or marketability when it ultimately distributes 100 percent of its rights and interests in the property. However, when a corporation does not distribute all its interests in the property, or retains economic or control rights in the property similar to the situations in TAM 200443032 and LTR 200934013, a discount to the value of the property for purposes of section 311 is appropriate. The IRS should not have disregarded the control rights retained by the corporation in TAM 200443032 or the enhanced economic rights of the corporation in LTR 200934013 in determining the gain under section 311.

C. Authority to Disregard a Partnership?

By ruling in TAM 200443032 and LTR 200934013 that the gain under section 311 is based on the FMV of the partnership’s assets rather than the partnership equity, the IRS disregarded the partnership as an entity and treated the partner as if it owned its respective share of the partnership’s assets. Because the corporation in Pope & Talbot did not in form have a distribution of partnership equity, the IRS’s reliance on that case to disregard a partnership in determining the amount of section 311 gain is misplaced when the corporation retains economic or control rights in the partnership. If the IRS wants a rule that in all cases of a distribution of partnership equity the gain under section 311 is determined based on the FMV of the partnership’s assets, that rule should originate from the code, like sections 751 and 864(c)(8), and not a technical advice memorandum or private letter ruling.

The code generally treats a partner selling a partnership interest differently from the partnership selling its assets.25 In some instances when a partnership interest is sold, the amount of the gain recognized by the partner is determined based on the assets of the partnership.26 For example, regulations under section 751(a) provide that the income or loss recognized by a partner upon the sale of a partnership interest is determined by reference to a hypothetical sale of the partnership’s assets.27 This hypothetical sale approach under section 751 can affect the amount of the income recognized by the seller and cause a sale of a partnership interest that would have generated a capital loss in the absence of section 751, to instead result in ordinary income and a capital loss. The approach taken by the section 751 regulations is clearly authorized by section 751.28 Without section 751, the IRS would lack the authority to look through the partnership to its assets to determine the character and amount of a partner’s gain on the sale of its partnership interest.

Under section 864(c)(8), if a non-U.S. person owns an interest in a partnership that is engaged in a trade or business within the United States, the gain or loss from the sale of the partnership interest is treated as effectively connected with a U.S. trade or business to the extent that the non-U.S. transferor would have had effectively connected gain or loss had the partnership sold all its assets at FMV as of the date of the sale. Similar to section 751, section 864(c)(8) requires the partnership to look at a hypothetical sale of the partnership’s assets to determine if the sale of the partnership interest will be treated as effectively connected to a U.S. trade or business and thus subject to U.S. taxation.

Section 864(c)(8) was added to the code by the Tax Cuts and Jobs Act in December 2017. Before the enactment of that provision, Rev. Rul. 91-32, 1991-1 C.B. 107, provided that a non-U.S. partner’s sale of an interest in a partnership engaged in a U.S. trade or business would be treated as a sale of the partner’s interest in the partnership assets for purposes of determining the source of the partner’s gain and whether the gain is effectively connected with a U.S. trade or business. In July 2017 the Tax Court issued its decision in Grecian Magnesite Mining.29 The primary issue was whether in a redemption the non-U.S. partner had to look through to the assets of the partnership to determine if any gain was effectively connected with a U.S. trade or business. The IRS argued that the Tax Court should follow the analysis in Rev. Rul. 91-32 in deciding this case. The Tax Court rejected that argument and declined to follow Rev. Rul. 91-32.30 It noted that Congress had explicitly carved out a few exceptions to section 74131 that, when they apply, require looking “through the partnership to the underlying assets and deem such a sale as the sale of separate interests in each asset owned by the partnership.” Those exceptions are section 751 and section 897(g),32 which, the Tax Court noted, reinforce the conclusion that the entity theory is the general rule for the sale or exchange of an interest in a partnership.

The Tax Court’s refusal to defer to Rev. Rul. 91-32 is evidence that it does not view a revenue ruling as the appropriate authority in which to create an exception to entity treatment.33 If the Tax Court did not view a revenue ruling as an appropriate authority, it would likely view a private letter ruling34 or technical advice memorandum35 as even less appropriate. If the IRS wants to create a rule to look through a partnership to its assets for purposes of computing section 311 gain, that rule should be in the code rather than a technical advice memorandum or private letter ruling.36

D. Noncontrolling Interests in Partnerships

It is not clear if the rule applied in TAM 200443032 and LTR 200934013 applies only to a partnership formed by a corporation or if it applies to all partnerships owned by a corporation. Applying the rule is problematic in situations in which a corporation owns a noncontrolling interest in a partnership. If the partnership does not grant information rights to its partners, a partner with a small or noncontrolling interest may be unable to obtain information on the FMV of the partnership’s assets to calculate the gain under section 311(b). It would be costly and burdensome for the partnership to perform a valuation of its assets as of the date of the distribution, especially when it is not on a year-end or quarter-end.

V. Conclusion

Pope & Talbot does not stand for the proposition that a corporation that distributes partnership equity must in all scenarios determine the amount of its gain under section 311 based on the FMV of the partnership’s assets. That could not be the holding of Pope & Talbot for the simple reason that no partnership equity was distributed in that case. Instead, Pope & Talbot likely stands for the proposition that a corporation cannot discount the value of the property it distributes under section 311 when it ultimately distributes 100 percent of its rights and interests in the property.

In TAM 200443032 and LTR 200934013 the IRS cited Pope & Talbot to support its position that in a distribution of partnership equity the corporation must determine its gain under section 311 by reference to the value of the assets of the partnership rather than the value of the partnership equity distributed. However, that was not the holding in Pope & Talbot, so the IRS incorrectly relied on that case in creating this rule in TAM 200443032 and LTR 200934013. Because the authority cited by the IRS in those rulings does not support its position, the rulings should not be considered authoritative on this point. If the IRS wants a rule that in all instances of a distribution of partnership equity the gain under section 311 is to be determined based on the FMV of the partnership’s assets, that rule should be addressed through an amendment to the code rather than a technical advice memorandum or private letter ruling.

FOOTNOTES

1 Pope & Talbot Inc. v. Commissioner, 104 T.C. 574 (1995), aff’d, 162 F.3d 1236 (9th Cir. 1999).

2 Section 311(b) does not apply to liquidating distributions, which are governed by section 336, or distributions in connection with a reorganization.

3 Section 311(b) was first added to the code as section 311(d) by the Tax Reform Act of 1969. Section 311(d) was modified by the Deficit Reduction Act of 1984, and then further modified and designated as section 311(b) by the TRA 1986. For a discussion of the changes to the language of this provision since its enactment in 1969, see Pope & Talbot, 104 T.C. at 577-580, 582-583. All references to this provision in this article are to section 311(b).

4 Senate Finance Committee, “Deficit Reduction Act of 1984: Explanation of Provisions Approved by the Committee on March 21, 1984,” S. Prt. 98-169, at 176-177 (1984).

5 See Jasper L. Cummings, Jr., “The Corporation as Partner: Tax Reasons and Tax Effects,” The Corporate Tax Practice Series, ch. 185A, at 20.

7 A when-issued transaction is a conditional transaction in which the buyer indicates a desire to buy the security when it is authorized for sale. Pope & Talbot, 162 F.3d at 1237.

8 After this decision, a trial was held to determine the FMV of the Washington properties. See Pope & Talbot Inc. v. Commissioner, T.C. Memo. 1997-116 and T.C. Memo. 1997-399.

9 “If the corporation distributes one form of property and the shareholders receive another, there is no ‘symmetry.’ That was the case here. The corporation did not distribute gold coins to shareholders who received gold coins. The corporation distributed the Washington Properties to the Partnership, and the shareholders received individual limited partnership interests.” Pope & Talbot, 162 F.3d at 1240.

10 TV Subsidiary was the managing general partner of the joint partnership.

11 The IRS did apply discounts to the value of the joint partnership interests received by the family partnerships in exchange for their cash contributions to reflect that they were minority interests and could face marketability issues.

12 The technical advice memorandum stated that the ruling was based on the assumption that a deemed section 311(b) distribution had occurred.

13 Cox Enterprises Inc. v. Commissioner, T.C. Memo. 2009-134. The description of the structures and transactions in this case and TAM 200239001 are almost identical.

14 For a discussion of Cox Enterprises, see Steven B. Gorin, “Using Partnerships to Distribute Corporate Assets,” 37 J. Real Est. Tax’n No. 4 (Fall 2010).

15 The S corporation did not contribute all of its assets to the limited partnerships.

16 The S corporation raised other arguments that the IRS rejected.

17 The full footnote reads: “No argument was made that sec. 311(d)(1) should not apply, because the Washington properties were not conveyed directly ‘to a shareholder,’ and it is clear that a conveyance of property to a partnership on behalf of a shareholder falls within the ambit of sec. 311(d)(1).” Pope & Talbot, 104 T.C. at 581 n.5.

18 This footnote shows that the Tax Court recognized that the asset that actually left the corporate solution was the Washington properties and not the units.

19 Pope & Talbot, 162 F.3d at 1240; see also Deanna Walton Harris, “Ltr. Rul. 200934013 — Was the Reference to Pope & Talbot Correct?” 37 J. Corp. Tax’n No. 2 (Mar.-Apr. 2010). The Tax Court’s opinion also stated that Pope & Talbot was not a partner in the partnership and never received any units.

20 Although the value of the LLC interests would be based on the underlying assets of the LLC, the IRS ruled that in calculating the gain, the S corporation would use its adjusted basis in the LLC interests, rather than the basis of the underlying assets.

21 See Harris, supra note 19, at 30 (“Clearly then, the Ninth Circuit found significance in the fact that the corporation in Pope & Talbot never held interests in the limited partnership (and thus legally speaking could not be said to have distributed partnership interests).”).

22 See Stephen L. Owen, “Using a Partnership to ‘Unlock’ Corporate Assets,” 2 J. Passthrough Entities 17, 18 (1999) (“Because Pope & Talbot never received a partnership interest in [the partnership], it would be difficult for it to argue that the property distributed from the company was in the form of limited partnership units.”).

23 See Harris, supra note 19, at 30 (“Is not the IRS’s victory in Pope & Talbot better viewed as only applicable when either the corporation does not, in form, distribute interests in a legal entity; or a legal entity is formed, but its formation is disregarded to serve the purposes of Section 311(b)?”).

24 Although the amount of the discount is a factual question.

25 See Lukasz M. Rachuba, “Grecian Magnesite and the Rev. Rul. 91-32 Roller Coaster,” Tax Notes, Dec. 11, 2017, p. 1557.

26 See Todd McArthur, “Partnership Transactions — Section 751 Property,” Portfolio 720-2nd, at para. II.E.3.

28 Section 751(a) provides that any consideration attributable to inventory items or unrealized receivables of the partnership will not be considered as an amount realized from the sale of a capital asset. This statutory language requires a seller of a partnership interest to take into account the partnership’s assets in determining the character and amount of its gain. Further, section 751(f) creates a look-through approach for tiered partnerships in determining whether property is an unrealized receivable or inventory item.

29 Grecian Magnesite Mining, Industrial & Shipping Co. SA v. Commissioner, 149 T.C. 63 (2017).

30 The Tax Court noted that the ruling was “cursory in the extreme” and that its “subchapter K analysis essentially begins and ends with the observation that [s]ubchapter K of the Code is a blend of aggregate and entity treatment for partners and partnerships.” Id. at 84.

31 Section 741 generally provides that in a sale or exchange of an interest in a partnership, the gain or loss shall be considered as gain or loss from the sale of a capital asset, except as otherwise provided in section 751.

32 Section 897(g) generally provides that proceeds from the sale of a partnership interest that are attributable to a U.S. real property interest will be considered as an amount received from the sale or exchange of a U.S. real property interest.

33 See Lee A. Sheppard, “A New Model for Taxation of Nonresident Partners,” Tax Notes, Aug. 7, 2017, p. 657 (“A revenue ruling is supposed to be merely the government’s opinion on how current law applies to stated facts. A revenue ruling is not a good way to introduce complex thinking or force taxpayers to obey a particular IRS position.”).

34 A private letter ruling may not be used or cited as precedent. See section 6110(k)(3).

35 A conclusion in a technical advice memorandum is exclusive to the case for which it was requested, and other taxpayers may not rely on a technical advice memorandum as precedent. See section 6110(k)(3). However, technical advice memoranda issued after October 31, 1976, are authoritative in determining whether there is substantial authority as a defense to the section 6662 accuracy-related penalty. See reg. section 1.662-4(d)(3)(iii); and Mitchell Rogovin and Donald L. Korb, “The Four R’s Revisited: Regulations, Rulings, Reliance, and Retroactivity in the 21st Century: A View From Within,” 46 Duq. L. Rev. 323, 356 (2008).

36 See Rachuba, supra note 25, at 1576 (noting that if the IRS wanted to create a backstop to section 875 similar to section 751, it should “take the form of a statutory amendment rather than a revenue ruling or even a Treasury regulation”).

END FOOTNOTES

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