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“Three Ways to Incorporate a Partnership.” Rev. Rul. 84-111 – Modified by Instructor
Transfers; Controlled Corporations; Partnership Interests For Stock. July 23, 1984.
The three situations below involve partnerships X,
Y, and Z, respectively. Each partnership used the
accrual method of accounting and had assets and
liabilities consisting of cash, equipment, and
accounts payable. The liabilities of
did not exceed the adjusted basis of its assets.
Numbers added by Instructor.
Partnerships X, Y and Z each
have the following balance sheet
Book Value and FMV
Partner A – Capital
Partner B – Capital
the partnership interest, before counting debt.
The three situations are as follows:
Situation 1 – Partnership X
transferred all of its assets to newly-
in exchange for all the
outstanding stock of R and the assumption by R of
X's liabilities. X then terminated by distributing all
the stock of R to X's partners in proportion to their
Situation 2 – Partnership Y
distributed all of its assets and
liabilities to its partners in proportion to their
partnership interests in a transaction that constituted
a termination of Y under section 708(b)(1)(A) of the
Code. The partners then transferred all the assets
received from Y to newly-formed
exchange for all the outstanding stock of T and the
assumption by S of Y's liabilities that had been
assumed by the partners.
Situation 3 – Partners of Z
The partners of Z
transferred their partnership
interests in Z to newly- formed
exchange for all the outstanding stock of T. This
exchange terminated Z and all of its assets and
liabilities became assets and liabilities of T.
In each situation, the steps taken by X, Y, and Z,
and the partners of X, Y, and Z, were parts of a plan
to transfer the partnership operations to a
corporation organized for valid business reasons in
exchange for its stock and were not devices to avoid
or evade recognition of gain.
LAW AND ANALYSIS
of the Code provides that no gain or
loss will be recognized if property is transferred to a
corporation by one or more persons solely in
exchange for stock in such corporation and
immediately after the exchange such person or
persons are in control (as defined in section 368(c) )
of the corporation.
) of the Income Tax Regulations
provides that, as used in section 351 of the Code, the
phrase "one or more persons" includes individuals,
trusts, estates, partnerships, associations, companies,
or corporations. To be in control of the transferee
corporation, such person or persons must own
immediately after the transfer stock possessing at