Rev. Rul. 80-323 1ISSUE
Is a limited partnership interest that is transferred in a section 351 exchange transferred subject to its share of partnership liabilities for purposes of sections 357(c) and 358(d) of the Internal Revenue Code?
P, a widely held corporation, is engaged directly and through S, its wholly owned subsidiary, in the business of acquiring film rights and exhibiting motion pictures. S is the general partner in a limited partnership also engaged in acquiring film rights and exhibiting motion pictures. The limited partnership was formed and began business activities in 1971. In its operation, the limited partnership has incurred bona fide indebtedness. At all times since the inception of the limited partnership, the fair market value of its assets has exceeded the sum of its liabilities. In many instances, however, the share of nonrecourse partnership liabilities allocated to a limited partner exceeds the limited partner's adjusted basis of the partnership interest.
For valid business reasons, an offer was made to the limited partners to transfer their partnership interests to Newco, a corporation to be organized for the purpose of the offer, in exchange for Newco stock. Limited partners holding, in total, a 35 percent interest in the partnership's capital and profits accepted the offer. No Newco stock other than the shares to be issued pursuant to the offer will be issued. The proposed transaction will qualify as a transfer of property to a controlled corporation within the meaning of section 351 of the Code.
The principal production of motion picture property owned by the partnership began before September 11, 1975.
LAW AND ANALYSIS
Section 741 of the Code provides that in the case of a sale or exchange of an interest in a partnership gain or loss will be recognized to the transferor partner. However, section 1.741-1(c) of the Income Tax Regulations refers to section 351 for nonrecognition of gain or loss upon the transfer of a partnership interest to a corporation controlled by the transferor.
Section 351(a) of the Code provides that no gain or loss will be recognized if property is transferred to a corporation solely in exchange for its stock and immediately after the exchange the transferor or transferors are in control of the corporation. Under section 357(c), if the sum of the amount of liabilities assumed by the corporation and the amount of liabilities to which the property is subject exceeds the transferor's total adjusted basis of the property transferred, then the excess will be considered as gain from the sale or exchange of a capital asset or of property that is not a capital asset, as the case may be.
Section 1.752-1(e) of the regulations provides that where none of the partners has any personal liability with respect to a partnership liability (as in the case of a mortgage on real estate acquired by the partnership without the assumption by the partnership or any of the partners of any liability on the mortgage), then all partners, including limited partners, shall be considered as sharing such liability under section 752(c) of the Code in the same proportion as they share the profits.
Section 1.752-1(d) of the regulations provides that where there is a sale or exchange of an interest in a partnership, liabilities shall be treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships. For example, if a partner sells his interest in a partnership for $750 cash and at the same time transfers to the purchaser his share of partnership liabilities amounting to $250, the amount realized by the seller on the transaction is $1,000.
Each transferring limited partner's share of partnership nonrecourse liabilities shall be considered as a liability to which the partnership interest is subject for purposes of section 357(c). Consequently, each such limited partner will recognize gain as provided in section 357(c) of the Code to the extent that the partner's share of nonrecourse partnership liabilities exceeds the adjusted basis of the interest transferred. That gain will be ordinary or capital pursuant to the application of sections 741 and 751.
As provided in section 358(d) of the Code, the amount of the liabilities to which each transferred partnership interest is subject will be treated as money received by the transferor partner on the exchange, and, therefore, pursuant to section 358(a)(1), the basis in the Newco stock received will be the same as the basis of the partnership interest exchanged therefor, decreased by the share of the partnership liabilities allocated to the partnership interest and increased by the gain recognized, if any.
Each partnership interest exchanged for Newco stock will be transferred subject to its share of partnership liabilities, and gain will be recognized to the extent that each partner's share of partnership liabilities exceeds the adjusted basis of the interest transferred.
The holding in this ruling does not preclude the application of section 357(b) of the Code, if warranted.
1 Also released as News Release IR-80-114, dated October 30, 1980.