Revenue Ruling 84-111, Situation 1 describes the “assets over” method of converting a partnership into a corporation. Partnership X, owned by partners A and B, transfers all of its assets to newly formed corporation R in exchange for all of R’s outstanding stock and R’s assumption of X’s liabilities. Partnership X then terminates by distributing all of the R stock to A and B in proportion to their partnership interests.
Under IRC § 351, no gain or loss is recognized by X on the transfer of its assets to R in exchange for R’s stock and R’s assumption of X’s liabilities. Under IRC § 362(a), R takes the assets with a carryover basis equal to their basis in the hands of X immediately before the transfer.
Under IRC § 358(a), X’s basis in the R stock received equals its basis in the assets transferred, reduced by the liabilities R assumed — that assumption being treated as a payment of money to X under IRC § 358(d). The liability assumption also decreases each partner’s share of the partnership liabilities, decreasing the basis of each partner’s interest under IRC §§ 752 and 733.
On the distribution of the R stock, X terminates under IRC § 708(b)(1)(A). Under IRC § 732(b), each partner’s basis in the distributed R stock equals the adjusted basis of that partner’s partnership interest immediately before the distribution.
The partnership’s transfer of all its assets to newly formed Corp R for all of R’s stock qualifies as a nonrecognition exchange under IRC § 351.
Under IRC § 362(a), Corp R takes the transferred assets with the same basis they had in the hands of Partnership X immediately before the transfer.
R’s assumption of X’s liabilities is treated as money received under IRC § 358(d), reducing X’s basis in the R stock and, via IRC §§ 752 & 733, each partner’s outside basis.
When X liquidates under IRC § 708(b)(1)(A), IRC § 732(b) sets each partner’s basis in the distributed R stock equal to the adjusted basis of that partner’s former partnership interest.
