Assets Up Conversion Explained
At the initial structure, partners A and B each hold interests in Partnership Y. In the “assets up” form of converting a partnership to a corporation, Partnership Y first distributes all of its assets and liabilities to A and B in proportion to their partnership interests, and A and B surrender their partnership interests in the liquidation of Y.
The partners then transfer all of the assets received from Y to newly formed corporation S in exchange for all of the outstanding stock of S and S’s assumption of the Y liabilities that the partners had assumed. Partnership Y terminates under IRC § 708(b)(1)(A) on the distribution of all of its assets.
Under IRC § 732(b), the basis of the assets (other than money) distributed to the partners in liquidation of Y equals each partner’s adjusted basis in the Y interest, reduced by any money distributed. Under IRC § 752, the decrease in Y’s liabilities is offset by the partners’ assumption of those liabilities, so the net effect on each partner’s basis with respect to the liabilities transferred is zero.
Under IRC § 351, no gain or loss is recognized on the partners’ transfer of the assets to S in exchange for S stock and S’s assumption of the liabilities. Under IRC § 358(a), the partners’ basis in the S stock equals their IRC § 732(b) basis in the transferred assets, reduced by the liabilities assumed by S (treated as money received under IRC § 358(d)). Under IRC § 362(a), S’s basis in the assets equals the partners’ basis determined under IRC § 732(c) immediately before the transfer. At the ending point, A and B own all of the stock of Corp S.
