At the initial structure, partners A and B hold all of the interests in Partnership Z. To incorporate the business under the “interests over” form of Situation 3, the partners of Z transfer their partnership interests in Z to newly-formed corporation T in exchange for all of the outstanding stock of T. This exchange terminates Z, and all of its assets and liabilities become assets and liabilities of T.
Under IRC § 351, gain or loss is not recognized by Z’s partners on the transfer of the partnership interests to T in exchange for T’s stock. On the transfer of the partnership interests to the corporation, Z terminated under IRC § 708(b)(1)(A).
Under IRC § 358(a), the basis to the partners of Z of the stock received from T in exchange for their partnership interests equals the basis of their partnership interests transferred to T, reduced by Z’s liabilities assumed by T, the release from which is treated as a payment of money to Z’s partners under IRC §§ 752(d) and 358(d). T’s basis for the assets received in the exchange equals the basis of the partners in their partnership interests, allocated in accordance with IRC § 732(c).
At the ending point, A and B own the stock of Corp T, which holds Z’s former assets & liabilities. Because Rev. Rul. 84-111 provides that the form selected for incorporating a partnership controls how the transaction is treated, and the tax consequences may differ, partners should evaluate each option (Situations 1, 2 & 3) before choosing how to incorporate their partnership.
The partners transfer their partnership interests in Z to newly-formed Corp T for all of T’s stock; this contribution terminates Z and its assets & liabilities become T’s.
Because the partners contribute their interests solely for T’s stock and control T immediately after, no gain or loss is recognized on the exchange under IRC § 351.
On the transfer of all partnership interests to a single corporate owner, Partnership Z terminates under IRC § 708(b)(1)(A).
The partners’ stock basis equals their partnership interest basis under IRC § 358(a), reduced by liabilities assumed (treated as money under §§ 752(d), 358(d)), and T’s asset basis is set under IRC § 732(c).
