Tax advisers are constantly addressing choice of entity concerns. Ideally, we get clients into the perfect entity — generally a C corporation, S corporation, or partnership — on Day 1, and never have to address the issue again. Often times, however, either a change in client’s goals or the tax law necessitates a mid-life shift from one type of entity to another.
For the next three weeks, we’ll examine a common transaction: the incorporation of a partnership. In general, the incorporation of a partnership — as opposed to the opposite transaction, the conversion of a corporation into a partnership — can be done tax-free.
In Revenue Ruling 70-239, the IRS provided three ways for converting a partnership into a corporation, and at the time, the IRS concluded that all three options would yield the same tax consequences, giving taxpayers the ultimate flexibility in choosing their method of conversion.
In Revenue Ruling 84-111, however, the IRS revoked Revenue Ruling 70-239. In the Ruling, the IRS continued to offer three options for incorporating a partnership, but changed its tune regarding the implications of the chosen option. In R.R. 84-111, the IRS clarified that there may be subtle differences in the tax consequences based on which of the three conversion options are chosen, and unlike R.R. 70-239, the IRS would now hold you to your chosen option.
As a result, it is vital that a partnership that wishes to convert to a corporation understand its fact pattern and the potential implications of the chosen conversion method under R.R. 84-111.
To that end, the video blogs for the next three weeks will address the three conversion options under R.R. 84-111, as well as the resulting tax consequences and traps for the unwary. Enjoy.