In last week’s video blog, we introduced Revenue Ruling 84-111, which provides three methods for converting a partnership into a corporation. Each method can result in a tax-free incorporation, but care must be given in deciding which method to employ, as the IRS will respect the method chosen and tax the transaction accordingly.
To illustrate the potential traps of carelessly choosing a conversion method, last week we highlighted that the default first method — the “Assets Over” method, would result in income being recognized at the partnership level under Section 357(c) if the liabilities transferred to the newly formed corporation as part of the Section 351 transaction exceeded the tax basis of the transferred assets. Thus, as we pointed out, if your partnership has Section 357(c) exposure, the “Assets Over” method may not be the best choice for you.
Today, we discuss the second method provided for in Revenue Ruling 84-111, the “Assets Over” method. Because the Assets Over method involves a liquidation of the partnership followed by a Section 351 transfer by the partners to the newly formed corporation, there is a potential opportunity to avoid any Section 357(c) gain. Enjoy.