Today we conclude our three-part look at Revenue Ruling 84-111 and the methods available for incorporating a partnership. To summarize what we’ve covered so far:
- Partnership transfers assets to the newly formed corporation in exchange for stock. Partnership then liquidates, distributing stock to partners.
- Partnership recognizes no gain or loss on the transfer of assets and liabilities under Section 351 unless the liabilities transferred exceed the tax basis of the transferred assets, in which case the partnership recognizes gain under Section 357(c).
- As a result, if the liabilities exceed the tax basis of the assets, the “Assets Over” Method may not be the right one for you.
- Corporation takes a basis in the assets equal to the partnership’s basis in the assets under Section 362.
- Partnership takes a basis in the stock received equal to the partnership’s basis in its assets less the liability relief under Section 358.
- Partnership then liquidates, with partners taking a basis in the stock received equal to their basis in the partnership under Section 732 less their share of debt relief under Section 752.
- Partnership liquidates first, and then partners transfer assets and liabilities to the corporation in exchange for stock.
- Upon liquidation, partners recognize gain if cash distributed exceeds their outside basis in the partnership under Section 731.
- Under Section 732, partners take a basis in the assets distributed equal to their outside basis less any cash received.
- Upon transfer of assets and liabilities to the corporation, no gain or loss is recognized under Section 351.
- Any potential Section 357(c) gain can be avoided by contributing additional assets necessary to equalize asset basis with liabilities.
- Corporation takes a basis in the assets received equal to the partners’ basis in those assets under Section 362.
- Partners take a basis in the stock received equal to their basis in the assets less any liabilities relieved of.
Today we take on the third and final method provided for in Revenue Ruling 84-111, in which the partners merely transfer their partnership interests to the newly formed corporation in exchange for stock in a Section 351 transfer. I apologize for the less than formal background, but circumstances beyond my control (read: the European Championship semifinals) forced me to record today’s video from a different location.
