¹Prop. Regs. Secs. 1.708-1(c) and (d), 1.743-1(h)(1) and 1.752-1(f) and (g) (REG-111119-99, 1/11/00). In this article, "partnership" includes limited liability companies (LLCs) and other entities classified as partnerships for Federal tax purposes.

²Although the proposed regulations do not specifically address built-in gain or loss issues arising under Secs. 704(c)(1)(B) and 737, the preamble describes the interaction of these provisions with the transactions that occur when a particular form of merger or division is undertaken.

³Prop. Regs. Sec. 1.708-1(c)(6) and (d)(6). The American Bar Association (ABA) Tax Section comments on the proposed regulations recommended that affected partnerships be able to elect to retroactively apply them to mergers and divisions occurring after Jan. 10, 2000. See "Comments Concerning Proposed Regulations 1.708-1, 1.743-1, and 1.752-1 Regarding Partnership Mergers and Divisions," 2000 TNT 92-33 (5/11/00) (hereinafter, "Comments").

⁴In this article, "merger" includes both mergers and consolidations.

⁵Although the proposed regulations do not specify the type of termination, presumably, it is a Sec. 708(b)(1)(A) termination.

⁶"Capital interest" and "profits interest" are not defined in Sec. 708 or its regulations. Regs. Sec. 1.704-1(e)(1)(v), which deals with family partnerships, defines a "capital interest" as an interest in partnership assets distributable to the owner on withdrawal or partnership liquidation; a "profits interest" is defined as the mere right to participate in partnership earnings or profits. Presumably, the capital or profits interests existing at the date of the partnership merger or division would apply; the partners' profits interests would include their interests in separately stated items of income or gain, as well as special allocations of such items. See Rev. Proc. 93-27, 1993-2 CB 343.

⁷Regs. Sec. 1.708-1(b)(2)(i) provides that the continuing partnership is the merging partnership that contributed the greatest dollar value of assets. Prop. Regs. Sec. 1.708-1(c)(1) clarifies that this determination is made net of partnership liabilities. This (net) asset value criterion is a creature of the regulations; it does not appear in the statute.

⁸Regs. Sec. 1.708-1(b)(2)(i); Prop. Regs. Sec. 1.708-1(c)(1) contains the same requirements. If the resulting partnership is not a continuation of any of the merging partnerships, the tax years of all merging partnerships close and the resulting partnership must adopt a tax year in accordance with Sec. 706(b).

⁹For example, if partners who owned a majority interest in the prior partnership acquire interests in each of the resulting partnerships, all of the resulting partnerships will be continuations of the prior partnership.

¹⁰The prior partnership, if not liquidated, may be a continuing partnership under certain circumstances. For example, if ABCD (owned by A, 20%, B, 30%, C, 30% and D, 20%) transferred a portion of its assets to a newly created partnership, Newco, and distributed Newco interests to partners B and C in partial liquidation of their ABCD interests, both ABCD and Newco would be resulting partnerships that are continuations of ABCD.

¹¹Regs. Sec. 1.708-1(b)(2)(ii); Prop. Regs. Sec. 1.708-1(d)(1) contains the same requirement.

¹²State merger statutes often do not dictate a particular form for partnership mergers; see the preamble to the proposed regulations. See also, for example, Fla. Stats. 608.4383.

¹³Rev. Rul. 68-289, 1968-1 CB 314; see also Rev. Rul. 77-458, 1977-2 CB 220. Both rulings were clarified by Rev. Rul. 90-17, 1990-1 CB 119.

¹⁴IRS Letter Ruling 8945069 (8/17/89).

¹⁵In IRS Letter Ruling 9015016 (1/9/90), the Service concluded that, "the contribution to the continuing partnerships is deemed to have occurred simultaneously with the distribution of the continuing partnership interests. Thus, there was no time when [the prior partnership] was considered to hold for its own account any of the continuing partnership interests as the sole 'partner' within the meaning of section 761(a)...." See also IRS Letter Ruling 9437007 (6/10/94).

¹⁶IRS Letter Ruling 8852004 (9/19/88). The Service held that the distribution of property to the partners and the contribution of that property to the resulting partnerships under the (imposed) assets-up form occur simultaneously.

¹⁷IRS Letter Ruling 9350035 (9/22/93).

¹⁸Prop. Regs. Sec. 1.708-1(c)(2) and (d)(2). The Service is not precluded from disregarding the assets-over or assets-up form of a merger or division if necessary to properly reflect the overall transaction's substance; see Prop. Regs. Sec. 1.708-1(c)(5) and (d)(5).

¹⁹The preamble justifies the rejection of the interest-over form on the grounds that subchapter K imposes certain tax results on partners, such as the Secs. 704(c) and 737 built-in gain and loss rules, which match contributed assets to the contributing partners. Accordingly, if partners of noncontinuing partnerships contribute assets (e.g., their partnership interests) different from the assets received by the continuing/resulting partnership (e.g., noncontinuing partnerships' assets), the operation of these rules is nullified. This rationale is based on Edwin E. McCauslen, 45 TC 588 (1966), and Rev. Rul. 67-65, 1967-1 CB 168, discussed in the text below.

²⁰Adapted from Prop. Regs. Sec. 1.708-1(c)(4), Example 2.

²¹However, only recipient partnerships that are noncontinuing/resulting partnerships are treated as new partnerships. By definition, there must be a divided partnership to have recipient partnerships.

²²In the case of a division using the assets-up form when there are no continuing partnerships, if the prior partnership does not liquidate under local law and, in form, retains certain assets and liabilities, it is deemed to transfer these assets and liabilities to a new resulting partnership under the assets-over form; see Prop. Regs. Sec. 1.708-1(d)(2)(ii)(B), last sentence.

²³Adapted from Prop. Regs. Sec. 1.708-1(d)(4), Example 4.

²⁴Rev. Rul. 84-111, 1984-2 CB 88.

²⁵McCauslen, note 19 supra.

²⁶Rev. Rul. 67-65, note 19 supra.

²⁷See also Regs. Sec. 1.708-1(b)(1)(v) (a Sec. 754 election in effect for a partnership terminating under Sec. 708(b)(1)(B), or made by a terminating partnership on its final return, applies to the incoming partner). Regs. Sec. 1.708-1(b)(1)(iv) has been amended since McCauslen and Rev. Rul. 67-65, note 19 supra. However, the purchase of the partnership interest that effects a partnership termination is respected under either version of the regulation.

²⁸Siller Bros. Inc., 89 TC 256 (1987).

²⁹Rev. Rul 99-6, IRB 1999-6, 6. Both McCauslen, note 19 supra, and Rev. Rul. 99-6 (which relies on McCauslen) involve the purchase of partnership interests.

³⁰See note 2, supra.

³¹But see Regs. Sec. 1.704-4(c)(5) (Sec. 704(c)(1)(B) does not apply to an incorporation of a partnership, unless the assets-up form is used). Regs. Sec. 1.737-2(c) provides a similar rule in the Sec. 737 context.

³²See Regs. Sec. 1.737-2(d)(3).

³³Query: if ABCD receives only one interest in each of AB and CD, how can an AB or CD interest distributed in liquidation of ABCD be attributable to Sec. 704(c) property contributed to AB or CD, as opposed to other contributed property? Can the division be structured so that ABCD receives a separate AB (or CD) interest in exchange for each Sec. 704(c) property contributed to AB (or CD)? See Rev. Rul. 84-53, 1984-1 CB 159 (a partner has a single outside basis in a partnership, even if he holds different classes of partnership interests).

³⁴Regs. Secs. 1.704-4(c)(4) and 1.737-2(b)(1) also would not apply if either AB or CD were a continuing/resulting partnership. For example, if AB was the divided partnership, ABCD and AB would be one partnership for Federal income tax purposes. These regulations would not apply, because ABCD/AB would not have contributed all of its assets and liabilities to another partnership.

³⁵As the example demonstrates, complex tracking issues arise in the case of an assets-over division of a partnership with both Sec. 704(c) property and non-Sec. 704(c) property. Like mergers effected under the assets-up form, had ABCD been divided under the assets-up form, the distribution of its assets could trigger Sec. 704(c)(1)(B) or 737, depending on the identity of the distributed assets and the distributee partners.

³⁶Adapted from an example in the preamble to the proposed regulations.

³⁷One issue not addressed in the preamble to the proposed regulations is whether a new Sec 704(c) layer is created when the divided partnership contributes appreciated or depreciated property to a recipient partnership under the assets-over form. See Example 16 and Variation 1 therein in the text below.

³⁸Adapted from Rev. Rul. 90-17, note 13 supra.

³⁹Rev. Rul. 90-17, note 13 supra.

⁴⁰Adapted from Prop. Regs. Sec. 1.752-1(g), Example 2; see also the preamble to the proposed regulations.

⁴¹The proposed regulations implicitly disregard momentary ownership here, but recognize it in certain partner buyouts for Sec. 743(b) purposes. See "Partner Buyout" in the text below.

⁴²B ends up with a 25% ((10% 3 70%) + (90% 3 20%)) interest in S Partnership.

⁴³On T's complete liquidation, B receives a $420 adjusted basis in the S interest T distributed, under Sec. 732(b).

⁴⁴See Regs. Sec. 1.707-3(f), Example (1), and -5(f), Examples (1) and (2). Any gain or loss on the deemed sale flows through to A and B as T partners.

⁴⁵Recently, the Service issued proposed regulations under Sec. 752 (REG-103831-99, 1/13/00) on the allocation of a partnership's nonrecourse liabilities. The preamble requested guidance on the allocation of a nonrecourse liability that encumbers assets held by multiple partnerships (e.g., a partnership division); see Prop. Regs. Sec. 1.752-3(b).

⁴⁶See Crnkovich and Lowy, "Planning for UPREIT Transactions When Selling Partners Want to Go Their Separate Ways," 90 J. Tax'n 238 (April 1999).

⁴⁷Prop. Regs. Sec. 1.708-1(c)(3) does not literally require that the selling partner's entire interest be sold to the resulting partnership. However, the preamble clearly contemplates that the selling partner does not become a partner of the resulting partnership.

⁴⁸See Prop. Regs. Sec 1.708-1(c)(4), Example 4.

⁴⁹See Prop. Regs. Sec. 1.708-1(d)(2)(ii)(B), last sentence, for a mixing of forms: assume a division in which there are no continuing/resulting partnerships and the assets-up form has been adopted (in each case). The prior partnership does not liquidate under the applicable jurisdictional law. The assets and liabilities that remain in the prior partnership are treated as transferred to a new resulting partnership under the assets-over form. See also Prop. Regs. Sec. 1.708-1(d)(4), Example 6. The ABA Tax Section's comments on the proposed regulations recommended that final regulations permit the use of both the assets-over form for some partners and the assets-up form for others in a single merger or division. See Comments, note 3 supra.

⁵⁰See the preamble to the proposed regulations (assumes titling of assets in the partners' names).

⁵¹See, e.g., Fla. Admin. Code Rule 12B4.013(10) (contribution of real property by a partner to a partnership generally subject to documentary stamp tax; similarly for a distribution of real property by a partnership to a partner). See also, Fla. Stats. 201.02(5).

⁵²See Sheppard, "ABA Tax Section: Partnerships Committee Considers Unanswered Questions," 2000 TNT 94-18 (5/15/00) (reporting on comments made by Daniel Carmody, IRS attorney-advisor). The ABA has recommended that the assets-up form be respected if the partners assign to the resulting partnership their rights to receive title to the assets or otherwise clearly direct the terminated partnership to transfer title directly to the resulting partnership. See Comments, note 3 supra.

⁵³See Sec. 704(c)(1)(A) and (B). The penultimate sentence of Regs. Sec. 1.704-4(c)(4) applies a step-into-the-shoes approach, under which the land's FMV at the time of the merger is irrelevant and there is no restarting of the seven-year period for A. Compare the Regs. Sec. 1.704-3(a)(9) tiered partnership rule.

⁵⁴Compare Regs. Sec. 1.704-1(b)(2)(iv)(l), -3(a)(3)(i), -4(a)(4)(ii) and -4(c)(3) (carryover of book capital accounts, book value of assets and Sec. 704(c) potential in a Sec. 708(b)(1)(B) termination); see also the Example in Regs. Sec. 1.708-1(b)(1)(iv).

⁵⁵See, e.g., McKee, Nelson and Whitmire, Federal Taxation of Partnerships and Partners (WGL, 3d ed., 1996), 10.04[4][b]7. Although these regulations technically apply, they may not have been intended to apply when, as here, some partners of the transferee partnership were not partners of the transferor partnership.

⁵⁶Regs. Secs. 1.704-4(c)(4) and 1.737-2(b)(1); the preamble to the proposed regulations states that gain under Secs. 704(c)(1)(B) and 737 is not triggered under the assets-over form for mergers.

⁵⁷ Sec. 381 provides rules for the preservation of tax attributes when corporate assets are acquired in a Sec. 332 liquidation or in certain reorganizations; see Regs. Sec. 1.381(c)(4)-1.

⁵⁸Of course, certain provisions that may cause a change of accounting method may be triggered by the merger. For example, Sec. 448 may apply to ABC, thereby causing a change from the cash to the accrual method (assuming at least one of ABC's partners is a corporation). Query how the three-year, $5 million gross receipts look-back rule applies in this context.

⁵⁹Of course, general methods of accounting rules (such as Sec. 446(b) clear reflection of income) would apply.

⁶⁰See Regs. Sec. 1.708-1(b)(1)(iv), which refers to Regs. Sec. 301.6109-1(d)(2)(iii) (successor to partnership terminated under Sec. 708(b)(1)(B) retains same taxpayer identification number).

⁶¹But see GCM 33774 (3/22/68).

⁶²The assets-up form cannot apply to a merger if any asset is held back, even if the transaction otherwise looks like assets-up. The (default) form then deemed used for Federal income tax purposes is the assets-over form. The definition of assets-up should be expanded to take holdbacks into account.

⁶³Because in Examples 21 and 22, BC is deemed to contribute all its assets and liabilities to AB, then to distribute its AB interest to B and C in complete liquidation, the Regs. Secs. 1.704-4(c)(4) and 1.737-2(b) exceptions to Secs. 704(c)(1)(B) and 737 apply.

⁶⁴In Examples 21 and 22 (mergers), the deemed distribution of the cash to partners is made by the "combined" partnership (post-merger). Likewise, the deemed (and actual) distribution of cash in Example 24 (division) is made by the "combined" partnership (pre-division).

⁶⁵See Prop. Regs. Sec. 1.708-1(d)(3)(i), last sentence.

⁶⁶See generally, the substance-over-form rules of Prop. Regs. Sec. 1.708-1(c)(5) and (d)(5).