Rev. Rul. 67-65

Advice has been requested whether the surviving partner in a two-man partnership who purchased the deceased partner's interest from his estate, acquired the assets represented thereby through a distribution within the meaning of section 735(b) of the Internal Revenue Code of 1954, so that in computing his holding period for assets attributable to the partnership interest purchased by him from the deceased partner's estate, he may include the period those assets were held in the partnership.

D and E were equal partners in a two-man partnership engaged in the wholesale produce business. Upon D's death, E purchased, pursuant to a buy and sell agreement, and through the use of his own funds, the decedent's interest in the partnership from his estate. Thereafter, the business was continued by E as a sole proprietorship.

Section 708(b)(1)(A) of the Code provides that a partnership shall terminate when the operations of the partnership are discontinued and no part of any business, financial operation or venture of the partnership continues to be carried on by any of its partners in a partnership.

Section 1.708-1(b)(1)(i) of the Income Tax Regulations implements section 708(b)(1)(A) of the Code with an example which states that on November 20, 1956, A and B , each of whom is a 20-percent partner in partnership ABC , sell their interests to C , who is a 60-percent partner. Since the business is no longer carried on by any of its partners in a partnership, the ABC partnership is terminated as of November 20, 1956.

Accordingly, in the instant case, the sale of D's partnership interest to E resulted in termination of the partnership under section 708(b)(1)(A) of the Code since the business is no longer carried on by any of its partners in a partnership.

Section 735(b) of the Code provides that in determining the period for which a partner has held property received in a distribution from a partnership there shall be included the holding period of the partnership, as determined under section 1223, with respect to such property.

Although it is recognized that one partner in a two-man partnership may sell his partnership interest to his partner (sec. 1.741-1(b) of the regulations), such a transaction is viewed as though one partner acquired by purchase, the assets attributable to the partnership interest sold by the other partner. No distribution of property by the partnership occurred with respect to such assets. However, the purchasing partner is considered to have received as a distribution in kind, through liquidation of his partnership interest, those assets attributable to his own former interest in the partnership.

Accordingly, section 735(b) of the Code is applicable with respect to the assets attributable to E's partnership interest. Hence, his holding period for those assets include the holding period of the partnership. However, section 735(b) of the Code is not applicable with respect to the assets attributable to the partnership interest purchased from D's estate. Therefore, E's holding period for those assets does not include the holding period of the partnership, and runs from the date of his purchase of D's partnership interest. See Edwin E. McCaulsen v. Commissioner , 45 T.C. 588 (1966).