Rev. Rul. 70-239

Advice has been requested whether, under each of the circumstances described below, a partnership will be treated as the transferor of partnership property to a newly formed corporation in a transaction that meets the requirements of section 351 of the Internal Revenue Code of 1954.

The three situations described below involve partnerships X, Y, and Z, respectively. Each partnership was engaged in the coin-operated laundry business and had assets and liabilities consisting of cash, laundry equipment, and accounts payable. The liabilities of each partnership did not exceed the adjusted basis of its assets. X, Y, and Z were incorporated for valid business reasons.

Situation 1

X transferred all its assets subject to its liabilities to a newly formed corporation R in exchange for all the outstanding stock of R. X then terminated by distributing all the stock of R to its partners in proportion to their partnership interests.

Situation 2

Y terminated by distributing all its assets subject to its liabilities to its partners in proportion to their partnership interests. Simultaneously, the partners transferred all the property subject to the liabilities received from Y to a newly formed corporation S in exchange for all the outstanding stock of S.

Situation 3

The partners of Z transferred their partnership interests in Z to a newly formed corporation T in exchange for all the outstanding stock of T. This exchange terminated Z and all its assets subject to its liabilities became assets and liabilities of T.

Section 351 of the Code provides, in part, that no gain or loss will be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c) of the Code) of the corporation.

Section 1.351-1(a)(1) of the Income Tax Regulations provides that, as used in section 351 of the Code, the phrase "one or more persons" includes individuals, trusts, estates, partnerships, associations, companies, or corporations. To be in control of the transferee corporation, such person or persons must own immediately after the transfer stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of each other class of stock of such corporation.

In each of the situations described, the steps taken by X, Y, and Z, and the partners of each were part of a plan to change the organization of the respective partnerships to corporate form.

Since the Federal income tax consequences of the plan are the same whether the transfer of assets is made by the partnership, whether the partnership is terminated and the assets are transferred by the partners, or whether the partners transfer their partnership interests to the corporation followed by a termination of the partnership, it is held that each of the situations described above is regarded as a transfer under section 351 of the Code by X, Y, or Z, of all of its assets subject to its liabilities to R, S, or T, respectively, in exchange for all the outstanding stock of the respective corporation. The subsequent distribution of the stock to the partners in proportion to their partnership interests will not violate the control requirements of section 368(c) of the Code. The basis of the property acquired by each corporation will be the same as its basis in the hands of the transferor partnership. Section 362(a) of the Code. The basis of the stock received by a partner will be an amount equal to the adjusted basis of his partnership interest. Section 732(b) of the Code.