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PARTNERS & PARTNERSHIPS
The IRS recently issued Rev. Rul. 2004-59, holding that the incorporation of a partnership under a state law formless conversion statute will be treated in the same manner as a partnership that makes a "check-thebox" election to be treated as a corporation for tax purposes. Thus, the following will be deemed to occur: (1) the partnership contributes its assets and liabilities to a new corporation in exchange for stock; and (2) the partnership immediately liquidates, distributing that stock to the partners.
Rev. Rul. 2004-59 provides that an earlier ruling, Rev. Rul. 84-111, does not apply to a formless conversion of a partnership. In the prior ruling, the IRS described three different methods of incorporating a partnership: (1) the assets-over method (as used in Rev. Rul. 2004-59); (2) the distribution of the partnership's assets to the partners in liquidation of the partnership, followed by the transfer of those assets by the partners to the corporation; and (3) the transfer by the partners of their partnership interests to the corporation. Rev. Rul. 84-111 held that the form of each of the three methods would be respected, then described the different tax consequences associated with each.
Although a formless conversion may be the simplest method of converting a partnership into a corporation, it may not be the most tax effective method. As...