Partnership's ownership of residence does not deny sec. 121 exclusion.

• Author: Hamill, James R.
• Position: Internal Revenue Code

In Letter Ruling 200004022, the IRS ruled that, for purposes of applying the Sec. 121 residence sale exclusion, a husband and wife were the owners of a residence during all periods that the property was titled in a partnership. The facts of the ruling indicate that title to the residence was distributed before any sale, but the ruling should also apply to a residence titled in the partnership at the time of sale.

In the ruling, a husband and wife initially owned a residence. They transferred title of 98% of the residence to a trust that qualified as a grantor trust under Secs. 671-678. The trust then transferred its 98% interest in the residence to a partnership, in which the trust held a 98% interest as a limited partner. The husband and wife also transferred their remaining 2% interest in the residence to the same partnership, in which they each held a 1% general partnership interest. The husband and wife also transferred several small rental properties to the partnership.

Sec. 121(a) provides for an exclusion of gain realized from the sale or exchange of property that has been owned and used as the taxpayer's principal residence for two of the five years preceding the sale. The issue in the ruling was whether the husband and wife would be treated as the owners of the residence during the time the property was titled in the partnership. Rev. Ruls. 66-159 and 85-45 held that the beneficiary of a grantor trust is treated as the owner of a residence titled in the trust for purposes of former Secs. 121 (exclusion of gain realized by a taxpayer age 55 or older) and 1034 (rollover of proceeds realized from sale of a principal residence). Thus, the unanswered issue in Letter Ruling 200004022 was whether, for purposes of the residence sale provision, ownership through a partnership could be imputed to the partners.

The facts of the ruling indicate that the residence was not used for conducting an enterprise, did not yield any income or produce any business deductions to the partnership or to the partners, and served no business purpose to the partnership or to the partners. Also, it was noted that the husband and wife owned 100% of the residence (either through the partnership or the grantor trust), at all times that title was held in the partnership.

The IRS analyzed the issue in light of the definition of a partnership found in Culbertson, 337 US 733 (1949), and Tower, 327 US 280 (1946), which generally require that for a partnership to exist...