Converting a general partnership interest into a limited partnership interest tax-free.

• Jurisdiction: United States
• Date: 01 October 2000
• Author: Ellentuck, Albert B.

Facts: Dick and Doug are equal general partners in Corvette City, which operates an airport-based sports car rental facility. Dick plans to become less active in the business and will turn over much of the management to Doug. The business has many risks of loss for which Dick no longer wishes to be liable. The partners ask their tax adviser how they can reorganize the partnership to limit Dick's exposure to liability. The partners do not want to incur any tax liability as a result of the reorganization. Issue: Will the conversion of Dick's general partner interest to a limited partner interest achieve his goal of limited liability? Can Dick convert his interest without incurring a tax liability on the transaction?

Analysis

Restructuring Corvette City from a general partnership to a limited partnership and exchanging Dick's general partner interest for a limited partner interest could accomplish the goal of limiting Dick's risk of loss to sums he invested in Corvette City.

The IRS has publicly ruled it possible, under certain circumstances, for a partner to exchange a general partner interest for a limited partner interest (or vice versa) without incurring tax liability from the transaction. Further, the Service has ruled these changes in ownership interests do not terminate the partnership.

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