Partnership mergers and divisions.

• Author: Lerman, Jerry L.
• Position: IRS regulations

The IRS issued final regulations on the tax consequences of partnership mergers and divisions, effective Jan. 4, 2001 (TD 8925). A partnership could elect to apply these regulations as of Jan. 11, 2000 (the publication date of the proposed regulations).

The final regulations provide guidance on the form of a partnership merger or division that the Service will respect. Failure to structure the merger or division consistent with the regulations may cause the transaction to be taxable if its substance more closely resembles a sale or exchange of either a partnership interest or partnership property. The regulations provide that the partnership merger or division may be in either the assets-over form or the assets-up form.

Background--Partnership Mergers

Under Sec. 708, a partnership is considered as continuing if it has not been terminated. A terminated partnership is one in which no part of its business is continued by any of the partners in the partnership or, if within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. Sec. 708 provides two special rules for the continuation of a partnership on a merger or consolidation of two or more partnerships and on the division of a partnership.

When two or more partnerships merge or consolidate, under Sec. 708(b)(2)(A), the resulting (or continuing) partnership is a continuation of any merging or consolidating partnership, whose members own an interest of more than 50% in the capital and profits of the resulting partnership. If more than one of the merged partnerships meets the requirement under Sec. 708(b)(2)(A), the partnership credited with contributing the greatest dollar value of assets to the resulting partnership is the continuation partnership (Regs. Sec. 1.708-1(b)(2)(i)). If the members of none of the merging partnerships own more than a 50% interest in the capital and profits of the resulting partnership, all of the merged partnerships are terminated and a new partnership would result (Regs. Sec. 1.708-1(c)(1)).

Mergers--Impact of Final Regs.

In the assets-over form structure, a terminating partnership contributes its assets and liabilities to a resulting partnership in exchange for partnership interests in the resulting partnership. Immediately thereafter, the terminating partnership transfers the interest in the resulting partnership to its partners in liquidation of the terminating partnership (Regs. Sec...