Rev. Rul. 81-38

ISSUES

Issue 1. Is the transfer of a taxpayer's 50 percent interest in a partnership to a corporation wholly owned by the taxpayer in a transaction qualifying under section 351 of the Internal Revenue Code an exchange terminating the partnership under section 708(b)(1)(B)?

Issue 2. Is gain or loss recognized to the transferor when the partnership interest is exchanged?

FACTS

S, a corporation, is wholly owned by a taxpayer. The taxpayer owned a 50 percent interest in the capital and profits of PYZ partnership. The taxpayer transferred the 50 percent interest in PYZ to S in a transaction qualifying under section 351 of the Code. The taxpayer's share of the liabilities of the partnership did not exceed the taxpayer's basis in the partnership interest. The business of PYZ was continued in a partnership composed of S, Y, and Z.

LAW AND ANALYSIS Section 351 of the Code provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.

Section 708(a) of the Code provides that an existing partnership shall be considered as continuing if it is not terminated.

Section 708(b)(1)(B) of the Code provides that a partnership will be considered terminated if within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.

Section 741 of the Code provides that, in the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner.

Section 1.741-1(c) of the Income Tax Regulations refers to section 351 of the Code for the nonrecognition of gain or loss upon the transfer of a partnership interest to a corporation controlled by the transferor.

Since the transfer of the partnership interest by the taxpayer to S is an exchange within the meaning of section 351 of the Code, the transfer is an exchange within the meaning of section 708(b)(1)(B).

HOLDING

Issue 1. The transfer by the taxpayer of a 50 percent interest in a partnership to a wholly owned subsidiary in a transaction under section 351 of the Code is an exchange terminating the partnership under section 708(b)(1)(B).

Issue 2. Since the transfer qualifies under section 351 of the Code, no gain or loss is recognized to the transferor upon the exchange. However, see Rev. Rul. 80-323, 1980-2 C.B. 124, for a situation to which section 357(c) applies.