PARENT PARTNERSHIP'S TERMINATION ON SALE OF PARTNERSHIP INTEREST DEEMED AN EXCHANGE OF PARENT'S INTEREST IN SUBSIDIARY PARTNERSHIP.

Rev. Rul. 87-50

ISSUE

In a multi-tier partnership arrangement, if a partner's interest in a parent partnership is sold -- with a resulting termination of the parent under section 708(b)(1)(B) of the Internal Revenue Code -- then, for purposes of section 708(b), does that sale also cause an exchange of the parent partnership's interest in the capital and profits of the subsidiary partnership?

FACTS

A had owned a 60 percent interest in partnership PAB. PAB in turn was a parent partnership that owned an 80 percent partnership interest in the capital and profits of PRS, a subsidiary partnership. A sold to C A's entire 60 percent interest in PAB.

LAW AND ANALYSIS

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 1.708-1(b)(1)(iv) of the Income Tax Regulations provides that if a partnership is terminated by a sale or exchange of a partner's interest, the partnership is deemed to have distributed all of its properties to the purchaser and other remaining partners in proportion to their respective interests in the partnership properties. Immediately thereafter, the purchaser and the other remaining partners are deemed to have contributed the properties to a new partnership, either for the continuation of the business or for its dissolution and winding up.

Section 761(e) of the Code provides that, for purposes of section 708, any distribution (not otherwise treated as an exchange) shall be treated as an exchange.

The sale of A's 60 percent partnership interest in the parent partnership, PAB, results in a termination of PAB under section 708(b)(1)(B) of the Code. Pursuant to section 1.708-1(b)(1)(iv) of the regulations, the termination causes PAB to liquidate for federal tax purposes, and PAB is deemed to have distributed all of its assets to its partners. Among the assets that PAB is deemed to have distributed is PAB's 80 percent interest in the capital and profits of the subsidiary partnership, PRS. Under section 761(e), the distribution of PAB's partnership interest in PRS is treated as an exchange for purposes of section 708. Therefore, the sale of A's 60 percent interest in the capital and profits of PAB causes an exchange of PAB's 80 percent interest in the capital and profits of PRS. Since PAB owns more than 50 percent of the capital and profits interest in PRS, the subsidiary partnership PRS terminates under section 708(b)(1)(B) upon PAB's deemed distribution of its interest in PRS.

HOLDING

In a multi-tier partnership arrangement, if the sale or exchange of an interest in the capital and profits of a parent partnership causes the termination of the parent under section 708(b)(1)(B) of the Code, then, for purposes of applying section 708 to the subsidiary partnership, the parent partnership is treated as exchanging its entire partnership interest in the subsidiary partnership.