PARTNER'S SALE OF 40 PERCENT INTEREST IN PARENT PARTNERSHIP IS NOT DEEMED A SALE OF INTEREST IN SUBSIDIARY PARTNERSHIP.

Rev. Rul. 87-51

ISSUE

In a multi-tiered partnership arrangement, if a partner of an upper-tier partnership sells a partnership interest of less than 50 percent of the capital and profits of the upper-tier partnership, then, for purposes of section 708(b)(1)(B) of the Internal Revenue Code, is that sale also considered a sale of the partner's proportionate share of the upper-tier partnership's interest in a lower-tier partnership?

FACTS

AB is a partnership that holds a 50 percent interest in the capital and profits of XYZ, another partnership. A, a partner in AB, sold A's 40 percent interest in the capital and profits of AB, and, within twelve months of the sale by A, X, a partner in XYZ, sold all of X's 30 percent interest in the capital and profits of XYZ. There were no other sales of interests in either AB or XYZ during the same twelve month period.

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 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. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items which have appreciated substantially in value).

In the present situation, A sold a 40 percent partnership interest in AB, which held a 50 percent partnership interest in the partnership XYZ. In addition, within twelve months of the sale by A, X, sold a 30 percent interest in XYZ. If A's sale of a 40 percent partnership interest in AB is also considered a sale of a 20 percent (40 percent of 50 percent) interest in XYZ, then A's sale of the 20 percent interest combined with X's sale of a 30 percent interest in XYZ within twelve months would result in the termination of XYZ under section 708(b)(1)(B) of the Code.

Under the provisions of subchapter K of the Code, a partnership is considered for various purposes to be either an aggregate of its partners or an entity, transactionally independent of its partners. Generally, subchapter K adopts an entity approach with respect to transactions involving partnership interests. See Rev. Rul. 75-62, 1975-1 C.B. 188. Whether an aggregate or entity theory of partnerships should be applied to a particular Code section depends upon which theory is more appropriate to such section. See S. Rep. No. 1622, 83d Cong., 2d Sess. 89 (1954), and H.R. Rep. No. 2543, 83d Cong., 2d Sess. 59 (1954); Casel v. Commissioner, 79 T.C. 424 (1982). The termination of a partnership under section 708(b)(1)(B) depends on whether there was a sale or exchange of a partnership interest and on whether there was a transfer of at least 50 percent of the total interest in partnership capital and profits. Because section 708(b)(1)(B) is an entity-oriented provision, an entity approach is more appropriate for that section.

Thus, in a multi-tiered partnership arrangement, the sale of a partner's interest in the capital and profits of an upper-tier partnership that is itself a partner in a lower-tier partnership is not a sale of the partner's proportionate share of the underlying assets of the upper-tier partnership for purposes of section 708(b)(1)(B). Rather, under section 741, the sale of A's interest in AB is considered the sale of a single capital asset, the interest in AB. Accordingly, only X's sale of a 30 percent partnership interest in XYZ qualifies for the determination of whether there has been a sale or exchange of 50 percent or more of the total interest in the partnership capital and profits of XYZ.

HOLDING

In a multi-tiered partnership arrangement, the sale of a partner's interest in an upper-tier partnership that does not trigger a termination of the upper tier partnership is not considered a sale of that partner's proportionate share of the upper-tier partnership's interest in a lower-tier partnership for purposes of the termination provisions of section 708(b)(1)(B) of the Code.

See Rev. Rul. 87-50, page 19, this Bulletin, for the application of section 761(e) when 50 percent or more of the capital and profits interest in an upper-tier partnership is sold and the partnership terminates under section 708(b)(1)(B).