College of William & Mary Law SchoolScholarship
RepositoryWilliam & Mary Annual Tax Conference Conferences,
Events, and Lectures2011A Comparison of Partnership and S
CorporationExit TransactionsMark J. SilvermanAaron P.
NocjarCopyright c 2011 by the authors. Tis article is brought to
you by the William & Mary Law School Scholarship
Repository.htp://scholarship.law.wm.edu/taxRepository
CitationSilverman, Mark J. and Nocjar, Aaron P., "A Comparison of
Partnership and S Corporation Exit Transactions" (2011). William
& MaryAnnual Tax Conference. Paper
660.htp://scholarship.law.wm.edu/tax/[email protected]
TEL:202.429.6450 FAX:202.429.3902 1330 Connecticut Avenue,NW
Washington, DC20036 AREASOF PRACTICE Tax Corporate Transactions
Mergers,Acquisitions, andJoint Ventures Mark J.Silvermanis a
partner inthe Washington office of Steptoe & Johnson LLP.Mr.
Silverman wasnamed one of the top ten tax lawyersinWashington
in2005 by Legal Times.He isa member of The AmericanLaw Institute,
Tax Advisory Group for the Study of Subchapter C of the Internal
Revenue Code. He was formerly anadvisor to the Committee on Ways
andMeans during their consideration of revisions to the corporate
tax provisionsof the Internal Revenue Code.He isa Fellow of the
American College of Tax Counsel.Mr.Silverman was formerly a
Councilmember of the AmericanBar Association,Sectionof Taxation and
was formerly Chair of the Corporate Tax Committee. He chaired the
Tax Section Task Force onLeveraged Buyouts.Mr.Silverman co-authored
the Tax AdvisorsPlanningSeries onFinancially Troubled
Businesses.Mr.Silverman iscurrently a member of the advisory boards
of BNA Tax Management, ConsolidatedReturns Tax Report,M&A Tax
Report,andCorporate Taxationmagazines.Mr.Silverman ison the
Editorial Board of The American Journal of Tax Policy,andisonthe
Board of Trustees of the Southern Federal Tax
Institute.Mr.Silvermanchairs the ALI-ABA annualconsolidatedreturns
program. He was formerly Corporate Tax Editor of The Journalof
Taxation,anda member of the adviSOry boards of NYUInstitute
onFederal Taxation. Mr.Silverman was formerly a member of the
Executive Committee of the New York State Bar
Association.Inaddition,heis anAdjunct Professor of Law at
GeorgetownUniversity Law Center and was formerly attorney-advisor
to Judge Samuel B.Sterrett of the United States Tax
Court.Mr.Silvermanisa frequent speaker on tax matters andhas
publishednumerous articles onthe subject. HONORS &DISTINCTIONS
Former advisor to Committee on Ways & Means Counsel, ABA,Tax
Section Chair,Corporate Tax Committee, ABA,Tax Section Advisory
BoardMember,NYU Institute and BNA Tax Management Member,Board of
Trustees, Southern Federal Tax Institute Adjunct Professor,
Georgetown University Law Center Chair, ALI-ABA Consolidated
Returns Program Co-author of Tax Advisors Planning Series
onFinancially Troubled Businesses Former attorney-advisor to Judge
SamuelB.Sterrett of US Tax Court Planning and Transactional
Practice Mr.Silverman focuses onplanning and
transactionalmatters.Hehas extensive experience in structuring
acquisitions,mergers, andspin-off transactions for large public
corporations,as wellas closely heldbusinesses.He has authored a
book on the tax consequences of financially troubled businesses
andadvises corporations onconsolidated
returnissues.Mr.Silvermanadvises leverage buyout groups, venture
capitalists andprivately heldcommercialrealestate developers
withrespect to various transactionalmatters.He isoften calledupon
to advise the Internal Revenue Service, Treasury Department and the
staffs of the Congressional tax writingcommittees withrespect to
corporate tax issues. Tax Policy Practice A significant part of
Mr.Silverman's practice involves the resolutionof tax policy issues
before Congress andthe Treasury Department.These issues arise inthe
context of pending or proposed legislationandproposed Treasury
Department regulations.Mr.Silvermaniscurrently meeting with members
of Congress and their staffs onmany of the corporate tax
provisionsproposedby the Administration andby members of Congress
(includingcorporate spin-offs, financialproduct
provisions,andcorporate capitalgains). Audit andControversy
Mr.Silverman alsohandles audit andcontroversy matters.He has
extensive experience negotiating with fieldagents,appeals officers
and district counselinsettling significant audit issues.
Mr.Silverman frequently prepares technical advicerequests
andoftenmeets withNationalOffice officials withrespect to audit and
tax litigationmatters. Recently,Mr.Silverman wassuccessful
innegotiating global tax shelter settlements withtheIRS.
[email protected] TEL:202.429.6211 FAX:202.261.0601 1330
Connecticut Avenue,NW Washington, DC 20036 AREASOF PRACTICE Tax
HONORS & DISTINCTIONS Chair,Passthroughs andRealEstate
Committee,D.C.Bar,Tax Section Member, Steering Committee,D.C. Bar,
Tax Section Speaker for the Tax Executives Institute, ALI-ABA,Tax
Management,Inc.,SouthernFederal Tax Institute, andother
organizations Recipient ofthe Thomas Bradbury Chetwood,S.J. Prize
for attaining the highest academic average inhis graduating class
(LL.M. in Taxation) at GeorgetownUniversity Law Center
AaronP.Nocjar isa partner inthe Washington office of Steptoe &
Johnson LLP, wherehe is a member of the Tax group.He focuses
onfederalincome taxationissues, withparticular emphasis onthe
taxationof pass-throughentities.Mr.Nocjar advises
clientsinstructuring transactions
involvingpartnerships,limitedliability companies,S
corporations,REITs,and disregarded entities.Inaddition to providing
tax planning advice,Mr.Nocjar assists clients the InternalRevenue
Service administrative process. Mr.Nocjar alsohas experience
addressing tax policy issues before Congress and the Treasury
Department. Mr. Nocjar's clientsrange fromhigh-net-worthindividuals
to family-run,closely-heldbusinesses to multinational groups. The
industries he serves include entertainment, hospitality,energy
(including alternative energy),the private
equity/venturecapital/hedge fund space, financial
institutions,insurance,government contracts, andrealestate
development. PUBLICATIONS Co-author,Partnership
Mixing-BowlIssues,PractisingLaw Institute (2011) Co-author, The S
CorporationRules and theUse of S Corporations as
AcquisitionVehicles, PractisingLaw Institute (2011) Co-author,
Partnership DisguisedSale Rules,Practising Law Institute (2011)
Co-author,Section197 andPartnership Transactions,
PractisingLawinstitute (2011) Author,Using Tax Partnerships to
Trigger Tax Loss inthe Commercial RealEstate Market, Tax Management
RealEstate Journal (May 2010) Author,Closely HeldCompanies:Now
Might be theBest Time to Convert to Tax Partnership Status,Journal
of Taxation(Oct.2009) Author,The Sliver Investor:May We Disregard
You for Tax Purposes?, Tax Management RealEstate Journal
(Apr.1,2009) Author,Section 470 andPartnerships Left Outside Future
CongressionalRelief,Tax Management Memorandum (2007)
Co-author,Establishing BusinessPurpose ina Transparent World, 2004
USC Tax Institute Author,The 2000 ProposedRegulations onCorporate
Sponsorship Payments: A Step TowardRestoring the Public's Trust
inCharitable Organizations,54 Tax Law.357(Winter .2001) EDUCATION
GeorgetownUniversity Law Center LL.M.,Taxation,withdistinction,
2001 Case Western ReserveUniversity J.D.,magna cum laude,1998 Order
of the Coif Executive ArticlesEditor,Case Western Reserve Journal
of International Law University of Notre Dame
B.B.A.,Accountancy,magna cum laude,1995 PROFESSIONAL AFFILIATIONS
American Bar Association,Sectionof Taxation D.C.Bar,Section of
Taxation MEMBERSHIPINSTATE BARS District of Columbia South Carolina
III III Purposeofpresentationistocompareandcontrastexitstrategiesof
ownersofpartnershipswithexitstrategiesofownersofScorporations
Presentationorganizedasfollows:
oSimilaritiesbetweenpartnershipsandScorporations
oDifferencesbetweenpartnershipsandScorporations
oTransactionalillustrations II II II II II II II II II
Generally,noentity-leveltaxonearnings
oExceptionforScorporations:builtingain(BIG)taxandexcessnetpassiveincome
(ENPI)tax
Taxitemsfromentity-levelactivitiesflowthroughtoownersannually oK -1
sissuedtoowners Characterof
entity-leveltaxitemsdeterminedatentitylevel
Owneradjustsits"outsidebasis"(basisinownershipinterest)foritsshareof
entity-leveltaxitemsannually
Owners'abilitytodeductentity-levellossessubjecttopassiveloss,at-risk,and
outsidebasislimitations State-lawLLCcanbepartnershiporScorporation
BothtaxentitiescanownanypercentageinterestInCcorporations
Bothtaxentitiescanowndisregardedentities
Bothtaxentitiescanbeusedforsmallorlargebusinesses
OnlyScorporationscanhaveasingleowner
Scorporationscanhaveonlycertaintypesofowners
Scorporationscanhaveupto100ownersonly
Scorporationscanhaveonlyoneclassofownershipinterest- no
common-preferredequitystructures o o w e v e r ~
votingrightscandiffer
ScorporationscanallocatetaxitemstoownersonlyIn"straight up"fashion-
nospecialallocations
ContributionstoScorporationsaretax-freeonlytotheextentthey
meet351requirements
oContributionstopartnershipsaretax-freewithout351limitations .. ..
.. .. .. ..
Third-partydebtofScorporationdoesnotincreaseowners'outsidebases
Differencesbetweeninsideandoutsidebasescanbecorrectedinapartnership
DistributionbyScorporationsofappreciatedpropertytriggersgain(andforall
shareholders)- generallynotinpartnershipdistributions
MosttransactionalrulesforScorporationsareSubchapterCrules
oTransactionrulesforpartnershipsarelargelyconfinedtoSubchapterK
AllocableshareofincomefromScorporationnotsubjecttoemploymenttax
oDistributiveshareofincomefrompartnershipsubjecttoemploymenttax
MoreperceivedgovernmentalsympathyforScorporationsthanpartnerships
TaxconsequencesofexitingbusinessformedasS
corporationoftendifferfromtaxconsequencesofexiting
businessformedaspartnership Generallycannotconvertmid-stream o
ConversionfrompartnershiptoScorporationmaynotbepossible
duetotypeandnumberofownersandcapitalstructure . o
ConversionfromScorporationtopartnershipgenerallytriggerstax
forshareholders So,importanttoconsidertaxconsequencesofexiting
businessatthetimeofconsideringwhattaxentitytouse
ComparativeExamples ofExitTransactions B Partnership
Partnercanrecognizegainifcashdistributedexceedsoutsidebasis
oGainiscapitalgain
oExcepttotheextentthepartnershipheld751assets(inventory,unrealizedreceiv3bles)
PartnercanrecognizelossifamountofcashdistributedisIssslhanoutsidebasis
Nogainorlossrecognizedbythepartnersnip c
Note:Amount-"_asntreatedasdistributedmightbemorethanmeetstheeye-
752 A f I f ! Cash\ \\ ""- Bc 5 302
(a)redemption,completeterminationofshareholder'sinterestunder302
(b) (3 )
oShareholdercanrecognizegaintotheextentcashdistributedexceedsbasisinshares
Gainiscapitalgain-
no751equivalentthatcouldrecastcapitalgaintoordinaryincome
oShareholdercanrecognizelosstoextentcashdistributedlessthanbasisinshares
oNogainorlossrecognizedbyScorporation
oDecreaseAAAbyamountequaltotheratableshareofAAAattributabletotheredeemedstockasoftheredemptiondate
Note:AmountofcashtreatedasdistributedisnotincreasedforreliefofScorporationdebt-
no752equivalent B A c 1\ '. PropertY-,_
....--.-....-.....------------Partnership
Partnergenerallydoesnotrecognizegainorloss
oCanrecognizeagainifcashdistributedexceedsoutsidebasis
oCanrecognizealossonlyifcash,unrealizedreceivables,orinventorydistributedthatislessthanoutsidebasis
oHoldingperiodofdistributedpropertytacks
oPartnertakesasubstitutedbasisinpropertyafteroutsidebasisreducedforanycashdistributed
Cannotstepupbasisondistributedunrealizedreceivablesorinventory-
excessoutsidebasisallocatedtodistributedcapitalassetsor
createslossrecognition Nogainorlossrecognizedbypartnership
Note:All-propertyredemptioncouldactuallybedeemedtoincludecashifpartnershiphasdebt--
752 ., f ( Property\ \ l.\ A '. '" B 5 302
(a)redemption,completeterminationofshareholder'sinterestunder302
(b) (3 )
oShareholdercanrecognizegaintoextentnetFMVofpropertyexceedsbasisinshares
oShareholdercanrecognizelosstotheextentnetFMVofpropertyislessthanbasisinshares
ShareholdertakesFMVbasisindistributedproperty(unlikepartnershipscenario)
c
DistributionofappreciatedpropertytriggersgainrecognitionatScorporationlevel(unlikepartnershipscenario)
oGenerally,noentity-leveltaxonsuchgain(unlessBIGtaxapplies)
oRecognizedgainallocatedtoshareholders
Proratav.closing-the-booksallocationmethodsimportant
Note:All-propertyredemptionnotsusceptibletodeemedcashdistribution-
no752equivalent A ~'. \ ....Marketable ...
~Securities"""'--'--'---" ~ 8 Partnership
Distributionofmarketablesecuritiestreatedasdistributionofcash c
Whilegenerallyaredemptiondistributionofpropertyistax
-freetoboththeredeemedpartnerandthepartnership,thereareexceptions
Distributionofproperty- marketablesecurities-
treatedasadistributionofcashforpurposesofdetermininggainorlossofthepartner
oPartnertakesbasisinsecuritiesequaltooutsidebasisplusgainrecognized
oHoldingperiodtacks Nogainorlossrecognizedbypartnership
Definitionof"marketablesecurity"isbroad- see731(c) ABC f f I I !
Marketable t i. Securities\ \ ;, \ ....,. 5
Sametaxconsequencesasredemptiondistributionofanyothertypeofpropertyby
Scorporation
oTypeofpropertyusedforredemptionisnotasimportantasinpartnershipscenario
Interest Value $100 Basis $200 A \ II " .... B 60% Capital Asset
FMV $100 Basis $100 \ ............... ....._---------Partnership c
Nogainorlossrecognizedbyanypartners,includingA
BuiltinlossinA'sinterestcarnesovertodistributedasset Interest Value
$100A Bc Basis $200 f I I i Capital Asset \ FMV $100\ Basis $100\
\. .........5 SrecognizesnogainbecausetheassethasaFMVbasis
Arecognizes$100capitallossvia302,but267(a)disallowsthislossbecauseAisamajorityshareholder
A's$100capitallosslostforever?267 (d)doesnotappeartoapply
AtakesaFMVbasisinthecapitalasset
Query:whatmightAdotopreventthisoutcome?MightAtrytosellhisinteresttoBorCinstead?
Year1 B A c Partnership Year1:CcontributesPropertyX,FMVS
100,basis,$40 Year5:PartnershipdistributesPropertyXtoA Year5 B
Partnership
Whilegenerallyaredemptiondistributionofpropertyistax-freetoboththeredeemedpartnerandthepartnership,thereareexceptions
c
Ifapartnercontributesgainorlosspropertytothepartnership,andwithinsevenyearsthatpropertyisdistributedtoadifferentpartner,thecontributingpartnermustrecognizethe
builtingainorlossasifthepartnershiphadsoldthepropertyforitsFMVatthetimeofthedistribution.704
(c) ( 1)( B
oPartnershiprecognizesgain(butonlyupto704(c)gainof$60),andgainisallocatedtocontributingpartnerC
oRedeemedpartnerAdoesnotrecognizegain(unlessdeemeddistributionofcashcausesgain)
Ifthedistributionisinyear8,thereisno704 (c) ( 1 )(B)trigger
Attimeofcontribution,importantforcontributingpartnerCtolimittypesofpropertiesthatpartnershipcanusefordistributions
Year1Year 5 B
SametaxconsequencesasredemptiondistributionofanyothertypeofpropertybyScorporation
oTypeofpropertyusedforredemptionnotasimportantasinthepartnershipscenario
However,notethatentity-levelgainrecognitionfromdistributionofpreviouslycontributedpropertynot
allocatedsolelytocontributingshareholderC(likeinpartnershipscenario)-
rather,allocatedtoall shareholders Year1Year 5 B B c c Partnership
Partnership Year1:AcontributesPropertyX,FMV$100,basis,$40
Year5:PartnershipdistributesPropertyYtoA,FMVof$120,basis$120
Whilegenerallyaredemptiondistributionofpropertyistax-freetoboththeredeemedpartnerandthepartnership,thereareexceptions
Contributingpartnermustrecognizegainifhecontributesappreciatedpropertytoapartnershipandwithinsevenyearsreceivespropertyotherthanmoneyasadistributionfromthe
partnership.737
Amountofthegainrecognizedbyredeemedpartneristhelesserof:
oFMVofthedistributedproperty.lesspartner"soutsidebasisbeforethedistribution(lessanycashdistributed):or
oPartner'snet704 (c)precontributiongain. Arecognizes$60gainunder737
A'soutsidebasisincreasedby$60,andPropertyX'sinsidebasisincreasedby$60(so,nocontinuing704
(c)exposureforcontinuingpartners)
Ifthedistributionisinyear8,thereisno737trigger.
Attimeofcontribution,importantforcontributingpartnerAtolimittypeandtimingofdistributions
Year1Year 5 B
SametaxconsequencesasredemptiondistributionofanyothertypeofpropertybyScorporation
oTypeofpropertyusedforredemptionnotasimportantasinthepartnershipscenario
Inpartnershipscenario,redeemedpartnerArecognized$60of737gain(andnogainrecognitionbypartnershipand
otherpartners)
InScorporationscenario,nogainrecognizedatentitylevel,sincePropertyYhasFMVbasis
oNoincreasetobasisofPropertyX-
continuingshareholdersonhookforfuturegainrecognition(unlikepartnershipscenario)
OutsideB Basis $40A \ Property X", " FMV $100'\
.........Basis$100'------. Partnership
LiquidatingdistributionofpropertytoA- PropertyXhasFMVbasis
oNogainrecognitionforanyparty c / Property Y FIVIV$100 Basis$40
oPartnerAtakes$40basisinPropertyX(a$60"step-down"inbasis)-
PartnerAtakes$60BIGinPropertyX Wheredoesthis"'lost"$60ofbasisgo?
oIfno754election,noadjustmenttobasisofremainingpartnershipassets-
$60gainduplicatedtodetrimentofcontinuing partnersBandC
oIf754electionmade,$60increasetobasisofpropertyY-
a"basisshift"of$60- via734 (b)
BandCcanwaituntilafterA'sliquidatingdistributiontomakethe754electionforthepartnership
II II II Outside Basis $40A t II\. Property X\ .., FMV
$100,.'--....__. B c Basis$100. - - - - - ~ ~ ~ ~ - . . . .
Property Y FMV $100 Basis$40
Nogain/lossrecognitionatentity-levelsincedistributedpropertyhasFMVbasis
$
60gainrecognitionatshareholderlevelforA(unlikepartnershipscenario)
oPropertyXtakesFMVbasis($100)inA'shands
Noabilitytoadjustbasisofremainingassetsforsuchgainrecognition-
no754equivalent
o$60built-ingainremainsinPropertyYtodetrimentofcontinuingshareholdersBandC
A I { i T ~ \o\. \.. Year 5 B \ ~Partnership
Year5:Acontributes$50cash c
Year6:RedemptiondistributionofPropertyXtoA
Generally,nogainrecognizedbyanyparty
Exceptionfordisguisedsaleofproperty
oNon-simultaneoustransfersmadewithintwoyearsarepresumedtobesales.Treas.Reg.1.707-3
(c). Year6 B c t Property X\ FMV $100\\, Basis$40'''---..
Partnership
Ifdisguisedsalerulesapply,partnershiptreatedasselling50percentofPropertyXtoAfor$50inyear5,andmakingredemptiondistributionofremaining50percentofPropertyX
inyear6
o$30gainrecognitionallocatedamongallpartners(butcouldbespeciallyallocated)
Whenplanningredemptiondistribution,needtoconsiderallcashandpropertytransfersinprevioustwoyearsandexpectedtransfersinsubsequenttwoyears
WhatifXhadbeencontributedbyCinyear5? Year 5 B c A ~ 0' ,A (
Property X\ FMV $100\" Year6 B c Ba 5
is$40.-------.l..-::::::---'--.......:::,._-----,
Regardlessofanyapplicationofdisguisedsaleconcepts,$60gainrecognizedatentity-level,allocatedtoshareholders
IstherearolefordisguisedsaleconceptsinScorporationcontext?
oSubstanceoverformconceptscouldapply,despitenothavingtoworryaboutdetailedpartnershipdisguisedsalerulesandthe
ir presumptions Inlightoffactthat$
60gainrecognizedatentity-levelunder311,whatwoulddisguisedsaletreatmentadd?
oProbablyaccelerate$30of$60gainrecognitionfromYear6toYear5 B c
1/31/3 Partnership RedemptiondistributiontoAofCapitalAssetX
Generally,nogainrecognizedbyanyparty Exception- HotAssetRules-
IsthereanygainrecognizedbyA,B,orC? oAgaveupits1/3interestin~ o t
assets"(Inv)inexchangefora"coldasset'(additional113interestinCapitalAssetX)
C-MTP Inventory,FMV $100, $40 basis Cash,$100 Capital AssetX,FMV
$100, $40 basis o751
(b)treatsAasreceivinga1/3distributionofInv,andthensellingsuch1/3interestinAIRforanadditional113interestinCapitalAssetX
oArecognizes01fromadeemedsaleof113ofInv- $2001
oBandC(butnotA)includedistributivesharesofthecapitalgainrecognizedbythepartnershiponthedeemedsaleofa113interestinCapitalAssetX--
$20CG oTaxbasisofInvandCapitalAssetXadjustedaccordingly
Couldtheyhaveavoidedthiswithaliquidatingdistributionofcashinstead?
oPartially-
Awouldstillhavegainfromthedeemedsaletothepartnershipofthe113interestinInv
oButthepartnership(so,BandC)wouldnothavegainfromthedeemedsaleof113ofCapitalAssetXtoA.sinceitwasdeemedto"sell"cashinstead
C-MTP Inventory, FMV$100, $40 basis Cash,$lOO Capital Asset X,FMV
$100, $40basis
NodeemedtaxableexchangebetweenAandScorporationof1/3interestinInventoryfor1/3interestinCapitalAssetX
oBetterthan751(b)hotassetrulesinpartnershipcontext,sinceno01recognizedbyredeemedshareholderA
oBut,redeemedshareholderArecognizescapitalgaintoextentFMVofCapitalAssetXexceedsA'soutsidebasis(nosuchgaininpartnershipcontext)
However,evenworsethan751( b)hotassetrulesinpartnershipcontext,$
60(ratherthan$20)capitalgainrecognizedatentitylevel,
allocatedtoshareholders
Distributingcash(ratherthanCapitalAssetX)eliminatesallgainforcontinuingshareholders(andpossiblyforA)
B A 1
\,....Note",......RedemptiondistributiontoAwithapromissorynoteofpartnership
\ ...'-..., ~------Partnersh ip c
Anolongertreatedasapartnerofpartnershipforstate-lawpurposes,eventhoughheremainsacreditor
A,however,continuestobepartnerofpartnershipfortaxpurposesuntilnotefullypaid
oReceiptofnotenottreatedasdistributionofproperty
oContinuestoreceiveK-1s oA ~ h o u g h
interestsingeneralprofitsandlossesbecomezerowhenreceivesnote,Astillcanbeallocatedpartnershipgainun
der,forexample704 (c)rules(e.g.,partnershipsellsproperty
previouslycontributedbyA)
Underdefault736rules,alloutsidebasisrecoveredfirstasnoterepaidovertime,andthen731gainrecognitionthereafter
oUnclearhowinteresttreatedforpartnershipandA- 707 (c) ? B A \ \ c \
'\ Note\" "---5
Unlikeinpartnershipscenario,Aceasestobetreatedasashareholderuponreceiptofnote
NotetreatedaspropertyissuedinexchangeforA'ssharesinS
oNogain/lossrecognizedbyS
oGain/lossrecognizedbyAtoextentFMVofnotediffersfromA'soutsidebasis
Avoidequity-flavorednotetoavoidriskoflossofSstatus(one-class-of-stockrequirement)
A Bc S Sdropsassetsinto anewlyformedsubsidiaryin
exchangeforstockSthen distributesSubstock to Cin exchangeforhis
interestin S Ifsatisfies 355requirements: DTaxfreeunder355
(a)forshareholderC DTaxfreeunder355 (c)forS Iffails355requirements:
oBuilt-ingain in Substock recognizedby S,allocatedto shareholders
Sub oShareholderCrecognizesadditionalgainto extentFMVof Substock
exceedse'soutsidebasis Key:Severalrequirementsto
meetfortax-free355treatment oActivebusinesses OS-year
activebusinesses oBusinesspurpose oDevicerequirement DMustavoid355
(d)and(e)scenarios CanmakeSelectionforSubimmediatelyif
getPLR(momentaryineligibleshareholdercan bedisregarded) AB c B c Bc
A Partnership1 Partnership1 , '\1/3 )' partnership assets
Drop113ofpartnershipassetsintoLLC1-
disregardedfortaxpurposes(or,ifuseCcorporationsub,tax-freevia351)
Distribute100%ofLLC1intereststoA-
treatedasredemptiondistributionbypartnershipofassetsinLLC1(or,ifuseCcorporation
sub,redemptiondistributionofsubstock)
Generally,tax-freetoallparties
Key:UnlikeinScorporationcontext,noneedtomeet355requirements
oNoactivebusinessrequirements oNo355businesspurposeneeded Interest
B A< $100 Partnership c