Partnership-interest sales between spouses' grantor trusts are tax-free

Plain-English summary

Each spouse had created a grantor trust that was disregarded as a separate taxpayer. One spouse and that spouse's trust proposed selling limited partnership interests to the other spouse's trust. Because the seller's trust was treated as owned by the first spouse and the buyer's trust was treated as owned by the second spouse, the transactions were treated as transfers between spouses. The IRS ruled that section 1041 prevented recognition of gain or loss on both sales. The receiving trust took the same adjusted bases the interests had in the hands of the spouse and the selling trust.

Ruling snapshot

• Question: Would sales of partnership interests by one spouse and that spouse's grantor trust to the other spouse's grantor trust trigger gain or loss?
• Outcome: Approved; no gain or loss was recognized, and the interests retained carryover basis.
• Key authorities: IRC §§ 675(4) and 1041; Rev. Rul. 85-13

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201927003                                                Third Party Communication: None
Release Date: 7/5/2019                                           Date of Communication: Not Applicable
Index Number: 1041.00-00
                                                                 Person To Contact:
------------------------                                         ---------------------, ID No. ----------------
-------------------------------------------                      Telephone Number:
-------------------------------                                  --------------------
--------------------------------------------                     Refer Reply To:
-----------------------------                                    CC:ITA:B04
-----------------------------------                              PLR-123678-18
                                                                 Date:
                                                                 April 05, 2019




Legend

Spouse 1          =        -------------------------
                           -------------------------

Trust 1           =        ------------------------------------------
                           -----------------------

Spouse 2          =        --------------------------
                           -------------------------

Trust 2           =        -----------------------------------
                           ------------------------

x                 =        --

Partnership =              --------------------------------------------


Dear --------------:

This responds to your request for rulings regarding the application of § 1041 of the
Internal Revenue Code to the sale of partnership interests to a grantor trust.

Spouse 1 created and funded Trust 1. It is represented that Trust is a grantor trust
under § 675(4) of the Code. As a grantor trust, the grantor, Spouse 1, is treated as the
owner of the assets, the trust is disregarded as a separate tax entity, and all income is
taxed to the grantor. Rev. Rul. 85-13, 1985-1 C.B. 184.
PLR-123678-18                                 2

Spouse 2 created and funded Trust 2. It is represented that Trust 2 is a grantor trust
under § 675(4) of the Code. As a grantor trust, the grantor, Spouse 2, is treated as the
owner of the assets, the trust is disregarded as a separate tax entity, and all income is
taxed to the grantor. Rev. Rul. 85-13, 1985-1 C.B. 184.

Spouse 1 proposes to sell a x percent limited partnership interest in Partnership to Trust

2. In addition, the trustees of Trust 1 propose to sell a x percent limited partnership
interest in Partnership to Trust 2.

Section 1041(a)(1) of the Code provides that no gain or loss shall be recognized on a
transfer of property from an individual to a spouse.

Section 1041(b) of the Code provides that, in the case of any transfer described in
subsection (a), (1) the property shall be treated as acquired by the transferee by gift,
and (2) the basis of the transferee in the property shall be the adjusted basis of the
transferor.

Because Trust 1 is a grantor trust, assets sold by Trust 1 will be treated for federal tax
purposes as sold by Spouse 1. In addition, because Trust 2 is a grantor trust, assets
purchased from Taxpayer and Trust 1 will be treated for federal tax purposes as
purchased by Spouse 2.

Accordingly, based on the information submitted, we rule as follows:

   (1) Spouse 1 will recognize no gain or loss on the sale by Spouse 1 of a x percent
       limited partnership interest in Partnership to Trust 2 (§ 1041(a)(1) and Rev. Rul.
       85-13).
   (2) Spouse 1 will recognize no gain or loss on the sale by Trust 1 of a x percent
       limited partnership interest in Partnership to Trust 2 (§ 1041(a)(1) and Rev. Rul.
       85-13).
   (3) The basis of property acquired from Spouse 1 by Trust 2 will be the same as the
       adjusted basis in the property in the hands of Spouse 1 (§ 1041(b)(2)).
   (4) The basis of property acquired from Trust 1 by Trust 2 will be the same as the
       adjusted basis in the property in the hands of Trust 1 (§ 1041(b)(2)).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, no opinion is expressed regarding the status of Trust 1 or Trust
2 as grantor trusts.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-123678-18                                  3

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                       Sincerely,



                                       Stephen J. Toomey
                                       Senior Counsel, Branch 4
                                       (Income Tax & Accounting)




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