PLR 9944016: Both partnerships continued after division of LLC

Plain-English summary

An LLC taxed as a partnership proposed dividing its gas interests between itself and a new LLC with the same two owners. The IRS ruled that both resulting partnerships would continue the original partnership under § 708. A prior ruling concerning the assets transferred to the new LLC would apply to it, and a separate ruling concerning assets held by a subsidiary would continue to apply to that subsidiary. The IRS did not rule on the tax consequences of the asset transfer, liability assumption, or any transfer of partnership interests.

Ruling snapshot

• Question: Would both resulting partnerships continue the original partnership and retain the reach of earlier asset rulings?
• Outcome: Approved as to continuity and the two prior rulings.
• Key authorities: IRC § 708(b)(2)(B); Treas. Reg. § 1.708-1(b)(2)(ii).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Index Number: 708.03-00 Washington, DC 20224

Number: 199944016
Person to Contact:
Release Date: 11/5/1999
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:2-PLR-106787-99
Date:
August 3, 1999

A =

B =

X =

Y =

Seller 1 =

Seller 2 =

Newco =

Ruling #1 =

Ruling #2 =

Date 1 =

Date 2 =

Dear
:

This is in reply to your letter dated March 29, 1999, and subsequent correspondence, requesting rulings on behalf of X under § 708 of the Internal Revenue Code and regarding the applicability of two prior letter rulings. 2 Mr. Eric B. Sloan The information submitted states that X is a limited liability company that is classified as a partnership for federal income tax purposes. A holds a 99 percent capital and profits interest in X and B holds a 1 percent capital and profits interest in X. Y is a limited liability company that is classified as a partnership for federal income tax purposes. X holds a 99 percent capital and profits interest in Y and B holds a 1 percent capital and profits interest.

On Date 1, X acquired certain gas working interests (Ruling #1 Assets) from Seller 1 in exchange for cash and additional payments payable from time to time. Seller 1 also retained production payments. The Internal Revenue Service (the Service) issued Ruling #1 to X with respect to the transfer of the Ruling #1 Assets.

On Date 2, Y acquired certain gas operating and/or royalty interests (Ruling #2 Assets) from Seller 2 in exchange for cash, a non-recourse note, and additional payments payable from time to time. Seller 2 also retained production payments. The Service issued Ruling #2 to Y with respect to the transfer of the Ruling #2 Assets.

To segregate the ownership of the Ruling #1 Assets from interests in Y, a division of X into X and Newco, a newly formed limited liability company, is proposed. Immediately thereafter, A will hold a 99 percent capital and profits interest in Newco and B will hold a 1 percent capital and profits interest in Newco. Newco will be classified as a partnership for federal income tax purposes. Newco will hold the Ruling #1 Assets and Y will continue to hold the Ruling #2 Assets.

X represents that, after the division, all of the Ruling #1 Assets and the liabilities associated with them will be owned and owed by Newco. X also represents that there will not be any material changes to the purchase and sale agreement between Seller 1 and X regarding the Ruling #1 Assets in connection with this transfer.

X represents that, after the division, all of the Ruling #2 Assets and the liabilities associated with them will continue to be owned and owed by Y. X also represents that there will not be any material changes to the purchase and sale agreement between Seller 2 and Y regarding the Ruling #2 Assets in connection with the transfer of the Ruling #1 Assets.
You have requested rulings that, after the division, (1) both X and Newco will be considered continuations of X for federal income tax purposes; (2) Ruling #1 will apply to Newco; 3 Mr. Eric B. Sloan and (3) Ruling #2 will continue to apply to Y.

Section 708(b)(2)(B) provides that in the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than a resulting partnership the members of which had an interest of 50 percent or less in capital and profits of the prior partnership) shall, for purposes of § 708, be considered a continuation of the prior partnership.

Section 1.708-1(b)(2)(ii) of the Income Tax Regulations provides, in part, that upon the division of a partnership into two or more partnerships, the resulting partnership or partnerships shall be considered a continuation of the prior partnership if its members had an interest of more than 50 percent in the capital and profits of the prior partnership.

Based on the facts and representations submitted, we conclude that X, after the division, and Newco will be considered continuations of the present X. In addition, we conclude that Ruling #1 will apply to Newco to the same extent that Ruling #1 applied to X and Ruling #2 will continue to apply to Y after the division.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code. Specifically, no opinion is expressed regarding the tax consequences of the transfer of the Ruling #1 Assets to Newco or the assumption of the liabilities associated with the Ruling #1 Assets by Newco. In addition, no opinion is expressed concerning the tax consequences of any transfer of any interest in X, Y, or Newco.

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

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to X.

Sincerely,
H. GRACE KIM
Assistant to the Chief,
Branch 2
Office of the Assistant
Chief Counsel( Passthroughs & Special
Industries)
Enclosures: (2)
Copy of this letter
Copy for § 6110 purposes