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TAX CLINIC

This scenario is similar to Rev. Example 3. Comparison to Rev. seem somewhat mutually exclusive.
Rul. 66-264, where a partnership with Rul. 99-6: Assume the same facts as Each ruling aligns better with a spe-
five owners sold all its assets pursu- Example 2; however, the purchase cific set of facts. To that end, where
ant to a court order. Three of the five agreement stipulates that the parties one applies, the other feels inherently
partners funded a new partnership account for the transaction under less applicable. Nevertheless, it is not
with cash and acquired the assets. Rev. Rul. 99-6, Situation 2. uncommon to see purchase agree-
The two exiting partners received ments that contain an “intended tax
cash. Since the newly formed part- The only factual difference here is treatment” section, which may specify
nership carried on the same business, the purchase agreement’s explicit appli- that a transaction that would result
the ruling held it was a continuation cation of Rev. Rul. 99-6. Under the Rev. in the continuation of a partnership
of the old partnership. The exiting Rul. 99-6 construction, NewCo would be accounted for under the mechan-
partners were treated as selling their reflect the transaction as a purchase of ics of Rev. Rul. 99-6. Although these
partnership interests to the continu- a 90% fractional interest in each asset provisions in agreements can provide
ing partners. The ruling echoes a of OpCo for the cash purchase price. directional guidance, the IRS is not
fundamental principle of Sec. 708 NewCo would take a carryover basis in bound by the parties’ agreed-upon
— a partnership continues if it does the remaining 10% fractional interest treatment. Keep in mind that on ex-
not terminate. of each asset contributed to NewCo by amination the IRS may seek to recast a
In Example 2, there was a change A and B. transaction based upon all relevant facts
in ownership but no substantial It is not entirely clear whether Rev. and circumstances.
change to the underlying business Rul. 99-6 is intended to apply to a part-
activity. The business continues to be nership continuation. The scope of the Partnership continuations from
carried on by the original members ruling is limited to transactions where mergers
in an entity taxed as a partnership. a partnership terminates under Sec. Rev. Rul. 66-264 is helpful in summariz-
NewCo satisfies all the requirements 708(b)(1)(A) under two sets of specific ing the relevant rules and consequences
for a “drop down” continuation. If factual situations involving a taxable of partnership “drop down” continuations. IMAGE BY THE PHOTO MATRIX/GETTY IMAGES
NewCo is a continuation, a full-year acquisition. Neither situation discussed However, it has a narrow scope; not every
partnership return is filed (presum- in the ruling addresses situations where transaction will fit within the ruling’s
ably under the NewCo name), and A Sec. 708(a) applies. framework. Fortunately, an additional
and B are deemed to sell 90% of their The underlying fundamentals of ruleset is available to look to for guidance
partnership interests to Sponsor. Rev. Rul. 66-264 and Rev. Rul. 99-6 where the ruling does not apply.

20 April 2023 The Tax Adviser