Internal Revenue Service (I.R.S.)

Revenue Ruling (Rev. Rul.)

LIKE-KIND EXCHANGE; PARTNERSHIP INTERESTS

26 CFR 1.1031(a)-1: Property held for productive use in trade or business or for investment.

(Also Section 741; 1.741-1.)

Like-kind exchange; partnership interests. Gain or loss realized on an exchange of general partnership interests does not qualify for nonrecognition under section 1031(a) of the Code.

Advice has been requested whether, under the circumstances described below, gain or loss realized on the exchange of partnership interests qualifies for nonrecognition under section 1031(a) of the Internal Revenue Code of 1954.

A owned a 10 percent general partnership interest in partnership X and a 15 percent general partnership interest in partnership Y.  B owned a 15 percent general partnership interest in partnership X and a 10 percent general partnership interest in partnership Y.  A and B entered into an agreement whereby A conveyed A's interest in partnership X to B in exchange for B's interest in partnership Y.

Section 1031(a) of the Code provides that no gain or loss shall be recognized if property held for productive use in a trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

The language in the parenthetical clause of section 1031(a) of the Code in part encompasses all types of equity interests in financial enterprises other than by direct ownership of the underlying property.  Because a partnership interest represents such an equity interest, it comes within the ambit of the parenthetical clause of section 1031(a).

Moreover, section 741 of the Code provides, in part, 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.  Thus, section 741, which requires recognition of gain or loss, is in conformity with the parenthetical clause of section 1031(a), which excepts exchanges of equity interests in financial enterprises from nonrecognition under section 1031.

In the instant case, both A and B have transferred property of a type that is described in the parenthetical clause of section 1031(a) of the Code. Accordingly, any gain or loss realized by A and B on the exchange of such property does not qualify for nonrecognition under section 1031(a).

The holding in this revenue ruling is consistent with the Service's nonacquiescence in Estate of Rollin E. Meyer, 58 T.C. 311 (1972), nonacq., 1975-1 C.B. 3, aff'd per curiam, 503 F.2d 556 (9th Cir. 1974).