In a recent private letter ruling (#200807005) the IRS held that the taxpayer’s receipt of 100% of the interests in a partnership holding real property was treated as the receipt of qualifying replacement property in a like-kind exchange. Although the partnership continued to exist as an entity for state law purposes, it became a disregarded entity for federal income tax purposes when the taxpayer and its wholly-owned LLC (itself a disregarded entity) acquired 100% of the interests. Therefore the IRS viewed the taxpayer as having acquired the replacement property directly.
The taxpayer, a limited partnership, sold real property through a qualified intermediary (QI), and the buyer transferred the sales proceeds to the QI. The replacement property was held in a different limited partnership (“Partnership”). The taxpayer formed an LLC that it represented would be a disregarded entity for federal income tax purposes.
With the proceeds of sale of the relinquished property, the QI purchased 100% of the partnership interests in Partnership. At the closing, those interests were to be transferred partly to the taxpayer and partly to the LLC formed by the taxpayer.
The IRS reasoned that the acquisition of 100% of the interests in the Partnership would be treated as a direct acquisition of the real property held by the Partnership. Further, since the LLC was a disregarded entity, the taxpayer would be treated as the sole acquiror of the replacement property.
This is the first ruling in which the IRS has addressed for purposes of the like-kind exchange rules a taxpayer’s acquisition of 100% of the interests in a partnership or other entity treated as a partnership for federal income tax purposes that holds replacement property. Although a private letter ruling may not be relied upon by other than the taxpayer to whom it was issued, the ruling reflects the IRS’ view that such an acquisition will be treated as a direct acquisition of the partnership’s property for purposes of those rules.