Partnership Ownership Realignments via Partnership Reallocations, Legal Status Changes, Recapitalizations and Conversions: What are the Tax Consequences?

Members of partnerships and limited liability companies require flexibility in structuring theirinitial and ongoing ownership of their partnership interests.   They demand the ability to restructure their interests to permit or unilaterally provide for changes in the partners’ economic and/or legal status.  Partnership recapitalizations (akin to corporate recapitalizations), partner interest conversions (akin to exercises of options to convert preferred into common interests or vice versa) and the issuance and exercise of partnership options (akin to stock options) have increased popularity. 

The tax consequences of these realignments of partnership interests have not been thoroughly analyzed for income tax purposes.  IRS’ letter rulings, revenue rulings and proposed regulations are not consistent.  Different characterizations of these partnership realignment transactions can result in substantially different tax consequences.  This paper, well-received at the 57th annual University of Chicago Law School Federal Tax Conference, is the first article to comprehensively consider these restructurings.  One thing that has not changed:  tax practitioners still need to know how to apply operative tax provisions to partnerships and their owners.