The AC partnership has the following balance sheet:

Assets Partners Capital

A.B. F.M.V. A.B. F.M.V.

Inventory $80,000 $100,000 A $60,000 $100,000

Capital

Asset 40,000 100,000 C 100,000 100,000

$120,000 $200,000 $160,000 $200,000

The difference between the partnerships aggregate inside basis in its assets and the partners outside bases in their interests is attributable to the fact that C purchased her interest from B three years ago. For convenience, assume that the balance sheet remained unchanged over that period of time.

A and C wish to incorporate the partnership. Several alternative forms of incorporation are available: (1) the partnership could distribute its assets in complete liquidation, and A and C could transfer those assets to the corporation in exchange for its stock; (2) A and C could transfer their partnership interests to the corporation in exchange for its stock and the corporation would in essence liquidate the partnership; or (3) the partnership could transfer its assets to the corporation in return for stock and the partnership then could liquidate, distributing the stock to A and C.

1. Consider the tax consequences of each alternative approach to incorporation of the partnership. See 351, 358, 362.
2. Does Revenue Ruling 84-111 correctly conclude that the results are different?