Tax Consequences of a Formless Conversion Following Rev. Rul. 2004-59

The deemed asset transfer under Rev. Rul. 2004-59 suggests a number of issues that might affect an unincorporated entity's choice of conversion methods and impacts its decision to select a formless conversion as the appropriate method of transferring the partnership's operations to a corporation. Planning considerations not only include the effect of the Rev. Rul. 2004-59 deemed election on the partnership, its partners, and the corporation, but the effect of a formless conversion on a subchapter S status election, small business stock losses, small business stock gain exclusions, and prior partnership Section 754 elections. While the new ruling eliminates uncertainty about the federal tax treatment of these formless conversions, it also presents issues that should be considered by the partnership before it incorporates under a formless conversion statute.