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its dealership to a limited partnership in exchange for
a limited partnership interest. Following the transfer
of assets to the limited partnerships, the subsidiaries
were liquidated. As a result, P obtained the
subsidiaries’ limited partnership interests.
R determined that pursuant to sec. 1363(d), I.R.C.,
P’s conversion to an S corporation triggered the
inclusion of the affiliated group’s pre-S-election LIFO
reserves ($5,077,808) into P’s income. R’s primary
position was that the restructuring should be disregarded
because it had no tax-independent purpose. R
alternatively maintained that under the aggregate
approach to partnerships, a pro rata share ($4,792,372)
of the pre-S-election LIFO reserves was attributable to
P.
Held: The restructuring was a genuine multiple-
party transaction with economic substance, compelled by
business realities and imbued with tax-independent
considerations. The restructuring was not shaped solely
by tax avoidance features. Consequently, R’s primary
position that there was no tax-independent business
purpose for the restructuring is rejected.
Held, further: The aggregate approach (as opposed
to the entity approach) to partnerships better serves the
underlying purpose and scope of sec. 1363(d), I.R.C.
Accordingly, P is deemed to own a pro rata share of the
partnerships’ inventories of automobiles and light
trucks. Consequently, upon its election of S corporation
status, P was required to include $4,792,372 in its gross
income as its ratable share of the LIFO recapture amount.
Sheldon M. Kay and Robert L. LoRay, for petitioner.
James P. Dawson and Julius Gonzalez, for respondent.
JACOBS, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes as follows:
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