How does Rev Proc 99-6 apply to Partnership Interest Sale with momentary sole ownership?

What you're describing is an interesting situation with some nuanced tax implications. The key issue is whether that brief 2-minute window creates a taxable event under Rev Proc 99-6. Generally, when a partnership becomes a sole proprietorship (even briefly), there's a technical termination of the partnership. However, the IRS often looks at the substance of transactions rather than just their form, especially when steps are clearly part of an integrated plan. Since your purchase of Partner K's interest is explicitly contingent on the immediate sale to VentureCap, and these transactions are happening within minutes of each other as part of a prearranged plan, there's a strong argument that these should be viewed as steps in a single integrated transaction rather than separate events. The step transaction doctrine might apply here, where the intermediate steps (your momentary sole ownership) could be collapsed if the end result was always intended to be the formation of the new C corp with multiple owners.

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I was really skeptical about using an AI tool for something as complex as my partnership-to-corporation conversion, but I decided to try https://taxr.ai after reading about it here. Wow - I'm genuinely impressed with how comprehensive the analysis was! I uploaded our partnership agreement, the proposed sale documents, and our non-compete clauses. The system actually identified a similar Rev Proc 99-6 issue in our transaction plan that none of us had caught. It explained exactly how the momentary single-member ownership could trigger unintended tax consequences and suggested specific revisions to our timing and documentation. The tax attorney we consulted afterwards confirmed these issues and said we'd saved at least $18,000 in potential tax liability by restructuring the transaction sequence. The tool even generated language we could use in our agreements to strengthen the integrated transaction argument. Definitely worth checking out if you're doing any complex partnership restructuring!

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One aspect that hasn't been mentioned - the formation of the new C corp adds another layer to consider. From my experience with similar transactions, if you're contributing partnership interests in exchange for stock, you'll want to ensure you meet the requirements of Section 351 for tax-free treatment of that exchange. If the partnership is deemed terminated under 99-6 during that brief window, it could potentially disrupt your Section 351 exchange. The timing and documentation become even more critical to establish that these are integrated steps of a single business restructuring transaction.

Has anyone considered whether the partnership agreement itself might already have provisions that address this? Many partnership agreements have specific clauses about what happens in single-member scenarios. Before you restructure anything, check if your existing agreement already addresses temporary sole ownership!