Tax Consequence of Retirement or Withdrawal of Proportionate Shares of Partners from Ortigas & Co. Ltd. Partnership

August 16, 1985 BIR RULING NO. 126-85 035 000-00 126-85 Gentlemen : This refers to your letter dated June 14, 1985 requesting a ruling as to the tax consequence of the proposed retirement or withdrawal of the proportionate shares of some general and limited partners from Ortigas & Company Limited Partnership. It is represented that Ortigas & Company Limited Partnership was organized as a limited partnership by shares (sociedad comanditaria por acciones) under the provisions of Articles 145 to 150 inclusive and Article 160 of the Code of Commerce and by express provision of Article 1867, paragraph 2 of the New Civil Code continued to be governed by the aforementioned provisions of the old law or the Code of Commerce; that despite the several amendments to its articles of partnership after the effectivity date of the New Civil Code on August 30, 1950, Ortigas & Company Limited Partnership did not convert itself into a partnership under the provisions of the New Civil Code; that under said articles of partnership, the interest of the general as well as the limited partners in the partnership are transferable, the interest of the limited partners being represented by transferable shares with a par value of P10.00 per share; that some general and limited partners have requested that they be allowed to withdraw or retire from the partnership and the remaining general partners are disposed to grant their request by giving them their pro-rata share to the extent of their respective interests in the assets of the partnership in their present form consisting of parcels of land, shares of stock in other corporations, receivable, furniture and fixtures, equipment and vehicles while the rest of the partners who own the majority of the limited partners' shares will remain with the partnership, and that the partnership will not be dissolved and the remaining partners will continue to conduct and manage the partnership affairs. cdtech In reply, I have the honor to inform you that this Office hereby confirms your position that Ortigas & Company Limited Partnership is not dissolved by the proposed retirement or withdrawal of some of its general and limited partners. This is so because under the law applicable to the said partnership, i.e., provisions of the Code of Commerce particularly Articles 221, 222 and 225, retirement or withdrawal of a partner is not a cause of dissolution of a partnership. Moreover, the Securities and Exchange Commission has ruled that the retirement or withdrawal of a general or limited partner did not dissolve the said partnership. Since the above partnership is not dissolved by the retirement or withdrawal of some of its general and limited partners, no gain or loss is recognized to said partnership including the remaining partners, on its distribution to the retiring partners of partnership assets in proportion to their respective interests in said partnership. If ever, only the retiring partner or partners whose shares are liquidated realize gain or loss upon receipt of retirement or liquidating payments for their interest in the partnership property. (par. 1575, 33 Am. Jur. 2d) When a partner withdraws or retires from a partnership, the tax consequence will differ depending on whether the retiring partner's interest is liquidated by the payment of liquidating distributions by the partnership to the retiring partner, or sold to another partner who may be a continuing/remaining partner or a new partner. (par. 1601, Ibid .) Thus, pursuant to Section 142 of the Income Tax Regulations implementing Section 35 of the Tax Code, when a partner retires from a partnership or the partnership is dissolved, he realizes a gain or loss measured by the difference between the price received for his interest and the cost to him of his interest in the partnership including in such cost the amount of his shares in any undistributed net income earned since he became a partner on which the income tax has been paid. If the partnership distributes its assets in kind and not in cash, the partner realizes gain or suffers loss according to the market value of the property received in liquidation. cdt Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner