Here are two great videos explaining Revenue Ruling 99-6, and the tax consequences of converting from a multiple-member LLC into a single member LLC that is disregarded as an entity separate from its owner. The first video explains Situation 1 and the second video (below the first video’s transcript) explains Situation 2. Enjoy!
Understanding Situation 1 of Revenue Ruling 99-6
Understanding Revenue Ruling 99-6, Situation 1
“Lets jump right in with Revenue Ruling 99-6, specifically situation 1. Revenue Ruling 99-6 gives a very straight forward solution to a very common tax question: What are the tax consequences when a multi-member LLC becomes a single member LLC that is disregarded as an entity separate from its sole owner?
Situation 1 of Ruling 99-6 deals with when one partner buys out the other partner–specifically in Situation 1, partner B has bought out partner A’s interest for $10,000 of cash–and it gives a list of tax consequences to the LLC, to partner A, and to partner B.
For the LLC the tax consequences are really straight forward. Because it ceases to have more then one member, the partnership terminates under 708(b)so a final tax return needs to be filed through the date that B buys A’s interest.
Now for A (the selling partner), the consequences are also very straightforward. For A, he is treated as if he’s any other partner that sold a partnership interest–which means he gets a capital gain, or loss, under Section 41, except to the extent that the LLC had any hot assets. If thats the case, then A may well recognize some ordinary income under Section 751.
Now, where things get a little confusing, or can be complicated, is with B (the buying partner). Why is that? Because in order to get from the situation where the LLC owns assets to where B is deemed to own assets directly as a single member LLC, Revenue 99-6 creates a hypotheical situation where, strictly for determining the tax consequences to B (not to A), the LLC is deemed to hypothetically liquidate and distribute all of its assets to A and B -and then B is deemed to have purchased A’s share of its assets for $10,000. So that means two things for B: 1) This deemed liquidation has real tax consequences to B. As a result, if the deemed cash distributed to B exceeds B’s tax basis, B will actually recognize gains under section 731 and 2) B will take a basis in the assets deemed distributed to them under the normal distribution rules of Section 732. 50% of the assets required from B’s basis will be determined under Section 732 and for the 50% required from A, B will take a stepped up basis equal to $10,000.
..and thats it for revenue rulling 99-6, Situation 1. We will come back next week and take on Situation 2. -See you then.”
Situation 2 of Revenue Ruling 99-6 – Partnership Converts to SMLLC
Partnership Converts to SMLLC: Revenue Ruling 99-6, Situation 2
“In Situation 2 of Revenue Ruling 99-6 we are still dealing with the tax consequencs of converting from a multi-member LLC to a single member LLC. Only, instead of a situation where one partner buys out the remaining partner’s interest, Situation 2 gives us a fact pattern where an outside buyer comes in and buys everyones interests in the partnership. The exact facts in the Revenue Ruling are that C and D own 50% each of an LLC and E, an outside buyer, comes in and buys C and D’s interest for $10,000 each. The Revenue Ruling gives us the tax consequences to the LLC, to the selling partners (C and D), and to the buyer (E).
For the LLC, it is very straight forward. Just like under Situation 1, the LLC ceases to exist under Section 708(B) on the day it no longer has more then one member. So we need a final tax return for that date.
For C and D (the selling partners) it is also very straightforward. They’re going to recognize a capital gain or loss under Section 741, except to the extent that there is any hot assets at the LLC level in which case there may be some ordinary income under Section 751.
For E (the buyer)… remember when E acquires all the interest, the LLC is going to convert to a Single Member LLC (SMLLC) that is disregaurded as seperate from E. So we need to create a situation, or a hypothetical transaction, where the assets of the LLC become directly owned by E. The way we do that is the Revenue Ruling comes up with a hypothetical distribution where the LLC distributes all assets equally to C and D and then E comes in and buys the assets from C and D directly for $10,000 each. There are two important things to note about that: 1) That hypothetical liquidateed distribution has no tax consequences to C and D. 2) E is not treated as though it bought a pertnership interest. He is treated as if he actually bought assets. E has to take the $20,000 purchase price and allocate it among the underlying assets of the LLC, just like a buyer would in a normal asset acquisition. So at the end of the day, E is going to end up with $20,000 steped up basis, allocated among all the underlying assets of the LLC.
And that’s it for Situation 2 of Revenue Ruling 99-6..”
You should not assume that any discussion or information contained in the presented material(s) serves as the receipt of, or as a substitute for, personalizedfinancial advice from PWM. The items in this article are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. Tony Nitti writes Double Taxation, and any opinions expressed or implied are not necessarily shared by anyone else at WithumSmith+Brown or PWM Advisory Group, LLC. Phtoto Credit: Alan Cleaver – flickr
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