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Tax Law Roundup current law developments in U.S. taxation

IRS Concludes Upper-Tier Disregarded Entity is Continuation of Historical Partnership

Posted in Joint Venture, Partnership/LLC, Passthrough Entity, Real Estate

Magnifying glass-resized-600The IRS favorably ruled that an internal partnership restructuring was essentially a “nothing” for tax purposes even though the transaction moved the tax-regarded partnership to a different state-law entity.  Specifically, in PLR 201605004, the IRS privately ruled that an upper-tier disregarded entity succeeded to the partnership status of a lower-tier tax partnership when the second partner in the lower-tier partnership contributed its partnership interest to the upper-tier entity.  The ruling concluded that effectively the lower-tier partnership was converted into the upper-tier partnership and the upper-tier partnership will be considered a continuation of the lower-tier partnership.

The guidance is consistent with prior IRS guidance on conversions between state-law entities taxed as partnerships under Rev. Rul. 84-52 and Rev. Rul. 95-37.  Specifically the IRS concluded that (1) the conversion of the lower-tier tax-partnership into the upper-tier partnership did not cause the partners in the partnerships to recognize gain or loss under §§ 741 or 1001 (except for the possible results of debt shifting under § 752); (2) the conversion resulted in the holding period of the partners’ interests in the upper-tier partnership to include the period of time during which those interests were held as partners in the lower-tier partnership; (3) the conversion did not cause the taxable year of the partnership to close under § 706; (4) the continuing upper-tier partnership does not need to obtain a new taxpayer identification number; (5) the basis of the assets held by the upper-tier partnership is the same as the basis of the assets in the hands of the lower-tier partnership prior to the conversion; and (6) the conversion did not result in the assets of the partnership being contributed or distributed to the partners of the partnership.