In partially redacted field attorney advice (FAA 20132101F), the IRS has determined that a partnership continued in the form of a new local law entity after a series of transactions in which original partnership interests were exchanged for interests in a new local law entity, and the original partnership became a disregarded entity wholly owned by the new local law entity.
The taxpayer addressed in the advice was organized as a limited liability partnership and entered into a series of transactions in which a new local law entity created a transitory subsidiary that merged with the original partnership, and the partners received interest in the new local law entity or cash. Following the merger, the original partners held more than 50% of the new local law entity, a partnership, and the original partnership continued to operate the business as a wholly owned disregarded entity of the new local law entity.
Citing Rev. Rul. 66-294, the IRS concluded that the new entity is considered a continuation of the original partnership, even though it bears a different EIN. The IRS also concluded that the partnership did not terminate under Section 708(b)(1)(B), which provides that a partnership terminates if within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. On the Section 708(b)(1)(B) issue, the IRS cited Treas. Reg. Sec. 1.708-1(b)(2), under which a contribution of property to a partnership does not constitute a sale or exchange and stated that "none of the steps that are treated as occurring as part of the merger that transfers partnership interests [from the old partnership to the new] are considered a sale or exchange."
The FAA reinforces the need to examine transactions involving partnerships to ascertain their tax characterization, especially when tiered entities involving single member LLCs are part of the transaction.
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