Implications of IRS Revenue Ruling 99-5 on reorganizations
Scenario 1
Scenario 2
Scenario differences
Issues to consider
Scenario 1
1. Buyer is deemed to purchase 75% of assets in the target SMLLC.
2. Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
3. Buyer is treated as purchasing 75% of the assets held by the target SMLLC and contributing them to target partnership in a 721 transaction, the code section that governs the tax-free contribution of assets in exchange for partnership interest.
4. Seller is treated as contributing 35% of the assets of target SMLLC in a 721 transaction.
Scenario 2
1. Buyer contributes cash equal to 75% of the value to target SMLLC in exchange for a 75% interest.
2. Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
3. Buyer's tax treatment is governed under the terms of code 721.
4. Seller is treated as contributing 25% of the assets of target SMLLC in a 721 transaction.
Scenario differences
Differences between scenarios 1 and 2
1. Taxable vs. nontaxable
2. Step up
3. Target 1065 contribution to new target partnership
Scenario 1:
Target 1065 contributes 25% of the assets with a carryover basis but receives a 25% stepped-up capital account for 704(b) purposes.
Scenario 2:
Target 1065 contributes 100% of the assets with a carryover basis but receives a 100% stepped-up capital account for 704(b) purposes.
Issues to consider
Potential tax issues to consider
Deductibility of transaction expenses
Seller costs
Buyer costs
Lender costs
Depreciation expense on contributed assets
704(c) on contributed assets - methods
Implications of IRS Revenue Ruling 99-6 on reorganizations
Sequence of 99-6 transaction
Issues to consider
Sequence of 99-6 transaction
1. Organization B pays cash for organization A’s interest in Holdco LLC.
2. A is treated as selling its partnership interest to B.
3. B is treated as purchasing A’s proportionate share of assets that are deemed distributed to A immediately prior to sale.
4. Holdco LLC pays cash for A and B's interest in a target LLC.
5. A and B are treated as selling their partnership interest to Holdco LLC.
6. Holdco is treated as purchasing A and B’s proportionate share of assets that are deemed distributed to A and B immediately prior to sale.
Issues to consider
Tax issues to consider
Cash basis partnerships and accrued liabilities assumed by the buyer
Transaction costs
Section 751(a) reporting on an old return
Form 8308 to report the sale or exchange by a partner of all or part of its partnership interest
Form 8594 for sellers and purchasers to report a sale of a group of assets if goodwill or going concern value attaches to those assets and if the purchaser’s basis is determined solely by the amount paid
Our experienced tax professionals can help you tackle your most pressing tax challenges. Contact the Crowe tax team today.
