LLC mergers.

• Author: Owen, Sheila A.
• Position: Limited liability companies

This case study has been adapted from PPC's Guide to Limited Liability Companies, 25th edition (October 2019), by Michael E. Mares, Sara S. McMurrian, Stephen E. Pascarella II, and Gregory A. Porcaro. Published by Thomson Reuters/Tax & Accounting, Carrollton, Texas, 2019 (800-431-9025; tax.thomsonreuters.com).

Sec. 708 governs the federal income tax treatment of the merger of two or more partnerships (including limited liability companies (LLCs) classified as partnerships). A merger of a partnership into a newly formed LLC is one method of converting an existing business from a partnership to an LLC. When discussing LLC mergers in this column, the resulting entity, for legal purposes, is assumed to be an LLC.

Note: The preamble to the proposed regulations addressing series LLCs indicates that a series of an LLC cannot merge with another entity (REG-119921-09).

Note: In Field Service Advisory 199952016, the IRS clarified that the substantive consolidation of a group of related partnerships in a bankruptcy proceeding did not result in a merger.

Mergers governed by state law

Although Sec. 708 governs the tax treatment of LLC mergers, from a legal standpoint, LLC mergers must be completed in accordance with state law. Generally, each state specifies within its statutes (1) which entities may be merged; (2) the approval procedures for such mergers; and (3) the state filing requirements necessary to consummate the transaction. Practitioners should note that although a state's LLC statute may allow the merger of an LLC with a corporation, such a merger is not necessarily a tax-free merger under the provisions of Sec. 368(b). However, a merger of a target corporation into a disregarded entity may qualify as a tax-free statutory merger under Sec. 368(a)(1)(A) (see Regs. Sec. 1.368-2(b)(1)(iii), Example (2)).

If a merger involves LLCs (or other entities) organized in different jurisdictions, the transaction will be subject to the laws of each jurisdiction of organization. If an LLC is registered to do business in several states, a merger may require it to comply with filing requirements in each state in which it is registered to do business. To ensure compliance with state requirements, the practitioner should consult the statute under which the LLC is organized as well as the statutes in those states in which it is registered to transact business.

Determining the continuing entity for tax purposes

Sec. 708 provides that for federal income tax purposes, the LLC resulting from a merger is deemed to be a continuation of the premerger LLC or partnership whose members or partners own more...