Treatment of a state law merger of S corporation into LLC.

• Author: Starr, Samuel P.
• Position: Limited liability company - Brief Article

In Letter Ruling 9543017, the IRS ruled that a state law merger of an S corporation into a limited liability company (LLC) was equivalent to the contribution of S assets to the LLC in exchange for the LLC interest subsequently distributed in complete liquidation to the former S shareholder. Although the letter ruling concurrently addresses the classification of the LLC as a partnership for tax purposes, the conclusion reached by the Service is consistent with earlier classification letters.

The following is a summary of the integrated steps applied by the IRS to the transaction.

* The S corporation is deemed to contribute its assets to the LLC in exchange for an interest in a tax-free exchange under Sec. 721. The S corporation's basis in its interest is equivalent to the basis in the assets contributed (increased by any gain recognized under Sec. 721 (b)).

* The S corporation will recognize gain or loss on distributing the LLC interests to the shareholders in complete liquidation of their shares. The amount and character of the gain or loss is determined under the rules of Secs. 741 and 751.

* In accordance with Sec. 1366 (a), any gain or loss to the S corporation resulting from the liquidation will be passed through to the shareholders. The shareholders will adjust their bases in the S stock in accordance with the rules of...