The reason: the entity’s brief stint as a corporation was, in the final analysis, disregarded for tax purposes.
In the ruling, a partnership required access to “new capital and equity” for the purpose of making acquisitions in its expansion efforts.
A month later, the corporation made a distribution to its shareholders in their capacity as former partners.
In its ruling, the IRS stated that the distribution would have been made, in the same amounts, whether or not the partnership had converted into a corporation.
It was represented that there is no material difference in the ultimate economic outcome and tax consequences between the two-step conversion (from a corporation to a partnership and then to an LLC) and the one-step conversion (from a corporation to an LLC) that was to be undertaken in this case.
The IRS concluded that the LLC should be treated as a partnership at all times during the 2009 taxable year.
On application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.
(e) Section 18-607 of this title shall not apply to a distribution to which this section applies.
In the conversion, partners holding Class A interests in the partnership received Class A common stock in the corporation, while partners holding Class B interests received either Class B or Class C common stock in the corporation.
A member is admitted to the limited liability company in the manner provided for in the limited liability company agreement, effective as of the occurrence of the event that terminated the continued membership of the last remaining member, within 90 days or such other period as is provided for in the limited liability company agreement after the occurrence of the event that terminated the continued membership of the last remaining member, pursuant to a provision of the limited liability company agreement that specifically provides for the admission of a member to the limited liability company after there is no longer a remaining member of the limited liability company.
(5) The entry of a decree of judicial dissolution under § 18-802 of this title.
As a result, for tax purposes, the corporation never existed.
It follows that the conversion of a corporation into a LLC is not treated as a liquidation of a corporation for purposes of determining the taxable income of a company and its equity holders.