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.
Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for
Accordingly, the shareholders recognize gain on the liquidation, measured by the excess of the net value of the property received over the basis of the stock surrendered in the transaction.2 However, in a private letter ruling issued by the IRS late last year, both the corporation and the distributee shareholders were absolved of any tax consequences arising from the liquidation of the corporation.
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.
Accordingly, a corporation was formed based on a “plan of conversion” that transformed a partnership to a corporation.