In CCA 201315026, the IRS considered taxpayer’s request for assistance in determining whether there is a continuation of a partnership where the Original Partnership merges with an existing disregarded entity held by the New Partnership, while at the same time the partners contribute their interests in the Original Partnership in exchange for interests in the New Partnership. The partners are left holding the same interests in the New Partnership as they held in the Original Partnership, and the Original Partnership becomes a disregarded entity held by the New Partnership.

The IRS evaluated this issue under both §708(b)(1)(A) and (B).

Section 708(b)(1)(A)provides that a partnership terminates if no part of any business of the partnership continues to be carried on by any of its partners in a partnership. The IRS emphasized that Rev. Rul. 66-264, 1966-2 C.B. 248, held that a partnership did not terminate when three partners of a five-partner partnership purchased the partnership's assets at a judicial sale, and then continued the partnership's business through a new three person partnership. Apparently, the IRS’s position is that as long as the historic partners of a partnership continue the old partnership's business through a new partnership, the old partnership should not be treated as terminating under §708(b)(1)(A).

Section 708(b)(1)(B) provides that a partnership terminates if within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. Regs. §1.708-1(b)(2) provides, in relevant part, that the contribution of property to a partnership does not constitute a sale or exchange. As a result, stated the IRS, the transfer of the Original Partnership interests to the New Partnership is not treated as a sale or exchange; thus, there is no termination under §708(b)(1)(B).

The IRS also noted that the New Partnership is considered a continuation of the Original Partnership, even though the New Partnership bears a different employer identification number (EIN). While the CCA does not offer any additional facts pertaining to the circumstances resulting in EIN choice, it is interesting to consider the partnership merger regulations’ guidance regarding EIN retention. Regs. §1.708-1(c)(1) states that if two or more partnerships merge or consolidate into one partnership, the resulting partnership is a continuation of the merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the resulting partnership. According to Regs. §1.708-1(c)(2), the resulting partnership will retain the (EIN) of the partnership that is continuing.

In Rev. Rul. 2008-18, 2008-13 I.R.B. 674, the IRS considered EIN retention in the context of an S corporation’s “F” reorganization. In Rev. Rul. 2008-18, an individual owning all of the stock of Y Corp, an S corporation, formed NewCo by transferring the stock of the Y to NewCo. Because NewCo qualified as a small business corporation and NewCo immediately elected to treat Y as a QSub, the transaction was converted into a valid “F” reorganization and Y's S corporation election remained in effect for NewCo. The IRS ruled that NewCo was required to obtain a new EIN immediately following the “F” reorganization. However, the IRS ruled that Y must retain its EIN whenever the QSub is otherwise treated as a separate entity for federal tax purposes (including for employment and certain excise taxes).

CCA 201315026 reminds us once again of the need for guidance with respect to the use of EINs after partnership mergers. Guidance is necessary because of the inconsistency between the partnership merger regulations and the EIN retention regulations for unemployment tax reporting under Regs. §301.6109-1(h). Under the EIN retention regulations, an entity retains its EIN classification after a change in federal tax classification. Thus, it is likely that many merger scenarios will result in uncertainty regarding which EIN rules apply in reporting unemployment tax liability.  

  -- Mary Lundstedt, Analyst, Bloomberg BNA Tax and Accounting