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Section 721.-Nonrecognition of Gain or Loss on Contribution
26 CFR 1.721-1: Nonrecognition of gain or loss on contribution.
(Also sections 722, 723, 1001,1012, 1223, 7701; 1.1223-1, 301.7701-3.)
Disregarded entity to partnership. This ruling describes the federal income tax consequences when a single member limited liability company that is disregarded as an entity separate from its owner under section 301.7701-3 of the Procedure and Administration Regulations becomes an entity with more than one owner that is classified as a partnership for federal tax purposes.
Rev. Rul. 99-5
ISSUE
What are the federal income tax consequences when a single member domestic limited liability company (LLC) that is disregarded for federal tax purposes as an entity separate from its owner under sec 301.7701-3 of the Procedure and Administration Regulations becomes an entity with more than one owner that is classified as a partnership for federal tax purposes?
FACTS
In each of the following two situations, an LLC is formed and operates in a state which permits an LLC to have a single owner. Each LLC has a single owner, A, and is disregarded as an entity separate from its owner for federal tax purposes under sec 301.7701-3. In both situations, the LLC would not be treated as an investment company (within the meaning of sec 351) if it were incorporated. All of the assets held by each LLC are capital assets or property described in sec 1231. For the sake of simplicity, it is assumed that neither LLC is liable for any indebtedness, nor are the assets of the LLCs subject to any indebtedness.
Situation 1. B, who is not related to A, purchases 50% of A's ownership interest in the LLC for $5,000. A does not contribute any portion of the $5,000 to the LLC. A and B continue to operate the business of the LLC as co-owners of the LLC.
Situation 2. B, who is not related to A, contributes $10,000 to the LLC in exchange for a 50% ownership interest in the LLC. The LLC uses all of the contributed cash in its business. A and B continue to operate the business of the LLC as co-owners of the LLC.
After the sale, in both situations, no entity classification election is made under sec...