IRS Revenue Ruling 99‑6 addresses what happens for federal income tax purposes when one person purchases all ownership interests in a domestic Limited Liability Company that is classified as a partnership, causing a termination under Section 708 and a conversion to a single‑member, disregarded entity; in “IRS Revenue Ruling 99-6,” sellers are treated as selling a partnership interest under Section 741 (with possible Section 751 hot‑asset ordinary income), while the buyer is treated as purchasing assets in a deemed liquidation‑then‑acquisition sequence, establishing new basis, new holding periods, and purchase price allocation implications that drive depreciation and amortization going forward.
What Does IRS Revenue Ruling 99-6 Cover?
Revenue Ruling 99‑6 sets facts and consequences for two common paths to 100% acquisition of a partnership‑taxed LLC: an existing partner buys out the other member(s), and an outside acquirer buys all interests, in each case terminating the partnership under Section 708(b)(1)(A). Sellers report sale of a partnership interest under Section 741 (subject to Section 751 for unrealized receivables and inventory), while the buyer is treated as acquiring the underlying assets, triggering asset‑level basis step‑ups on purchased portions and fresh holding periods.
Situation 1: Existing Partner Buys Out The Other
When a two‑member LLC has Partner B purchase Partner A’s entire interest, the partnership terminates, A reports gain or loss under Section 741, and for B the partnership is deemed to liquidate, followed by B purchasing the assets attributable to A’s former share, giving B cost basis and a new holding period for that purchased portion. For B’s pre‑acquisition portion, basis is determined under Section 732 and the holding period tacks under Section 735(b), producing a split basis/holding‑period profile across the assets.
Situation 2: Outside Buyer Acquires 100% Of Interests
If an unrelated Buyer E purchases all interests from C and D, each seller recognizes gain or loss on a partnership interest sale under Section 741, while E is deemed to purchase all partnership assets for total consideration, obtaining cost basis and new holding periods beginning the day after acquisition. The entity continues as a single‑member LLC disregarded for federal income tax purposes unless an election is made to be an association.
Key Code Sections And Concepts
- Section 708(b)(1)(A): Partnership termination when no business continues in partnership form after 100% interest is acquired by one owner.
- Section 741 and Reg. 1.741‑1: Sellers recognize capital gain or loss on sale of a partnership interest, except for Section 751 hot assets.
- Section 751: Ordinary income recharacterization for unrealized receivables and inventory; diligence on “hot assets” is essential.
- Sections 731, 732, 735: Deemed liquidating distribution mechanics, basis outcomes for the buyer’s pre‑owned portion, and holding‑period tacking.
- Section 1012: Buyer’s cost basis in deemed purchased assets equals consideration paid for sellers’ interests.
Buyer’s Asymmetric Treatment (Why It Matters)
Although sellers sell interests, the buyer is treated as if acquiring assets, which typically enables a basis step‑up, new depreciation/amortization, and fresh holding periods that can materially affect after‑tax cash flows and valuation models. Buyers should align purchase price allocation with Section 1060 residual method and file appropriate statements where applicable to preserve deductions and minimize controversy.
Practical Structuring And Compliance Tips
- Confirm 100% Acquisition: Less than full buy‑in generally won’t trigger 99‑6 asset‑purchase treatment for the buyer.
- Hot Asset Analysis: Quantify Section 751 exposure to avoid mischaracterized seller gain and reporting errors.
- Purchase Price Allocation: Apply residual method principles and maintain robust valuation support for asset classes to secure step‑up benefits.
- Track Split Holding Periods: For an existing partner buyer, maintain separate lots and dates for pre‑owned vs. purchased portions.
- Don’t Confuse Redemptions: Entity redemptions/liquidations are not 99‑6 purchases and may follow different rules.
Common Pitfalls To Avoid
- Treating Both Sides As Interest Sale: Buyers must not ignore deemed asset purchase treatment; missing allocations can forfeit deductions.
- Overlooking Debt And Liens: While the ruling’s examples assume no liabilities, real‑world deals must model liabilities and their basis/amount realized effects.
- Ignoring State Divergences: State conformity can vary; coordinate federal characterization with state tax results.
Quick Illustrations
- Two‑Member LLC Buyout: A sells to B; A recognizes Section 741 gain, B gets cost basis in A’s half and carryover in B’s former half, with split holding periods post‑termination.
- Third‑Party Acquisition: E buys 100%; C and D report partnership interest sales, E acquires assets at cost basis with new holding periods and potential amortization.
FAQs
- Does 99‑6 apply to partial acquisitions?
No—99‑6 addresses complete acquisitions that result in a single owner and a partnership termination. - Are sellers’ gains always capital?
Generally under Section 741, but portions tied to hot assets are ordinary under Section 751. - Does the buyer file allocation statements?
Yes, buyer treatment mirrors an asset purchase and requires defensible allocation and filings consistent with residual method rules.