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CASE STUDY

LLC, the prior LLC distributes certain
The form of an LLC division will be respected assets to some or all of its members in
partial or complete liquidation of their
for federal income tax purposes if it is either interests in the prior LLC. Immediately
an assets-over transaction or an assets-up thereafter, the members contribute the
transaction. distributed assets to a resulting LLC or
LLCs. If the prior LLC does not liq-
uidate under applicable state law, then,
with respect to the assets and liabilities
must file Forms 1065 for the period transaction, the division is treated as that in form are not transferred to a
beginning on the day after the date of an assets-over transaction (Regs. Sec. new resulting LLC, the prior LLC will
the division. However, resulting LLCs 1.708-1(d)(3)(i)). be treated as transferring those assets
that are regarded as continuing LLCs In an assets-over division where at and liabilities to a new resulting LLC
but not as the divided LLC still remain least one resulting LLC is a continu- in an assets-over transaction. Under
subject to the prior LLC’s accounting ation of the prior LLC, the LLC that either type of assets-up division, the
methods and tax elections (Regs. Sec. is considered the divided LLC con- distribution must result in the members’
1.708-1(d)(2)(ii)). These continuing tributes certain assets and liabilities to being treated under applicable state and
LLCs must also include a tax return a recipient LLC or LLCs in exchange local law as the owners of the distrib-
statement disclosing the name, address, for interests in the recipient LLC or uted assets. Additionally, for the form
and EIN of the prior LLC. All result- LLCs. Immediately thereafter, the of this transaction to be respected, all
ing LLCs regarded as new LLCs must divided LLC distributes the interests it assets held by the prior LLC that are
obtain EINs and adopt their own ac- receives to some or all of its members transferred to the resulting LLC must
counting methods and make their own in partial or complete liquidation of be distributed to and then contributed
elections. When there is no divided their interests in the divided LLC. In by the members of the resulting LLC
LLC, the prior LLC is deemed to ter- an assets-over division where none of (Regs. Sec. 1.708-1(d)(3)(ii)).
minate and liquidate as of the division the resulting LLCs is a continuation If any division is part of a larger
date. A final return for the prior LLC of the prior LLC, the divided LLC is series of transactions and the substance
for the short period ending on the divi- treated as contributing all of its assets of the larger series of transactions
sion date must be filed. and liabilities to new resulting LLCs is inconsistent with the form of the
in exchange for interests in the recipi- transaction, the IRS may disregard the
Tax results of division ent LLCs. Immediately thereafter, the form and may recast the larger series of
The form of an LLC division will prior LLC is treated as liquidating by transactions in accordance with their
be respected for federal income tax distributing the interests in the result- substance (Regs. Sec. 1.708-1(d)(6)).
purposes if it is either an assets- ing LLCs to its members (Regs. Sec. The regulations clarify that for a
over transaction or an assets-up trans- 1.708-1(d)(3)(i)(A)). division to occur, at least two members
action (Regs. Sec. 1.708-1(d)(3)). In a In an assets-up division, the prior of the prior LLC must be members of
division under the assets-over form, the LLC transfers assets to its members, each resulting LLC that exists after the
momentary ownership of all interests in who then transfer those assets to a transaction (Regs. Sec. 1.708-1(d)(4)
the recipient LLCs by the prior LLC recipient LLC. In an assets-up divi- (iv)). ■
does not prevent the classification of sion where the LLC distributing assets
the recipient LLCs as partnerships. is a continuation of the prior LLC,
LLC members should also consider the divided LLC (which must be a
any legal filings required by state law continuing LLC) distributes certain
and review the LLCs’ articles of or- assets to some or all of its members in Contributor
ganization and operating agreements partial or complete liquidation of their
Shaun M. Hunley, J.D., LL.M., is an
to ensure they meet the resulting interests. Immediately thereafter, the
executive editor with Thomson Reuters
LLCs’ needs. members contribute the distributed as-
Checkpoint. For more information
If an LLC division occurs under a sets to a recipient LLC in exchange for
about this column, contact
state law that does not require a form interests in that LLC. In an assets-up
thetaxadviser@aicpa.org.
to be implemented or is implemented division where none of the recipient
using any form that is not an assets-up LLCs are a continuation of the prior

52 February 2023 The Tax Adviser