College of William & Mary Law SchoolScholarship RepositoryWilliam & Mary Annual Tax Conference Conferences, Events, and Lectures2011A Comparison of Partnership and S CorporationExit TransactionsMark J. SilvermanAaron P. NocjarCopyright c 2011 by the authors. Tis article is brought to you by the William & Mary Law School Scholarship Repository.htp://scholarship.law.wm.edu/taxRepository CitationSilverman, Mark J. and Nocjar, Aaron P., "A Comparison of Partnership and S Corporation Exit Transactions" (2011). William & MaryAnnual Tax Conference. Paper 660.htp://scholarship.law.wm.edu/tax/660msilverman@steptoe.com TEL:202.429.6450 FAX:202.429.3902 1330 Connecticut Avenue,NW Washington, DC20036 AREASOF PRACTICE Tax Corporate Transactions Mergers,Acquisitions, andJoint Ventures Mark J.Silvermanis a partner inthe Washington office of Steptoe & Johnson LLP.Mr. Silverman wasnamed one of the top ten tax lawyersinWashington in2005 by Legal Times.He isa member of The AmericanLaw Institute, Tax Advisory Group for the Study of Subchapter C of the Internal Revenue Code. He was formerly anadvisor to the Committee on Ways andMeans during their consideration of revisions to the corporate tax provisionsof the Internal Revenue Code.He isa Fellow of the American College of Tax Counsel.Mr.Silverman was formerly a Councilmember of the AmericanBar Association,Sectionof Taxation and was formerly Chair of the Corporate Tax Committee. He chaired the Tax Section Task Force onLeveraged Buyouts.Mr.Silverman co-authored the Tax AdvisorsPlanningSeries onFinancially Troubled Businesses.Mr.Silverman iscurrently a member of the advisory boards of BNA Tax Management, ConsolidatedReturns Tax Report,M&A Tax Report,andCorporate Taxationmagazines.Mr.Silverman ison the Editorial Board of The American Journal of Tax Policy,andisonthe Board of Trustees of the Southern Federal Tax Institute.Mr.Silvermanchairs the ALI-ABA annualconsolidatedreturns program. He was formerly Corporate Tax Editor of The Journalof Taxation,anda member of the adviSOry boards of NYUInstitute onFederal Taxation. Mr.Silverman was formerly a member of the Executive Committee of the New York State Bar Association.Inaddition,heis anAdjunct Professor of Law at GeorgetownUniversity Law Center and was formerly attorney-advisor to Judge Samuel B.Sterrett of the United States Tax Court.Mr.Silvermanisa frequent speaker on tax matters andhas publishednumerous articles onthe subject. HONORS &DISTINCTIONS Former advisor to Committee on Ways & Means Counsel, ABA,Tax Section Chair,Corporate Tax Committee, ABA,Tax Section Advisory BoardMember,NYU Institute and BNA Tax Management Member,Board of Trustees, Southern Federal Tax Institute Adjunct Professor, Georgetown University Law Center Chair, ALI-ABA Consolidated Returns Program Co-author of Tax Advisors Planning Series onFinancially Troubled Businesses Former attorney-advisor to Judge SamuelB.Sterrett of US Tax Court Planning and Transactional Practice Mr.Silverman focuses onplanning and transactionalmatters.Hehas extensive experience in structuring acquisitions,mergers, andspin-off transactions for large public corporations,as wellas closely heldbusinesses.He has authored a book on the tax consequences of financially troubled businesses andadvises corporations onconsolidated returnissues.Mr.Silvermanadvises leverage buyout groups, venture capitalists andprivately heldcommercialrealestate developers withrespect to various transactionalmatters.He isoften calledupon to advise the Internal Revenue Service, Treasury Department and the staffs of the Congressional tax writingcommittees withrespect to corporate tax issues. Tax Policy Practice A significant part of Mr.Silverman's practice involves the resolutionof tax policy issues before Congress andthe Treasury Department.These issues arise inthe context of pending or proposed legislationandproposed Treasury Department regulations.Mr.Silvermaniscurrently meeting with members of Congress and their staffs onmany of the corporate tax provisionsproposedby the Administration andby members of Congress (includingcorporate spin-offs, financialproduct provisions,andcorporate capitalgains). Audit andControversy Mr.Silverman alsohandles audit andcontroversy matters.He has extensive experience negotiating with fieldagents,appeals officers and district counselinsettling significant audit issues. Mr.Silverman frequently prepares technical advicerequests andoftenmeets withNationalOffice officials withrespect to audit and tax litigationmatters. Recently,Mr.Silverman wassuccessful innegotiating global tax shelter settlements withtheIRS. anocjar@steptoe.com TEL:202.429.6211 FAX:202.261.0601 1330 Connecticut Avenue,NW Washington, DC 20036 AREASOF PRACTICE Tax HONORS & DISTINCTIONS Chair,Passthroughs andRealEstate Committee,D.C.Bar,Tax Section Member, Steering Committee,D.C. Bar, Tax Section Speaker for the Tax Executives Institute, ALI-ABA,Tax Management,Inc.,SouthernFederal Tax Institute, andother organizations Recipient ofthe Thomas Bradbury Chetwood,S.J. Prize for attaining the highest academic average inhis graduating class (LL.M. in Taxation) at GeorgetownUniversity Law Center AaronP.Nocjar isa partner inthe Washington office of Steptoe & Johnson LLP, wherehe is a member of the Tax group.He focuses onfederalincome taxationissues, withparticular emphasis onthe taxationof pass-throughentities.Mr.Nocjar advises clientsinstructuring transactions involvingpartnerships,limitedliability companies,S corporations,REITs,and disregarded entities.Inaddition to providing tax planning advice,Mr.Nocjar assists clients the InternalRevenue Service administrative process. Mr.Nocjar alsohas experience addressing tax policy issues before Congress and the Treasury Department. Mr. Nocjar's clientsrange fromhigh-net-worthindividuals to family-run,closely-heldbusinesses to multinational groups. The industries he serves include entertainment, hospitality,energy (including alternative energy),the private equity/venturecapital/hedge fund space, financial institutions,insurance,government contracts, andrealestate development. PUBLICATIONS Co-author,Partnership Mixing-BowlIssues,PractisingLaw Institute (2011) Co-author, The S CorporationRules and theUse of S Corporations as AcquisitionVehicles, PractisingLaw Institute (2011) Co-author, Partnership DisguisedSale Rules,Practising Law Institute (2011) Co-author,Section197 andPartnership Transactions, PractisingLawinstitute (2011) Author,Using Tax Partnerships to Trigger Tax Loss inthe Commercial RealEstate Market, Tax Management RealEstate Journal (May 2010) Author,Closely HeldCompanies:Now Might be theBest Time to Convert to Tax Partnership Status,Journal of Taxation(Oct.2009) Author,The Sliver Investor:May We Disregard You for Tax Purposes?, Tax Management RealEstate Journal (Apr.1,2009) Author,Section 470 andPartnerships Left Outside Future CongressionalRelief,Tax Management Memorandum (2007) Co-author,Establishing BusinessPurpose ina Transparent World, 2004 USC Tax Institute Author,The 2000 ProposedRegulations onCorporate Sponsorship Payments: A Step TowardRestoring the Public's Trust inCharitable Organizations,54 Tax Law.357(Winter .2001) EDUCATION GeorgetownUniversity Law Center LL.M.,Taxation,withdistinction, 2001 Case Western ReserveUniversity J.D.,magna cum laude,1998 Order of the Coif Executive ArticlesEditor,Case Western Reserve Journal of International Law University of Notre Dame B.B.A.,Accountancy,magna cum laude,1995 PROFESSIONAL AFFILIATIONS American Bar Association,Sectionof Taxation D.C.Bar,Section of Taxation MEMBERSHIPINSTATE BARS District of Columbia South Carolina III III Purposeofpresentationistocompareandcontrastexitstrategiesof ownersofpartnershipswithexitstrategiesofownersofScorporations Presentationorganizedasfollows: oSimilaritiesbetweenpartnershipsandScorporations oDifferencesbetweenpartnershipsandScorporations oTransactionalillustrations II II II II II II II II II Generally,noentity-leveltaxonearnings oExceptionforScorporations:builtingain(BIG)taxandexcessnetpassiveincome (ENPI)tax Taxitemsfromentity-levelactivitiesflowthroughtoownersannually oK -1 sissuedtoowners Characterof entity-leveltaxitemsdeterminedatentitylevel Owneradjustsits"outsidebasis"(basisinownershipinterest)foritsshareof entity-leveltaxitemsannually Owners'abilitytodeductentity-levellossessubjecttopassiveloss,at-risk,and outsidebasislimitations State-lawLLCcanbepartnershiporScorporation BothtaxentitiescanownanypercentageinterestInCcorporations Bothtaxentitiescanowndisregardedentities Bothtaxentitiescanbeusedforsmallorlargebusinesses OnlyScorporationscanhaveasingleowner Scorporationscanhaveonlycertaintypesofowners Scorporationscanhaveupto100ownersonly Scorporationscanhaveonlyoneclassofownershipinterest- no common-preferredequitystructures o o w e v e r ~ votingrightscandiffer ScorporationscanallocatetaxitemstoownersonlyIn"straight up"fashion- nospecialallocations ContributionstoScorporationsaretax-freeonlytotheextentthey meet351requirements oContributionstopartnershipsaretax-freewithout351limitations .. .. .. .. .. .. Third-partydebtofScorporationdoesnotincreaseowners'outsidebases Differencesbetweeninsideandoutsidebasescanbecorrectedinapartnership DistributionbyScorporationsofappreciatedpropertytriggersgain(andforall shareholders)- generallynotinpartnershipdistributions MosttransactionalrulesforScorporationsareSubchapterCrules oTransactionrulesforpartnershipsarelargelyconfinedtoSubchapterK AllocableshareofincomefromScorporationnotsubjecttoemploymenttax oDistributiveshareofincomefrompartnershipsubjecttoemploymenttax MoreperceivedgovernmentalsympathyforScorporationsthanpartnerships TaxconsequencesofexitingbusinessformedasS corporationoftendifferfromtaxconsequencesofexiting businessformedaspartnership Generallycannotconvertmid-stream o ConversionfrompartnershiptoScorporationmaynotbepossible duetotypeandnumberofownersandcapitalstructure . o ConversionfromScorporationtopartnershipgenerallytriggerstax forshareholders So,importanttoconsidertaxconsequencesofexiting businessatthetimeofconsideringwhattaxentitytouse ComparativeExamples ofExitTransactions B Partnership Partnercanrecognizegainifcashdistributedexceedsoutsidebasis oGainiscapitalgain oExcepttotheextentthepartnershipheld751assets(inventory,unrealizedreceiv3bles) PartnercanrecognizelossifamountofcashdistributedisIssslhanoutsidebasis Nogainorlossrecognizedbythepartnersnip c Note:Amount-"_asntreatedasdistributedmightbemorethanmeetstheeye- 752 A f I f ! Cash\ \\ ""- Bc 5 302 (a)redemption,completeterminationofshareholder'sinterestunder302 (b) (3 ) oShareholdercanrecognizegaintotheextentcashdistributedexceedsbasisinshares Gainiscapitalgain- no751equivalentthatcouldrecastcapitalgaintoordinaryincome oShareholdercanrecognizelosstoextentcashdistributedlessthanbasisinshares oNogainorlossrecognizedbyScorporation oDecreaseAAAbyamountequaltotheratableshareofAAAattributabletotheredeemedstockasoftheredemptiondate Note:AmountofcashtreatedasdistributedisnotincreasedforreliefofScorporationdebt- no752equivalent B A c 1\ '. PropertY-,_ ....--.-....-.....------------Partnership Partnergenerallydoesnotrecognizegainorloss oCanrecognizeagainifcashdistributedexceedsoutsidebasis oCanrecognizealossonlyifcash,unrealizedreceivables,orinventorydistributedthatislessthanoutsidebasis oHoldingperiodofdistributedpropertytacks oPartnertakesasubstitutedbasisinpropertyafteroutsidebasisreducedforanycashdistributed Cannotstepupbasisondistributedunrealizedreceivablesorinventory- excessoutsidebasisallocatedtodistributedcapitalassetsor createslossrecognition Nogainorlossrecognizedbypartnership Note:All-propertyredemptioncouldactuallybedeemedtoincludecashifpartnershiphasdebt-- 752 ., f ( Property\ \ l.\ A '. '" B 5 302 (a)redemption,completeterminationofshareholder'sinterestunder302 (b) (3 ) oShareholdercanrecognizegaintoextentnetFMVofpropertyexceedsbasisinshares oShareholdercanrecognizelosstotheextentnetFMVofpropertyislessthanbasisinshares ShareholdertakesFMVbasisindistributedproperty(unlikepartnershipscenario) c DistributionofappreciatedpropertytriggersgainrecognitionatScorporationlevel(unlikepartnershipscenario) oGenerally,noentity-leveltaxonsuchgain(unlessBIGtaxapplies) oRecognizedgainallocatedtoshareholders Proratav.closing-the-booksallocationmethodsimportant Note:All-propertyredemptionnotsusceptibletodeemedcashdistribution- no752equivalent A ~'. \ ....Marketable ... ~Securities"""'--'--'---" ~ 8 Partnership Distributionofmarketablesecuritiestreatedasdistributionofcash c Whilegenerallyaredemptiondistributionofpropertyistax -freetoboththeredeemedpartnerandthepartnership,thereareexceptions Distributionofproperty- marketablesecurities- treatedasadistributionofcashforpurposesofdetermininggainorlossofthepartner oPartnertakesbasisinsecuritiesequaltooutsidebasisplusgainrecognized oHoldingperiodtacks Nogainorlossrecognizedbypartnership Definitionof"marketablesecurity"isbroad- see731(c) ABC f f I I ! Marketable t i. Securities\ \ ;, \ ....,. 5 Sametaxconsequencesasredemptiondistributionofanyothertypeofpropertyby Scorporation oTypeofpropertyusedforredemptionisnotasimportantasinpartnershipscenario Interest Value $100 Basis $200 A \ II " .... B 60% Capital Asset FMV $100 Basis $100 \ ............... ....._---------Partnership c Nogainorlossrecognizedbyanypartners,includingA BuiltinlossinA'sinterestcarnesovertodistributedasset Interest Value $100A Bc Basis $200 f I I i Capital Asset \ FMV $100\ Basis $100\ \. .........5 SrecognizesnogainbecausetheassethasaFMVbasis Arecognizes$100capitallossvia302,but267(a)disallowsthislossbecauseAisamajorityshareholder A's$100capitallosslostforever?267 (d)doesnotappeartoapply AtakesaFMVbasisinthecapitalasset Query:whatmightAdotopreventthisoutcome?MightAtrytosellhisinteresttoBorCinstead? Year1 B A c Partnership Year1:CcontributesPropertyX,FMVS 100,basis,$40 Year5:PartnershipdistributesPropertyXtoA Year5 B Partnership Whilegenerallyaredemptiondistributionofpropertyistax-freetoboththeredeemedpartnerandthepartnership,thereareexceptions c Ifapartnercontributesgainorlosspropertytothepartnership,andwithinsevenyearsthatpropertyisdistributedtoadifferentpartner,thecontributingpartnermustrecognizethe builtingainorlossasifthepartnershiphadsoldthepropertyforitsFMVatthetimeofthedistribution.704 (c) ( 1)( B oPartnershiprecognizesgain(butonlyupto704(c)gainof$60),andgainisallocatedtocontributingpartnerC oRedeemedpartnerAdoesnotrecognizegain(unlessdeemeddistributionofcashcausesgain) Ifthedistributionisinyear8,thereisno704 (c) ( 1 )(B)trigger Attimeofcontribution,importantforcontributingpartnerCtolimittypesofpropertiesthatpartnershipcanusefordistributions Year1Year 5 B SametaxconsequencesasredemptiondistributionofanyothertypeofpropertybyScorporation oTypeofpropertyusedforredemptionnotasimportantasinthepartnershipscenario However,notethatentity-levelgainrecognitionfromdistributionofpreviouslycontributedpropertynot allocatedsolelytocontributingshareholderC(likeinpartnershipscenario)- rather,allocatedtoall shareholders Year1Year 5 B B c c Partnership Partnership Year1:AcontributesPropertyX,FMV$100,basis,$40 Year5:PartnershipdistributesPropertyYtoA,FMVof$120,basis$120 Whilegenerallyaredemptiondistributionofpropertyistax-freetoboththeredeemedpartnerandthepartnership,thereareexceptions Contributingpartnermustrecognizegainifhecontributesappreciatedpropertytoapartnershipandwithinsevenyearsreceivespropertyotherthanmoneyasadistributionfromthe partnership.737 Amountofthegainrecognizedbyredeemedpartneristhelesserof: oFMVofthedistributedproperty.lesspartner"soutsidebasisbeforethedistribution(lessanycashdistributed):or oPartner'snet704 (c)precontributiongain. Arecognizes$60gainunder737 A'soutsidebasisincreasedby$60,andPropertyX'sinsidebasisincreasedby$60(so,nocontinuing704 (c)exposureforcontinuingpartners) Ifthedistributionisinyear8,thereisno737trigger. Attimeofcontribution,importantforcontributingpartnerAtolimittypeandtimingofdistributions Year1Year 5 B SametaxconsequencesasredemptiondistributionofanyothertypeofpropertybyScorporation oTypeofpropertyusedforredemptionnotasimportantasinthepartnershipscenario Inpartnershipscenario,redeemedpartnerArecognized$60of737gain(andnogainrecognitionbypartnershipand otherpartners) InScorporationscenario,nogainrecognizedatentitylevel,sincePropertyYhasFMVbasis oNoincreasetobasisofPropertyX- continuingshareholdersonhookforfuturegainrecognition(unlikepartnershipscenario) OutsideB Basis $40A \ Property X", " FMV $100'\ .........Basis$100'------. Partnership LiquidatingdistributionofpropertytoA- PropertyXhasFMVbasis oNogainrecognitionforanyparty c / Property Y FIVIV$100 Basis$40 oPartnerAtakes$40basisinPropertyX(a$60"step-down"inbasis)- PartnerAtakes$60BIGinPropertyX Wheredoesthis"'lost"$60ofbasisgo? oIfno754election,noadjustmenttobasisofremainingpartnershipassets- $60gainduplicatedtodetrimentofcontinuing partnersBandC oIf754electionmade,$60increasetobasisofpropertyY- a"basisshift"of$60- via734 (b) BandCcanwaituntilafterA'sliquidatingdistributiontomakethe754electionforthepartnership II II II Outside Basis $40A t II\. Property X\ .., FMV $100,.'--....__. B c Basis$100. - - - - - ~ ~ ~ ~ - . . . . Property Y FMV $100 Basis$40 Nogain/lossrecognitionatentity-levelsincedistributedpropertyhasFMVbasis $ 60gainrecognitionatshareholderlevelforA(unlikepartnershipscenario) oPropertyXtakesFMVbasis($100)inA'shands Noabilitytoadjustbasisofremainingassetsforsuchgainrecognition- no754equivalent o$60built-ingainremainsinPropertyYtodetrimentofcontinuingshareholdersBandC A I { i T ~ \o\. \.. Year 5 B \ ~Partnership Year5:Acontributes$50cash c Year6:RedemptiondistributionofPropertyXtoA Generally,nogainrecognizedbyanyparty Exceptionfordisguisedsaleofproperty oNon-simultaneoustransfersmadewithintwoyearsarepresumedtobesales.Treas.Reg.1.707-3 (c). Year6 B c t Property X\ FMV $100\\, Basis$40'''---.. Partnership Ifdisguisedsalerulesapply,partnershiptreatedasselling50percentofPropertyXtoAfor$50inyear5,andmakingredemptiondistributionofremaining50percentofPropertyX inyear6 o$30gainrecognitionallocatedamongallpartners(butcouldbespeciallyallocated) Whenplanningredemptiondistribution,needtoconsiderallcashandpropertytransfersinprevioustwoyearsandexpectedtransfersinsubsequenttwoyears WhatifXhadbeencontributedbyCinyear5? Year 5 B c A ~ 0' ,A ( Property X\ FMV $100\" Year6 B c Ba 5 is$40.-------.l..-::::::---'--.......:::,._-----, Regardlessofanyapplicationofdisguisedsaleconcepts,$60gainrecognizedatentity-level,allocatedtoshareholders IstherearolefordisguisedsaleconceptsinScorporationcontext? oSubstanceoverformconceptscouldapply,despitenothavingtoworryaboutdetailedpartnershipdisguisedsalerulesandthe ir presumptions Inlightoffactthat$ 60gainrecognizedatentity-levelunder311,whatwoulddisguisedsaletreatmentadd? oProbablyaccelerate$30of$60gainrecognitionfromYear6toYear5 B c 1/31/3 Partnership RedemptiondistributiontoAofCapitalAssetX Generally,nogainrecognizedbyanyparty Exception- HotAssetRules- IsthereanygainrecognizedbyA,B,orC? oAgaveupits1/3interestin~ o t assets"(Inv)inexchangefora"coldasset'(additional113interestinCapitalAssetX) C-MTP Inventory,FMV $100, $40 basis Cash,$100 Capital AssetX,FMV $100, $40 basis o751 (b)treatsAasreceivinga1/3distributionofInv,andthensellingsuch1/3interestinAIRforanadditional113interestinCapitalAssetX oArecognizes01fromadeemedsaleof113ofInv- $2001 oBandC(butnotA)includedistributivesharesofthecapitalgainrecognizedbythepartnershiponthedeemedsaleofa113interestinCapitalAssetX-- $20CG oTaxbasisofInvandCapitalAssetXadjustedaccordingly Couldtheyhaveavoidedthiswithaliquidatingdistributionofcashinstead? oPartially- Awouldstillhavegainfromthedeemedsaletothepartnershipofthe113interestinInv oButthepartnership(so,BandC)wouldnothavegainfromthedeemedsaleof113ofCapitalAssetXtoA.sinceitwasdeemedto"sell"cashinstead C-MTP Inventory, FMV$100, $40 basis Cash,$lOO Capital Asset X,FMV $100, $40basis NodeemedtaxableexchangebetweenAandScorporationof1/3interestinInventoryfor1/3interestinCapitalAssetX oBetterthan751(b)hotassetrulesinpartnershipcontext,sinceno01recognizedbyredeemedshareholderA oBut,redeemedshareholderArecognizescapitalgaintoextentFMVofCapitalAssetXexceedsA'soutsidebasis(nosuchgaininpartnershipcontext) However,evenworsethan751( b)hotassetrulesinpartnershipcontext,$ 60(ratherthan$20)capitalgainrecognizedatentitylevel, allocatedtoshareholders Distributingcash(ratherthanCapitalAssetX)eliminatesallgainforcontinuingshareholders(andpossiblyforA) B A 1 \,....Note",......RedemptiondistributiontoAwithapromissorynoteofpartnership \ ...'-..., ~------Partnersh ip c Anolongertreatedasapartnerofpartnershipforstate-lawpurposes,eventhoughheremainsacreditor A,however,continuestobepartnerofpartnershipfortaxpurposesuntilnotefullypaid oReceiptofnotenottreatedasdistributionofproperty oContinuestoreceiveK-1s oA ~ h o u g h interestsingeneralprofitsandlossesbecomezerowhenreceivesnote,Astillcanbeallocatedpartnershipgainun der,forexample704 (c)rules(e.g.,partnershipsellsproperty previouslycontributedbyA) Underdefault736rules,alloutsidebasisrecoveredfirstasnoterepaidovertime,andthen731gainrecognitionthereafter oUnclearhowinteresttreatedforpartnershipandA- 707 (c) ? B A \ \ c \ '\ Note\" "---5 Unlikeinpartnershipscenario,Aceasestobetreatedasashareholderuponreceiptofnote NotetreatedaspropertyissuedinexchangeforA'ssharesinS oNogain/lossrecognizedbyS oGain/lossrecognizedbyAtoextentFMVofnotediffersfromA'soutsidebasis Avoidequity-flavorednotetoavoidriskoflossofSstatus(one-class-of-stockrequirement) A Bc S Sdropsassetsinto anewlyformedsubsidiaryin exchangeforstockSthen distributesSubstock to Cin exchangeforhis interestin S Ifsatisfies 355requirements: DTaxfreeunder355 (a)forshareholderC DTaxfreeunder355 (c)forS Iffails355requirements: oBuilt-ingain in Substock recognizedby S,allocatedto shareholders Sub oShareholderCrecognizesadditionalgainto extentFMVof Substock exceedse'soutsidebasis Key:Severalrequirementsto meetfortax-free355treatment oActivebusinesses OS-year activebusinesses oBusinesspurpose oDevicerequirement DMustavoid355 (d)and(e)scenarios CanmakeSelectionforSubimmediatelyif getPLR(momentaryineligibleshareholdercan bedisregarded) AB c B c Bc A Partnership1 Partnership1 , '\1/3 )' partnership assets Drop113ofpartnershipassetsintoLLC1- disregardedfortaxpurposes(or,ifuseCcorporationsub,tax-freevia351) Distribute100%ofLLC1intereststoA- treatedasredemptiondistributionbypartnershipofassetsinLLC1(or,ifuseCcorporation sub,redemptiondistributionofsubstock) Generally,tax-freetoallparties Key:UnlikeinScorporationcontext,noneedtomeet355requirements oNoactivebusinessrequirements oNo355businesspurposeneeded Interest B A< $100 Partnership c