Questions on EINs in F Reorganizations Involving Disregarded Entities

Editor: Annette B. Smith, CPA

Procedure & Administration

A business considering an extensive restructuring of operations should be aware not only of the certificates of merger or conversion that may have to be filed with state authorities, but also of the consequences of the reorganization under subchapter C of the Code, including the entity classification rules of Regs. Secs. 301.7701-1 et seq. If a company wants to retain its employer identification number (EIN) used for filing federal employment tax returns (e.g., Forms 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and 941, Employer’s Quarterly Federal Tax Return), or for filing its income tax return, care must be exercised to understand how the reorganization affects the EIN. If, for example, the company is involved in the provision of health care, and the EIN is used to obtain reimbursement from state Medicare or Medicaid authorities, any interruption in the EIN’s validity can create serious economic hardship for the company. The same concern exists if a business license or existing service contract depends on the business’s EIN remaining valid.

The IRS has published extensive guidance on when a business must obtain a new EIN and when an existing EIN may be retained following a reorganization (see, e.g., Publication 1635, Employer Identification Number: Understanding Your EIN (2012)), available on the IRS website at irs.gov. Additional IRS guidance is needed, however, to address reorganizations under Sec. 368(a)(1)(F) (F reorganization). Generally, an F reorganization occurs if there is a mere change in identity, form, or place of organization of one corporation, however effected. The use of disregarded entities is now common in F reorganizations, which can create unique issues as to what should happen to the EIN of a company that is a party to the reorganization.

Rev. Rul. 73-526 and the IRM

Rev. Rul. 73-526 addresses various scenarios in which a company undergoing a reorganization either can keep its EIN or must obtain a new one. The previously assigned EIN should be used by the surviving corporation in a statutory merger and in a reincorporation qualifying as an F reorganization. A new EIN should be requested by the new corporation in a consolidation and in any reincorporation transaction not qualifying as an F reorganization.

The Internal Revenue Manual (IRM) also contains guidance on what happens to a company’s EIN when that company is reorganized. IRM Section 3.13.2.9.20 states that “if an entity reorganizes/converts at the state level and maintains the same structure (officers, employees, type of business), the entity may retain their EIN.”

Use of Rev. Rul. 73-526 in “Drop and Check” Transaction

An F reorganization can involve the shareholders of an existing state law corporation (historic corporation) dropping the shares of that corporation into a newly formed state law corporation (Newco) and then converting the historic corporation to a single-member limited liability company that defaults to a disregarded entity for federal tax purposes. The IRS needs to clarify whether the historic EIN of the corporation that converts to an LLC is retained by that LLC, as the IRM allowed, or is reassigned to a new company, as allowed in a recent letter ruling.

In PLR 201236014, Parent was a state-law corporation that formed New HoldCo. New HoldCo formed MergerCo as a wholly owned subsidiary. MergerCo merged with Parent, with Parent surviving. The shareholders of Parent had their shares converted to New HoldCo common stock. New HoldCo became the holding company of Parent.

Parent then converted to a limited liability company (LLC) named Parent LLC, which was allowed to default to a disregarded entity and did not file Form 8832, Entity Classification Election, to be classified as an association taxable as a corporation. The letter ruling states, “The Reorganization will qualify as a reorganization within the meaning of section 368(a)(1)(F),” and “New HoldCo will continue to use the taxpayer identification number previously assigned to Parent.”

Letter Ruling 201236014 allows the historic EIN of Parent corporation to be used by a new and different legal entity, New HoldCo, even though Parent continues to exist as a single-member LLC under local law. This holding is inconsistent with IRM Section 3.13.2.9.20, which states that the LLC should continue to use the EIN of the predecessor corporation. If Forms 940 and 941 have been filed by Parent under Parent’s historic EIN, and a Form 940 or 941 is now filed under the name New HoldCo using Parent’s historic EIN, the IRS might reject the return because the name and EIN do not match the information in IRS records. The IRS may then assign New HoldCo a new EIN, which could disrupt the processing of the returns.

Furthermore, Regs. Sec. 301.7701-2(c)(2)(iv)(B) states that an entity that is disregarded as an entity separate from its owner is treated as a corporation with respect to employment taxes. Consequently, if Parent LLC continues to have the employees it had prior to converting to an LLC, it must have its own EIN to file employment tax returns. Many taxpayers want their employment tax “audit trail” to continue without interruption following the conversion of a state law corporation to an LLC.

It should also be noted that Regs. Sec. 301.6109-1(h)(1) requires any entity that has an EIN to retain that EIN if its federal tax classification changes under Regs. Sec. 301.7701-3. Under the holding in Letter Ruling 201236014, if Parent corporation’s historic EIN is reassigned to New HoldCo, it is unclear which EIN Parent LLC is to use if a second member owner is added and the LLC defaults to a partnership.

Conclusion

Until the IRS issues clarifying guidance on whether a corporation that converts to an LLC always must retain its historic EIN, companies are cautioned to consider the potential procedural conflicts that may exist in relying on Rev. Rul. 73-526 to retain an EIN in an F reorganization.

EditorNotes

Annette Smith is a partner with PwC, Washington National Tax Services, in Washington, D.C.

For additional information about these items, contact Ms. Smith at 202-414-1048 or annette.smith@us.pwc.com.

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.