CCA 1351018: former partnership's EIN remains valid for employment taxes

Plain-English summary

Chief Counsel Advice addresses a business that became a disregarded entity after one of two partners bought out the other and became the business's employee. It concludes that employment tax returns filed under the former partnership's name and employer identification number were valid under the applicable guidance. For other federal tax purposes, the business activity generally belongs to the remaining owner as a sole proprietorship, subject to the advice's discussion of retiring-partner rules. The remaining owner should sign statute-extension consents as the owner of the disregarded entity, and notices should be issued to that owner.

Ruling snapshot

• Question: How should a one-owner business handle its EIN, tax reporting, statute consents, and notices after a partnership ends?
• Outcome: Advice given
• Key authorities: IRC §§ 6501, 736; Treas. Reg. § 301.7701-2(c)(2)(iv)(B); Rev. Rul. 2001-61

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201351018
       Release Date: 12/20/2013
       CC:PA:02:HMarx
       POSTF-128354-13

UILC: 6501.08-00

date: August 16, 2013

 to:   Michael T. Shelton
       Attorney (Chicago, Group 1)
       (Small Business/Self-Employed)

from: Pamela Wilson Fuller
Senior Technician Reviewer
(Procedure & Administration)

subject: Statute extension consent signature

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

                                               ISSUES

       1. Whether a partnership that became a disregarded entity when one partner became
       an employee must use the former partnership’s EIN if it files its employment tax returns
       under the former partnership’s name.

       2. Whether Exam should treat all business activity after the former partnership became
       a disregarded entity as the sole proprietorship of Partner A, to be reported on Schedule
       C.

       3. Whether Exam should treat returns filed under the former partnership’s name and
       EIN as filed under the sole proprietorship’s owner’s SSN for statute purposes.

       4. Who should sign the statute extensions, and in what capacity?

       5. To whom should notices ultimately be issued?

                                               FACTS

POSTF-128354-13 2

The partnership consisted of two partners, Partner A and Partner B. Partner A and
Partner B executed a phased buyout plan whereby Partner B was bought out by Partner
A and Partner B became the at-will employee of Partner A. The former partnership
additionally had other employees during the years at issue.

The partnership terminated when Partner B became an employee, because Partner A
was now the only remaining partner. Notwithstanding the termination of the partnership
under state law, Partner A continued to file employment tax returns under the former
partnership’s name and EIN. Additionally, notwithstanding the contract stating that
Partner B was now an at-will employee, Partner B received K-1s, not W-2s.

Exam now needs to secure statute extensions for the employment tax periods at issue.
Exam also needs to issue a notice of determination concerning worker classification to
reclassify Partner B as an employee.

                             LAW AND ANALYSIS

  1. Whether a former partnership that became a disregarded entity when one
  partner became an employee must use the former partnership’s EIN if it files its
  employment tax returns under the former partnership’s name.

Yes, the former partnership’s employment tax returns were correctly filed under the
former partnership's old EIN. The partnership became a disregarded entity when its
membership was reduced to one member, at which time the partnership ceased to
exist. Rev. Rul. 2001-61 provides that, when a partnership becomes a disregarded
entity, and if the disregarded entity chooses to calculate, report, and pay its employment
tax obligations under its own name and EIN pursuant to Notice 99-6, the disregarded
entity "must retain the same EIN for employment tax purposes it used as a partnership."
(For all federal tax purposes other than employment obligations or except as otherwise
provided in regulations or other guidance, a disregarded entity must use the TIN of its
owner.)

Though Notice 99-6 was obsoleted by T.D. 9356, that T.D. also provides that the
disregarded entity reports its employment tax obligations, not the owner. See Treas.
Reg. § 301.7701-2(c)(2)(iv)(B).

Thus, because the employment tax returns were filed under the former partnership's old
EIN, they were proper.

  2. Whether Exam should treat all business activity after the partnership became a
  disregarded entity as the sole proprietorship of Partner A, to be reported on
  Schedule C.

Yes, except with respect to employment tax or excise tax, as described above. But it
could be the case that the former partnership passed through Partner A's share of the
POSTF-128354-13 3

business's income to Partner A as self-employment income. (Section 736 provides
rules governing retiring partners that may apply to Partner A.) If self-employment
income was passed through to Partner A and Partner A reported self-employment tax
on that income, the government may not have received less employment tax than is
due.

   3. Whether Exam should treat returns filed under the former partnership’s name
   and EIN as filed under the sole proprietorship’s owner’s SSN for statute
   purposes.

The former partnership’s employment tax returns should have been filed under the
former partnership's old EIN, not Partner A's SSN. Because the employment tax
returns were valid, Exam will need to obtain statute extensions.

   4. Who should sign the statute extensions, and in what capacity?

Partner A should sign the statute extension consent in his capacity as the owner of the
disregarded entity.

   5. To whom should notices ultimately be issued?

Notices should be issued to Partner A as the owner of the disregarded entity because
the partnership ceased to exist when its membership was reduced to one member.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call if you have any further questions.