What South Carolina income, sales, and deed-tax consequences did RR 95-9 assign to a partnership's conversion into an LLC?

Plain-English summary

South Carolina Revenue Ruling 95-9 treated a qualifying conversion from a partnership to an LLC as a partnership-to-partnership continuation, not a new entity for state tax purposes.

The ruling assumed that no owner was added or removed, no owner's percentage changed, the LLC continued the same business, and the LLC was classified as a partnership for South Carolina income tax. Under those assumptions, the partnership did not terminate under IRC Section 708, the tax year did not close, owners kept the holding period for their total interests, and the LLC did not need a new taxpayer identification number.

Basis could change if the conversion shifted owners' shares of organization liabilities. A deemed contribution increased an owner's basis. A deemed distribution reduced basis, and the owner recognized gain to the extent the distribution exceeded basis.

For sales tax, no new retail license was legally required because the organization remained the same taxpayer. The Department nevertheless advised obtaining a new license in the LLC's name for each location, waived the then-$50 application fee, and warned that leaving a license in the partnership's name could cause the Department to assume the general partners remained personally liable for unpaid sales or use tax.

For real property, a deed from the partnership to the LLC was not subject to state or county documentary stamp tax. The Department treated it as a reorganization of the same partnership, with no sale or transfer for consideration.

Common questions

Q: Did the conversion terminate the partnership for income-tax purposes? No, under the ruling's assumptions.

Q: Did owners receive a new holding period? No. Their holding period in the total organization interest continued.

Q: Could the conversion produce taxable gain? Yes, if a liability shift produced a deemed distribution greater than an owner's adjusted basis.

Q: Was a new retail license required? The ruling said no, but advised replacing each license with one in the LLC's name and waived the application fee then in effect.

Q: Was documentary stamp tax due on a deed to the LLC? No, because the qualifying conversion was treated as a reorganization of the same partnership.

Citations and references

• S.C. Code Ann. § 12-2-25 (LLCs classified as partnerships for state taxes)
• S.C. Code Ann. § 12-36-510 (retail licensing)
• S.C. Code Ann. §§ 12-21-380 and 12-25-10 (former state and county documentary taxes)
• IRC § 708 (partnership continuation)
• IRS Revenue Ruling 95-37 (federal conversion guidance adopted by the Department)

Subject

Conversion of Partnership to Limited Liability Company

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR95-9.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
SC REVENUE RULING #95-9 (TAX)
SUBJECT:

Conversion of Partnership to Limited Liability Company
(Income Tax, Sales Tax, and Documentary Stamp Tax)

EFFECTIVE DATE:

Applies to all periods open under statute.

SUPERSEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCES:

S.C. Code Ann. Section 12-36-510 (Supp. 1994)
S.C. Code Ann. Section 12-21-380 (Supp. 1994)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1994)
SC Revenue Procedure #94-1

SCOPE:

A Revenue Ruling is the Department of Revenue's official advisory
opinion of how laws administered by the Department are to be applied
to a specific issue or a specific set of facts, and provided as guidance
for all persons or a particular group. It is valid and remains in effect
until superseded or modified by a change in the statute or regulations
or a subsequent court decision, Revenue Ruling or Revenue Procedure.

In 1994 the South Carolina legislature passed legislation providing for the formation of limited
liability companies (LLCs). An LLC is an unincorporated business association that provides its
owners (members) limited liability, flexible management and financial alternatives. It has become a
popular new form of business entity since a properly formed LLC provides the favorable passthrough tax treatment of partnerships, and the limited personal liability of corporations.
Recently some issues have arisen concerning the conversion of a partnership to an LLC that is
classified as a partnership for South Carolina income tax purposes.
Definitions and Assumptions
For purposes of this Ruling, the term organization means the partnership before the conversion
and the LLC after the conversion, and the term “owner” means a partner before the conversion and a
member after the conversion.
This ruling assumes that (i) the conversion from a partnership to an LLC does not involve the
addition or removal of any owner or affect the amount of the organization owned by any owner,
(ii) the LLC will continue the same business conducted by the partnership, and (iii) both the
partnership and the LLC are organized under the laws of a state of the United States or the
District of Columbia.

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South Carolina Income Tax
In 1985 South Carolina adopted the Internal Revenue Code (with some exceptions) in order to
conform its income tax provisions to those of the federal. Among the statutes adopted were those
dealing with the tax classification of entities and the taxation of partner-ships. Since South Carolina
has adopted these provisions of the Internal Revenue Code, the Department will follow the federal
income tax guidelines set forth in IRS Revenue Ruling 95-37 (IRB 1995-17, 10) concerning the
conversion of a partnership to an LLC.
Therefore, with respect to the conversion of a partnership to an LLC as described above:

1. The conversion will be treated as a partnership-to-partnership conversion. This applies
   whether the resulting LLC is formed in the same state or in a different state than the
   converting domestic partnership. Therefore,
   a. The partnership will not terminate under section 708 of the Internal Revenue
   Code;
   b. If the owners’ shares of organization liabilities does not change, there will be no
   change in the adjusted basis of any owner’s interest in the organization;
   c. If the owners’ shares of organization liabilities change and cause a deemed
   contribution of money to the organization by an owner, then the adjusted basis of
   such an owner’s interest in the organization will be increased by the amount of the
   deemed contribution;
   d. If the owners’ shares of organization liabilities change and cause a deemed
   distribution of money by the organization to an owner, then the adjusted basis of
   such an owner’s interest in the organization will be reduced (but not below zero) by
   the amount of the deemed distribution, and gain will be recognized by the owner to
   the extent the deemed distribution exceeds the adjusted basis of the owner’s interest
   in the organization; and
   e. There will be no change in the holding period of any owner’s total interest in the
   organization.
2. The taxable year of the converting partnership will not close with respect to all the
   owners or with respect to any owner.
3. The resulting LLC will not need to obtain a new taxpayer identification number.
   Sales Tax
   Every person engaged in the business of selling tangible personal property at retail must obtain
   one or more retail licenses. Section 12-2-25 provides that for all South Carolina taxes the term
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“partnership” includes an LLC taxed for South Carolina income tax purposes as a partnership.
Since it has been determined that the conversion of a partnership to an LLC is treated as a
partnership-to-partnership conversion, the organization is still considered to be the same entity
for South Carolina tax purposes and is not required to obtain a new retail license.
However, the Department advises that the new LLC obtain a new retail license for each retail
location. If a retail license remains in the name of the partnership, the Department will assume that
the general partner or partners are personally liable for any sales or use taxes the LLC fails to pay.
Because a new retail license is not required, the Department will waive the $50 application fee for a
retail license. In order to apply for a new license:

1. Obtain Form SCTC 111 - Business Tax Application. It is in the South Carolina Package
   X or can be ordered by calling (803) 737-5080.
2. Write on the top of the application “Partnership Conversion to LLC”.
3. Send it to License and Registration Section, Office Services Division, Department of
   Revenue, P.O. Box 125, Columbia, SC 29214.
   Documentary Stamp Tax
   Code Sections 12-21-380 and 12-25-10 impose state and county documentary tax upon deeds. The
   purchaser or grantee is liable for the documentary taxes. In addition, if it is impractical to seek
   payment of the tax from the purchaser or grantee, the Department may assess the seller or grantor for
   the tax. See SC Revenue Ruling #92-14.
   Usually, a conveyance of realty by a partner to a partnership, as a contribution of partnership assets,
   is subject to the documentary tax. See SC Technical Advice Memorandum #89-8 and SC Private
   Letter Ruling #89-20.
   Section 12-2-25 provides that for all South Carolina taxes the term “partnership” includes an LLC
   taxed for South Carolina income tax purposes as a partnership. As stated earlier, a conversion from
   a partnership to an LLC as described above will be treated as a partnership-to-partnership
   conversion. Therefore, when a partnership converts to an LLC, as described above, for South
   Carolina state tax purposes, it is the mere reorganization of a partnership.
   Hence, for South Carolina tax purposes the property is still vested in the same partnership. No sale
   or transfer for consideration has taken place. Therefore, if a partnership converting to an LLC as
   described above conveys real property to the LLC, no documentary stamp tax will be due. (See SC
   Revenue Ruling #95-8 for a further discussion on the imposition of the documentary stamp tax on
   transfers of realty pursuant to the reorganization of a single entity.)

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For questions concerning limited liability companies, contact Jean Croft at (803) 737-5007 or Deana
West at (803) 737-4439.
SOUTH CAROLINA DEPARTMENT OF REVENUE
s/Burnet R. Maybank III
Burnet R. Maybank, III, Director
Columbia, South Carolina
, 1995
June 27

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