“Rollover Equity Conundrum in Transactions with Private Equity Funds – Partnership Continuations/Mergers Under Section 708 or Terminations Under Revenue Ruling 99”

Asel Lindsey co-authored the article “Rollover Equity Conundrum in Transactions with Private Equity Funds – Partnership Continuations/Mergers Under Section 708 or Terminations Under Revenue Ruling 99.” The article was written and provided as part of the authors’ presentation, “Flow-Through Entities and Transactions,” from the Texas Bar’s 42nd Annual Tax Law Course - Tax Law: Before the Sunset.

The article examines the tax complexities of selling a business to a private equity fund while retaining a portion of ownership through rollover equity. This type of transaction raises questions about whether the partnership is treated as terminated under Rev. Rul. 99-6 or as continuing under section 708. The choice between these rules significantly impacts how the transaction is taxed, including the recognition of gain, allocation of tax benefits, and treatment of depreciation.

When a transaction involves both cash payments and rollover equity, the structure determines the tax outcomes. A continuation of the partnership under section 708 may limit tax benefits, such as step-ups in asset basis, to the buyer. In contrast, a termination under Rev. Rul. 99-6 may allow these benefits to be shared with the seller. Additionally, anti-churning rules, which restrict deductions for certain intangible assets, can pose challenges if not accounted for during the planning process.

The article also highlights how the IRS evaluates transactions based on their economic reality rather than their formal structure. Even if a deal appears to terminate the partnership on paper, the IRS might treat it as a continuation if the business continues operating and certain sellers retain an interest. This approach ensures that the tax treatment aligns with the actual business dynamics and ownership structure.

Ultimately, the article underscores the need for more straightforward IRS guidance on these types of transactions. It suggests that treating them as partnership continuations often better reflects their economic substance. Buyers and sellers must carefully plan these deals to manage tax risks, comply with the rules, and maximize potential benefits.

To read the full article, click here.