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32.7 Conversion of a corporation into a partnership
Publication date: 12 Nov 2019
us Financial statement presentation guide
A partnership may be formed from an existing operation and may be the result of one of the following:
- Conversion or reorganization
An existing corporation transfers substantially all of its business into a partnership and liquidates the corporation. Existing shareholders exchange their shares for units in the partnership.
- Spin-off or roll out
An existing corporation places assets into a limited partnership and distributes the partnership units to the shareholders.
- Carve-out or drop-down
An existing corporation carves out a portion of its operations and places them in a partnership. Some or substantially all of the partnership units are sold to new investors.
Some transactions may include features of both a spin-off and a carve-out.
- Rollup
Formation of a partnership could also be in the form of a rollup. A rollup does not involve the conversion of a corporation to a partnership. It is the merger of several existing limited partnerships, or limited partnership interests, into one larger limited partnership. Generally, a rollup is done for efficiency or liquidity purposes.
There may be situations when rollup transactions qualify as a business combination that will require a new basis of accounting for the acquired assets and liabilities. An example includes a rollup in which the general partner of the new MLP was the general partner of some, but not all, of the predecessor limited partnerships.
The basis of accounting for a new LP will generally depend on the structure of the transaction. Once the partnership is formed, it should adhere to the financial statement reporting requirements for partnerships. Comparative financial statements for prior periods are the financial statements of the predecessor company. The new LP may present pro forma information for prior periods (as though the reporting entity had operated in partnership form - required in the initial registration statement for partnership units) as supplementary information, but that information cannot replace the predecessor entity’s financial statements as the principal comparative financial information. The presentation in the footnotes of the supplemental information should be sufficient and clear to prevent any information from being misleading if users were to rely solely on the comparative statements.
Newly-formed LLCs that are not taxed as partnerships and that constitute a new reporting entity would fall within the scope of an accounting change and are subject to ASC 250. ASC 250 requires retrospective application for all years presented following the presentation of the new LLC reporting entity. For further detail on accounting changes, see FSP 30.
32.7.1 Tax considerations of the new entity
Taxes payable (currently or deferred) generally will not appear on the opening balance sheet of a carved-out or spun-off entity as such taxes remain the liability of the general partner/sponsor.
If, in a conversion, the new reporting entity is not deemed an association taxable as a corporation, it should eliminate deferred tax balances in the first financial statements following conversion to partnership form. As noted in TX 8.2, a deferred tax liability or asset should be eliminated at the date the entity ceases to be taxable by including the reversal in income from continuing operations as a current provision for income taxes.
The reporting entity may continue to need some provision for current taxes. In addition to tax liabilities that arise (e.g., recapture or capital gains) on partnership formation, some jurisdictions assess taxes on a partnership as if the entity were a corporation. Under current tax law, Congress allowed MLPs to annually elect to retain their partnership tax status in exchange for a 3.5% gross revenue tax. The MLP should consider appropriate presentation and disclosure of the gross revenue tax in its financial statements. This would include (1) recognition as current tax expense and (2) a description as to the nature of the tax (its qualifications under the current tax law).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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