Can someone explain F Reorganization for turning an S corp into a partnership?

Thanks for the explanation! I'm a bit confused though - doesn't converting to an LLC taxed as an S corp and then to a partnership trigger a deemed liquidation? I thought that would cause immediate recognition of gain/loss?

Converting from an S corp to an LLC while maintaining S corp tax status doesn't trigger a deemed liquidation - that's the beauty of the F reorg. It's considered a tax-free reorganization. However, you're absolutely right that the second step (changing from S corp tax status to partnership tax status) is treated as a deemed liquidation followed by a contribution to a new partnership. This can trigger gain recognition on appreciated assets and potential recapture. That's why it's critical to value the assets properly and consider the tax basis before making this move.

Was it able to analyze the specific basis calculations for the assets? My biggest concern is getting hit with unexpected gains during the transition from S corp status to partnership taxation.

I've heard of services like this but I'm skeptical. Did it actually provide specific guidance on Section 368 reorganizations or just general info you could find elsewhere? Did it integrate with your existing accounting software?

It did provide specific basis calculations for the assets. You upload your balance sheet and other financial documents, and it identifies which assets have appreciation potential and calculates the estimated tax impact based on current FMV vs. adjusted basis. The tool provided specific analysis on Section 368 requirements and how to maintain qualification throughout the reorganization steps. It's not just general information - it gave me specific guidance tailored to my situation, including step-by-step filing requirements and timeline recommendations. It doesn't directly integrate with accounting software, but you can export the analysis as a PDF to share with your accountant.

How exactly does this work? Don't you still have to wait in the same IRS queue as everyone else? Seems like magic if they can actually bypass the hold times.

This sounds like a gimmick. The IRS is notoriously backlogged and understaffed. I really doubt any service can magically get you to the front of the line. Have you actually tried this yourself or are you just promoting something?

The service uses an automated system that dials in and waits on hold for you. Once they reach a representative, they call you and connect you directly to the IRS agent. You don't have to wait on hold yourself - their system does it for you. You just go about your day until they call you when an agent is on the line. Yes, I've used it myself multiple times, including for this F reorganization question. I was skeptical too, but it worked exactly as advertised. I was able to get specific guidance from the IRS about how to document the continuity of interest for the F reorg and what forms needed to be filed. It saved me hours of hold time and helped ensure the reorganization wouldn't be challenged.

That's a really important point! So in a state with formless conversion statutes, would you recommend still using the F reorg approach instead, or is there an advantage to the formless conversion path?

It really depends on the specific circumstances of your client's situation. Formless conversions can be simpler from a state law perspective, but they don't provide the same tax benefits as an F reorganization followed by an entity classification election. If preserving the tax attributes of the S corporation is important (like maintaining the EIN, tax history, accounting methods, etc.), then the F reorg path is generally preferred even in states that allow formless conversions. The F reorg essentially creates a new legal entity at the state level while maintaining tax continuity at the federal level.

I'm dealing with this exact situation! Did your client have any issues with the "substantial business purpose" requirement? I've heard the IRS has been scrutinizing F reorgs more closely lately.

This is incredibly helpful advice! I'm new to handling F reorganizations and the step transaction doctrine aspect is something I hadn't fully considered. When you mention spacing the steps out by a few months, is there a specific safe harbor period, or is it more about demonstrating independent business purposes for each step? Also, for the private letter ruling - roughly what cost range should clients expect for something like this? I want to make sure I'm setting proper expectations when discussing this option with clients who might be dealing with substantial asset values.

Great question! There's no specific safe harbor period in the regulations, but based on case law and IRS guidance, I generally recommend at least 3-6 months between steps. The key is demonstrating that each step has independent business significance and wasn't predetermined as part of a single integrated plan. For private letter rulings, clients should expect costs in the $15K-$30K range minimum when you factor in the IRS user fee (currently $38,000 for most business entity rulings) plus attorney fees for preparation and review. It's definitely a significant investment, but for transactions involving substantial assets or complex fact patterns, the certainty can be worth it. I'd also suggest documenting the business rationale for each step thoroughly in board resolutions and keeping detailed records of the timing and independent decision-making process. This helps if the IRS later questions whether the steps should be collapsed together.

This is exactly the kind of practical advice that newcomers like me need! I hadn't even thought about the state-specific requirements aspect. The point about outstanding audits is particularly eye-opening - it makes perfect sense that the IRS would scrutinize reorganizations more heavily when there are open issues, but it's not something you'd necessarily think about until you're in the middle of it. Do you have any recommendations for resources to check state-specific F reorg requirements? I'm working with clients in multiple states and want to make sure I'm not missing any critical filing deadlines or fees that could derail the process. Also, regarding the contract review point - have you encountered situations where change-of-control provisions were actually triggered by an F reorg? I'm curious if there are specific types of agreements that tend to be more problematic than others.

For state-specific requirements, I'd recommend checking each state's Secretary of State website and their corporation division resources. Many states have specific guidance documents for entity conversions and reorganizations. The CCH or BNA state tax services are also really helpful if you have access to those databases. Regarding contracts, I've definitely seen issues with loan agreements and commercial leases that had broad change-of-control language. Banking relationships can be particularly tricky - some lenders treat any corporate reorganization as requiring consent, even if it's technically the "same" entity for tax purposes. Equipment leases and licensing agreements are other areas where we've had to get advance approvals. My recommendation is to identify your top 5-10 most critical agreements and have them reviewed early in the planning process. It's much easier to get consent upfront than to deal with potential defaults after the fact. Some agreements may require 30-60 days advance notice, so timing becomes crucial when you're trying to coordinate the F reorg steps.