When does a converted entity or a merged entity need a new Employer Identification Number from the IRS?

What is an EIN?

An EIN is a federal tax ID number for an entity, estate, trust, or other organization. For example, the following are generally required to obtain an EIN: partnerships, limited liability companies (“LLC”), corporations, non-profit organizations, estates, trusts (except certain grantor-owned revocable trusts), retirement plans or individual retirement accounts (“IRA”), real estate mortgage investment conduits, and farmers’ cooperatives. While sole proprietorships often use the owner’s Social Security Number (“SSN”) in lieu of obtaining a separate EIN, obtaining an EIN can be advisable for banking relationships and is required when the sole proprietorship has employees.

What is a Converted Entity?

A converted entity is an entity that has been converted from one form of entity to another – for example, an entity that has been converted to an LLC from a corporation (“Inc.”). Entity conversions are done at the state level, pursuant to a state statute setting out the process and framework for the conversion. Sometimes, an entity’s shareholders’ agreement or operating agreement will provide for the conversion of the entity and include additional provisions related to the conversion, so those agreements should be reviewed before proceeding with a conversion.

What is a Merged Entity?

As used herein, the term “merged entity” means an entity that survives the merger of two or more entities and continues in effect after the merger. For federal income tax purposes, mergers can be structured as taxable mergers or as tax-free reorganizations under IRC § 368. The structure of a merger affects EIN retention.

Can a Converted Entity or a Merged Entity Keep Its EIN?

When an entity is planning a conversion or a merger, it must determine whether the converted entity or merged entity will require a new EIN.

Under most state laws, a converted entity is treated as the same entity as the converting entity, but be sure to check the applicable state statute addressing the conversion. For federal and perhaps state tax purposes, steps must be taken prior to the conversion if the converting entity’s EIN is to be maintained by the converted entity. According to the IRS, a converted entity may be able to retain its existing EIN in certain circumstances. The appropriate approach varies based on the specific conversion structure and intended post-conversion tax classification. For example, when converting an incorporated entity to a disregarded LLC to facilitate a transaction, different considerations apply than in other conversion scenarios.

While the IRS Internal Revenue Manuals (“IRM”) provide internal guidance for IRS agents regarding EIN retention procedures, such as IRM 3.13.2.10.18(1), including the preparation of a “dummy 8832,” it is critical to keep in mind that the IRM is intended as guidance that the IRS provides to its own agents rather than to taxpayers. The optimal approach for a taxpayer to retain its EIN often involves sending a carefully drafted EIN retention letter with appropriate supporting documentation as improper handling of this process could potentially lead to limitations on future entity classification elections.

In merger scenarios, typically the surviving merged entity retains its EIN, while the EIN of each non-surviving entity that is a party to the merger is retired; however, in certain “F” reorganizations under IRC § 368(a)(1)(F), involving “a mere change in identity, form, or place of organization,” the successor entity can retain the predecessor’s EIN.

Does Keeping a Historic EIN matter?

It may not. A new EIN may be perfectly fine and desirable for a converted entity or a merged entity. However, in other scenarios, keeping the existing EIN may not only be desirable but may be necessary for businesses that possess federal and/or state licenses and registrations – for example, liquor permits and licenses*. Having to reapply for those licenses or registrations due to a change in EIN could require a complete reapplication process, possibly requiring a stoppage of business in the meantime. Beyond regulatory considerations, EIN retention may also be critical for preserving tax attributes such as net operating losses, credit carryforwards, and S-corporation status, while preventing complications with existing contracts, lenders, and vendors that reference the entity’s tax ID.

*Despite the IRS permitting entities to maintain an EIN in certain circumstances, the Alcohol and Tobacco Tax and Trade Bureau “TTB,” for example, treats converted entities as a structure change, which it considers a Change of Proprietorship, requiring the issuance of a new Federal Basic Permit.

For more information, contact Clark Hill’s Corporate Law Group.

For more information on Alcohol and TTB licensing and permitting, contact Clark Hill’s Alcohol Industry Group.

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