A voluntary change in status from a C corporation to an LLC that has elected to be treated as a partnership is deemed to be a complete liquidation of the C corporation. Additionally, the shareholders are deemed to make an immediate contribution of the distributed assets to the newly-formed LLC. 26 C.F.R. § 301.7701–3(g)(1)(ii). Several private letter rulings have addressed different ways to convert a corporation into an LLC treated as a partnership, but the ultimate result is that the C corporation is treated as being liquidated. (Letter Ruling 9638047; 9401014; 9644003; 9701029; and 9924064). Corporate liquidation is subject to taxation on two different levels. One level is the corporate level and the other is the shareholder level.

Effects of Liquidation on Shareholders

Amounts received by a shareholder in a complete liquidation of the corporation are treated as a sale of