For those of you who help your clients with federal tax payments, here’s a new notice from Tax Analysts:
Comments Sought on Partnership, S Corporation Payment Form
The IRS has requested comments on Form 8752, “Required Payment or Refund Under Section 7519”; comments are due by April 11, 2016.
The following blog post should be of interest not only to Indiana lawyers but also to other lawyers (e.g., NH lawyers) whose states have established specialized business courts for complex business litigation or whose states ought to establish these courts: http://www.lexology.com/library/detail.aspx?g=fa290411-a0c2-4497-8c98-87b314c608ae&l=7QF23WQ.
In NH, I used to almost always draft LLC operating agreements for multi-member LLCs to provide for dispute resolution by a single arbitrator. But with the establishment of the New Hampshire Superior Court “Business Docket”—a really excellent, sophisticated, efficient and expeditious court—the analysis is now much more complicated.
If you think it may be useful to you to get a quick overview of all of the significant 2015 federal tax changes, go to Google and download the new IRS release designated FS-2016-8.
As most or all of you know, (i) LLCs can elect to be S corporations; but (ii) if they do, they must comply with all S corporation rules. The post from the Farrell firm under the link below provides an excellent summary of the S corporation rules barring non-resident aliens from being S corporation members, and it describes some ways that this NRA issue can arise yet be overlooked. Since many of the rules involve trusts, they are of particular importance to estate planners; but all lawyers who engage in LLC practice should be aware of them.
Here is the link: http://www.taxlawforchb.com/2015/11/are-you-foreign-to-s-corporations/?utm_source=Tax+Law+for+the+Closely-Held+Business&utm_campaign=3bb70f4cdf-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_4d5d267118-3bb70f4cdf-73367009
LLC lawyers should have at least a basic understanding of the IRC passive activity and at risk rules. Today’s Tax Notes has advised that IRS has just released Publication 925 (rev. 2015), Passive Activity and At-Risk Rules, for use in preparing 2015 returns, discussing the passive activity and at-risk rules that may limit the amount of a taxpayer’s deductible loss from a trade, business, rental, or other income-producing activity.
The copyrighted new CLE outline cited below addresses issues that have great importance in many LLC operating agreements for multi-member LLCs. I download these articles from Westlaw. Others in our group may have other means of obtaining such articles.
Here’s the cite:
TSXW04 ALI-CLE 1
The American Law Institute Continuing Legal Education
ALI-CLE Course Materials
October 29, 2015
Drafting Indemnification & Exculpation Provisions in LLE Agreements
DRAFTING INDEMNIFICATION & EXCULPATION PROVISIONS IN LLC AGREEMENTS
Eric N. Feldman
K&L Gates LLP
Melissa K. Stubenberg
Richards, Layton & Finger PA
Copyright (c) 2015 The American Law Institute; Eric N. Feldman and Melissa K. Stubenberg
The default federal income tax regimen for multi-member LLCs is partnership taxation under Internal Revenue Code Subchapter K, and for many multi-member LLCs, partnership is better than the other main option—namely, taxation under Subchapter S—except for purposes of avoiding Social Security Taxes. Occasionally, prospective members of multi-member LLCs want to obtain at least a basic understanding of partnership taxation if they don’t already have one. I think the nine points below will help them to obtain this understanding.
However, I know there are at least a few members of this blog—and maybe a lot—who know much more about partnership taxation than I do. I know we’d all be grateful for any comment these members may have about the list below.
Chief characteristics of federal partnership taxation
Federal partnership taxation is complex, but its chief features are as set forth below. In the discussion below, “partnership” means an LLC taxable as a partnership and “partner” means a member of this partnership.
- Any person may be a member of a partnership. Any type of individual or entity, whether U.S. or foreign, may be a member of an entity taxable as a partnership.
- Contributions are generally tax-free. Contributions of cash, property and services to partnerships by the partners are generally tax-free both to the contributors and to the partnership.
- Partnership basis may be included in member basis. Each partner can increase his basis in the partnership (and thus the possibility that he will be able to lawfully reduce or avoid tax on his share of certain LLC income) to the extent of his share of any LLC debts, including mortgage debts.
- “Regulatory” special allocations. The LLC must make “special allocations” to the members—i.e., allocations of LLC income that are disproportionate to their shares of that income—to the extent required by U.S. Treasury Regulations. These are called “regulatory” special allocations. For example, the operating agreements of LLCs taxable as partnerships must generally provide that precontribution gain by the partnership from dispositions of property contributed to it must be allocated to the contributing partners.
- “Contractual” special allocations. However, an LLC taxable as a partnership may also make “contractual” special allocations as long as these special allocations are not merely to evade federal taxes. For example, an LLC may allocate a share of the LLC’s profits to a partner even if the partner make no contributions of cash, property or services to the LLC. Under this arrangement, that partner’s interest in the LLC will be called a “profits interest.”
- Only the partners, not the partnership, are subject to partnership federal income tax. The partnership is not subject to federal tax on its profits. However, on their respective shares of partnership income, partners are subject to federal tax. The rate of this tax for each partner is the partner’s individual federal income tax rate. The partners must each withhold and pay this tax on a roughly quarterly basis unless the partnership does the withholding.
- Distributions to partners are generally tax-free. Distributions of cash by the partnership to the partners are generally not subject to federal income tax in the hands of the partners unless they exceed the partners’ bases (i.e., the deemed amount of their investment in the partnership as determined under federal tax rules).
- Requirement to maintain capital accounts for the partners. A partnership must maintain a capital account for each partner in accordance with U.S. Treasury Department rules. These rules are intended to determine each partner’s share of the economic value of the partnership.
- “Zeroing out” of capital accounts. When a partner is bought out by the partnership and when the partnership is dissolved and liquidated, the LLC must pay the affected partners enough to zero out their capital accounts, and the partners must pay the LLC any deficit in these accounts.
For those of you who practice even from time to time in community property states, below is an email from Jay Adkisson to me about community property state issues relating to LLC charging orders. As you may know, Jay is perhaps the leading expert on charging order law and also a first-rate asset protection lawyer who, with Chris Riser, has written an excellent book on asset protection.
There is hardly any decisional law that references any differences, and so the issues are largely theoretical.
In a community property state, if H & W each own 50% in a LLC, but they do not own it as their separate property, then the LLC might be deemed to be owned 100% by the community (and thus liable for the debts of either spouse) and thus treated as a SMLLC. In such case, a judgment against one spouse would allow a charging order to be issued against the non-separate interests of both.
Four of the five states in which I am licensed are community property states, but I’ve never personally seen (or even heard about) a community property issue come up in the charging order context.
FWIW, the more meaty issues involving community property and LLCs go to ownership and management rights, usually where an out-of-state attorney prepares interest assignment documents for a community property resident, but neither specifies that the interest is held as sole and separate property, nor obtains a spousal consent to the terms. The couple later files for divorce. Hilarity ensues.
The theme of the latest issue of ABA Business Law Today is LLCs. You can view it at http://www.americanbar.org/publications/blt/2016/01.html.