In CCA 201436049, dated May 20, 2014, the IRS Chief Counsel’s office ruled against two persons who claimed that they were limited partners of a state-law limited partnership taxable as a partnership and thus that they did not owe Self-Employment Tax on their shares of limited partnership income under IRC § 1402(a)(13). The ground for the ruling was that these persons provided substantial services as partners to the limited partnership and thus were not limited partners within the meaning of the above provision.
The CCA contains several useful citations of authority on the issue of partner liability for partnership income. Weirdly, it does not cite Prop. Reg. 1.402, even though the IRS has stated on a number of occasions that the Prop. Reg. is its basis for auditing partner SET issues. I still feel very confident that if you use the Prop. Reg. to protect your LLC clients from SET, your clients will be quite safe from adverse IRS audits. But the CCA is entirely consistent with the Prop. Reg. and can serve as additional authority for your client’s position in appropriate fact situations.
Chapter 31 of my Wolters Kluwer LLC formbook and practice manual contains a comprehensive discussion concerning the issue of the SET liability of LLC members.
In case you’ve been wondering: I was away on vacation from August 16 to August 30 and then had to handle a publishing deadline. Thus, since August 16, I’ve been unable to send any posts to this listserv. However, now I’m back and have met the above deadline, so I’ll be resuming these posts.
Any WealthCounsel or Business Counsel lawyers who are interested in developing a solid LLC practice should consider joining the ABA committee mentioned in the above subject line if they’re not already members of it. Among many other benefits, the committee publishes a very useful quarterly newsletter entitled “The LLC and Partnership Report.” Click here to view the first page of the current edition of that newsletter, together with pages listing the programs for the meeting of the committee at the ABA annual meeting in Chicago on September 11-12 meeting in Chicago and the PUE’s LLC institute in Alexandria, Virginia on October 16-17. These pages mention several hot current issues among LLC lawyers.
Here is a cite to a just-published article about Texas series LLCs and the ACA employer mandate:
McFadin, Scott, You Can’t Always Count How You Want: Why Texas Series LLCs Do Not Offer A Unique Advantage To Employers Who Wish To Avoid The Affordable Care Act’s Employer Mandate, Texas Tech Law Review, Summer 2014
I haven’t read the article yet, but I suspect it will be relevant not only to Texas lawyers but also to all other lawyers and accountants who are interested in either the ACA or series LLCs.
In my opinion, the two best blogs nationwide on LLCs are those of Peter Mahler and Doug Batey. Here is a recent post by Doug about a critical issue for LLC practitioners–namely, advising clients on how to protect their single-member LLCs from veil-piercing. Chapter 22 of my Wolters Kluwer LLC book addresses this issue, but I’m going to have to revise the chapter to take account of the cases discussed in Doug’s post.
Here is another excellent post in Peter Mahler’s blog on Business Divorce. In this post, Peter discusses a New York case that held that the executor of a deceased LLC member’s estate lacked standing to assert derivative claims against the LLC’s managers.
This case is important both for LLC lawyers and for estate planners. Maybe LLC operating agreements should routinely give executors of the estates of deceased members the right to assert claims that accrued to the members before their death.
The default federal tax classification of single-member LLCs is that of “disregarded entities.” The federal tax items of disregarded entities are treated as those of their members for federal tax purposes. However, as indicated by the quote below from the CCH weekly federal tax service, in certain circumstances single-member LLCs may use a different accounting method than that of their members.
“Disregarded Entity Can Use Different Accounting Method From Its Corporate Owner, Chief Counsel Rules,” CCA 201430013
IRS Chief Counsel has concluded that a limited liability company (LLC) that is treated as a disregarded entity (DE) can use a different method of accounting from its corporate owner. Though treated as a branch of its owner, the DE operated a separate trade or business from its owner and could use its own method of accounting under Code Sec. 446, Chief Counsel determined.
CCH Take Away. Under Reg. §1.446-1(d)(1), a taxpayer with two or more separate and distinct trades or businesses can use different methods of accounting for each business. The fact that the LLC was disregarded as an entity separate from its owner did not foreclose treatment of the LLC as a separate trade or business that was entitled to use its own method of accounting.”
Even experienced LLC lawyers sometimes refer to LLC members’ memberships as “LLC interests.” However, under most LLC statutes, the term “LLC interest” means only a member’s right to allocations of LLC profits and losses and to distributions of LLC cash and other assets. It does not mean a member’s LLC membership rights in their entirety (including, for example, management and fiduciary rights).
The above meaning of the term “LLC interest” is the basis for an interesting recent LLC charging order case. The cite is Young v. Levy, 140 So.3d 1109 (District Court of Appeal of Florida, Fourth District, June 18, 2014).
The most recent post in Peter Mahler’s excellent blog addresses a recent New York case that decided the above issue. I suspect courts in most or all other jurisdictions would rule similarly. Here is a link to the case.
The primary purpose of the Check-the-Box Regulations is to provide guidelines for determining the federal tax classification of at least of the various types of domestic and foreign specific state-law business entities. An entity’s federal tax classification, in turn, determines the Internal Revenue Code federal tax regimens (sole proprietorship taxation or taxation under Subchapters C, K or S) that are available to it.
Both for LLC tax lawyers and for LLC lawyers who aren’t tax specialists, the Check-the-Box Regulations are among the most important LLC practice tools.
A key concept in the Check-the-Box Regulations is that of “eligible entities.” Eligible entities comprise single-owner unincorporated business entities (such as single-member LLCs) and multi-owner unincorporated business entities (such as multi-member LLCs). The Check-the-Box Regulations permit eligible entities to elect their federal tax classification . The term “eligible entity” does not denote the federal tax classification of any entity. Rather it denotes a preclassification status.
- For single-owner unincorporated business entities, the default federal tax classification is that of “disregarded entities,” but these entities can elect to be taxable as “associations,” and thus, if they qualify, to be taxable as C or S corporations.
- For multi-owner unincorporated business entities, the default federal tax classification is that of partnerships, but these entities, too, can elect to be classified as associations and, if they are eligible, as C or S corporations.
All of the above elections must be made on IRS Form 8832. A few days ago, in revising the chapter on the Check-the-Box Regulations in my Wolters Kluwer LLC book and adding to it a section about Form 8832 and the Form 8832 instructions, I discovered, to my amazement, that in the first column of Page 4 of the Form 8832, the IRS wrongly defines eligible entities as associations. They aren’t associations. “Association” is one of the four federal tax classifications under the Check-the-Box Regulations (corporations, partnerships, associations and disregarded entities). As noted, “eligible entity” is a preclassification.
I’ve pointed out this error to the IRS. I hope the IRS will correct the error soon. It’s a dangerously misleading error for LLC lawyers and accounts who don’t happen to be experts in the Check-the-Box Regulations.
Mike Smith is a first-rate Indiana LLC lawyer. He publishes an excellent blog on, among other things, LLC law. Here is a recent blog post in which he discusses the above issue. It’s a very good introduction to the issue.