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REV. RUL. 99-5

It often happens that individuals who are members of single-member LLCs taxable as sole proprietorships want to take on a partner in their LLC (technically, a new co-member).  This seemingly simple process can trigger significant federal income tax issues.  The issues are addressed—controversially—in an IRS administrative ruling designated Rev. Rul. 99-5.

If you have a client in the above situation, you or your tax colleague should study Rev. Rul. 99-5 carefully in planning how to handle the situation.  Here is a link to the ruling:  http://www.actec.org/Documents/Revenue_Rulings/Revenue_Ruling_99-5.pdf.pdf.

Here is a link to a very useful AICPA comment on the problems in the ruling:  http://www.aicpa.org/Advocacy/Tax/Partnerships/DownloadableDocuments/Comments-on-Rev-Ruling-99-5-v-6-5-13submit.pdf.

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REMINDER! FREE THREE-CPE CREDIT SEMINAR ON CHECK-THE-BOX REGULATIONS

NOTE: ONLY A FEW SEATS LEFT!

Attorney John Cunningham, New Hampshire’s leading LLC lawyer, will present a free, three-CPE credit seminar, with extensive written materials, to NH accountants from 9 AM to noon on Thursday, May 21,2015, at the Manchester Chamber of Commerce at 54 Hanover Street, Manchester, NH. Seating is limited to 35 attendees. Metered street and parking lot parking are available. For further information and to enroll, please call Amanda Nelson at (603) 842-5490 or e-mail her at anelson_law@yahoo.com.

 

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DISCOUNTS FOR LACK OF MARKETABILITY

The link below is to the latest blog post in Peter Mahler’s excellent blog website on business divorce.  The post cites a very useful IRS manual on discounts for lack of marketability (“DLOM” which I’d never known about until I read Peter’s post), and it contains much other information about DLOM and related matters.

I’m a planner and drafter, not a litigator, but I know that Peter’s post will be useful background for me in drafting price provisions in LLC operating agreement buy-out provisions.

Here’s the link:

http://www.nybusinessdivorce.com/2015/05/articles/valuation/should-business-appraisers-rely-on-case-precedent-for-discounts/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NewYorkBusinessDivorce+%28New+York+Business+Divorce%29

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BLOG POST RE PASSIVE LOSSES

Passive loss issues arise all the time in LLC tax practice.  The link below provides an excellent plain-English discussion of these issues.  The source of the discussion is a fine tax blog called “Tax Law for the Closely Held Business.”

Here’s the link:

http://www.taxlawforchb.com/2015/05/passive-loss-or-nol-prove-it/?utm_source=Tax+Law+for+the+Closely-Held+Business&utm_campaign=604b188774-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_4d5d267118-604b188774-73367009

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REMINDER! FREE THREE CPE CREDIT SEMINAR ON CHECK-THE-BOX REGULATIONS

Attorney John Cunningham, New Hampshire’s leading LLC lawyer, will present a free, three-CPE credit seminar, with extensive written materials, to NH accountants from 9 AM to noon on Thursday, May 21,2015, at the Manchester Chamber of Commerce at 54 Hanover Street, Manchester, NH. Seating is limited to 35 attendees. Metered street and parking lot parking are available. For further information and to enroll, please call Amanda Nelson at (603) 842-5490 or e-mail her at anelson_law@yahoo.com.

Seats are filling up fast!

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STATUTORY CONVERSIONS OF GENERAL PARTNERSHIPS TO LLCS-PLR 200022016

A brief follow-up to the post I just published about the above subject:  Under PLR 200022016 and other federal tax authorities, the above conversions do not trigger any federal tax consequences as long as, connection with such a conversion, there are no internal adjustments among the members, such as shifts of liabilities; for federal tax purposes, the converting partnership is the same partnership after the conversion as before.

Here is the link to PLR 200022016:  http://www.irs.gov/pub/irs-wd/0022016.pdf.

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STATUTORY CONVERSIONS OF GENERAL PARTNERSHIPS TO LLCS–NEW HAMPSHIRE REAL ESTATE TRANSFER TAX

There are probably many tens of thousands of state-law general partnerships doing business today in the U.S.  The state-law general partnership business organization form is a very dangerous one, since, under the general partnership statutes of most or all states, each partner is jointly and severally liable for claims against the partnership and against every other partner.  Indeed, it is often suggested that for a lawyer to form a state-law general partnership would be malpractice per se.

Thus, if you have any clients that do business as general partnerships, you should urge them to make conversions—preferably, statutory conversions if your state laws permit—to LLCs; or at the very least to register as limited liability partnerships (thus providing a liability shield to each partner).  If you’re a lawyer, it can be argued that your failure to do so would be malpractice per se.

Under the Check-the-Box Regulations, the above conversions are non-events from a federal tax viewpoint for entities that are general partnerships taxable as partnerships for federal income tax purposes, since such an entity is the same partnership for federal tax purposes after the conversion as before.  Furthermore, the conversion should not trigger any state transfer tax, since only a single entity is involved in the conversion.  An entity can’t make a transfer to itself.

This obvious conclusion about the inapplicability of state transfer taxes to conversions of state-law general partnerships to LLCs was recently confirmed for New Hampshire Real Estate Transfer Tax purposes in a New Hampshire Department of Revenue Administration Declaratory Ruling 10799, effective March 19, 2015.  Click here for this ruling:  http://revenue.nh.gov/tirs/documents/abc-dcr.pdf.

The ruling is an important one in New Hampshire, since the RETT applies at an aggregate rate of 1.5% of fair market value of the relevant real property.

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LLCS-THE MAJOR FEDERAL INCOME TAX DEVELOPMENTS OF 2014

The article under the link below summarizes the major federal income tax developments of 2014 not only in the field of LLC taxation but in all other federal income tax areas as well.  But its summary of partnership tax developments is particularly relevant to LLC tax, since most multi-member LLCs are taxable as partnerships.  The title and citation of the article are McMahon, McGovern and Shepard, Recent Developments in Federal Income Taxation: The Year 2014 (Florida Tax Review, Vol. 17, No. 3, 2015)

Here’s the link:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569359

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S ELECTIONS FOR LLCS

As I’ve noted before in this listserv, when LLC members want to minimize their Self-Employment Tax on their shares of LLC income, the best option is often to make an S election.  One of my LLC clients recently filed a Form 1120S for 2014, but had never made the necessary S election and thus, under the default rules of the Check-the-Box Regulations, was a partnership for federal income tax purposes.  The IRS sent them a nastygram about this failure.  One or more of your clients may someday commit a similar failure.  If they do, you should tell them that the IRS is pretty liberal in accepting late elections.  See the very recent IRS private letter ruling under the following link:  http://www.irs.gov/pub/irs-wd/201515021.pdf.

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JOINT COMMITTEE ON TAXATION

As many of you will know, the Joint Committee on Taxation is a highly expert federal tax committee of the U.S. Congress.  On April 10, 2015, it published what, for me, at least, is a fascinating report entitled “Choice of Business Entity:  Present Law and Data Relating to C Corporations, Partnerships and S Corporations.”  The report contains an excellent comparison among the basic provisions of Subchapter C, Subchapter S and Subchapter K on various key federal income tax issues.  It also contains a lot of, to me, at least, fascinating information about non-farm and farm sole proprietorships.  If you want to take a look at the report and possibly download it, click here:  https://www.jct.gov/publications.html?func=startdown&id=4765.

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