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SINGLE-MEMBER LLCS

Roughly 70% of all LLCs are single-member LLCs whose members are individuals.  Thus, single-member LLCs are central to any LLC practice.  You literally can’t know too much about them.  Below are a citation to and the introductory paragraphs of an important law journal article about single-member LLCs:

36 Va. Tax Rev. 323
Virginia Tax Review
Spring, 2017
Article
Philip Manns, Jr., Timothy M. Todd
Copyright © 2017 by The Virginia Tax Review Association; F. Philip Manns, Jr., Timothy M. Todd
THE TAX LIFECYCLE OF A SINGLE-MEMBER LLC

The single-member LLC (SMLLC) is ubiquitous. Despite its ubiquity, the Internal Revenue Code (Code) does not squarely address its tax consequences nor even contemplate its existence. This article examines the tax lifecycle of an SMLLC through its formation, operation, and exit event (e.g., sale, gift, or deathtime transfer).

This article identifies and isolates a tax asymmetry that arises from the U.S. Tax Court’s decision in Pierre v. Commissioner. Despite the check-the-box regulations, which disregard the SMLLC, Pierre regards the SMLLC for federal gift tax purposes. This asymmetry has several tax consequences, including a potential prophylactic immunization of transfers to SMLLCs against application of section 2036–which claws back into the federal gross estate transfers when the transferor retains an interest–in the family partnership context.

Consequently, this article demonstrates that the SMLLC can be used to blunt the negative effects of section 2512 (a gift tax provision), section 1015 (an income tax provision), and section 2036 (an estate tax provision). In effect, due to the Pierre asymmetry, the SMLLC is the ideal initial entity in a gifting strategy.

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NH TAXES

For those interested in New Hampshire taxation:

2017 Business Tax Law Changes

TECHNICAL INFORMATION RELEASE

Date July 21, 2017

A Technical Information Release is designed to provide immediate information regarding tax laws administered by the Department or the policy positions of the Department as a service to taxpayers and practitioners. A Technical Information Release represents the position of the Department on the limited issues discussed herein based on current law and Department interpretation. For the current status of any tax law, practitioners and taxpayers should consult the source documents (i.e., Revised Statutes Annotated, Rules, Case Law, Session Laws, etc.). Questions should be directed to Taxpayer Services at (603) 230-5920.

 The purpose of this Technical Information Release (TIR) is to provide taxpayers and tax practitioners with a convenient reference guide to several of the major Business Profits Tax (BPT) and Business Enterprise Tax (BET) (collectively “Business Tax”) law changes that were made during the 2017 Legislative Session by the New Hampshire General Court. This TIR is for informational purposes only and is intended to provide a summary or synopsis of enacted legislation. It is not intended to be relied upon as full and complete text or as a substitute for the actual state law. Please refer to the applicable statute and rules to determine how this information applies to specific persons or situations.

BUSINESS TAX RATE REDUCTIONS

House Bill 517 (Chapter 156, Sections 213-217, Laws of 2017) reduces the rate of the RSA 77-A BPT and the RSA 77-E BET.

For taxable periods ending on or after December 31, 2019, HB 517 reduces the BPT rate to 7.7% and the BET rate to .6%.

For taxable periods ending on or after December 31, 2021, HB 517 reduces the BPT rate to 7.5% and the BET rate to .5%.

Pursuant to existing law, for taxable periods ending on or after December 31, 2018, the BPT rate is reduced to 7.9% and the BET rate is reduced to .675%, contingent upon combined unrestricted general and education trust fund revenues of $4.64 billion being collected during the biennium ending June 30, 2017 as reported in the audited comprehensive annual financial report performed pursuant to RSA 21-I:8, II(a). On or about December 31, 2017, the Legislative Budget Assistant will report on whether revenue collections have met the threshold. The Department will issue an additional Technical Information Release at that time advising taxpayers of the applicable BPT and BET rate for taxable periods ending on or after December 31, 2018. However, based upon preliminary unaudited revenue figures, the $4.64 billion dollar threshold set forth in RSA 77-A:2, IV and RSA 77-E:2, IV appears likely to have been met.

For taxable periods ending on or after December 31, 2016, the BPT rate is 8.2% and the BET rate is .72%.

INTERNAL REVENUE CODE § 179 DEDUCTION

House Bill 517 (Chapter 156, Section 218, Laws of 2017) amends RSA 77-A:3-a to provide that a taxpayer may calculate expense deductions pursuant to Internal Revenue Code (IRC) § 179 not to exceed $500,000 for property placed in service on or after January 1, 2018. For property placed in service from January 1, 2017 through December 31, 2017, the maximum IRC § 179 deduction is $100,000. For property placed in service prior to January 1, 2017, the maximum IRC § 179 deduction is $25,000.

INTERNAL REVENUE CODE CONFORMITY

House Bill 517 (Chapter 156, Section 229, Laws of 2017) amends RSA 77-A:1, XX to conform the BPT to the IRC of 1986 in effect on December 31, 2016 for taxable periods beginning on or after January 1, 2018, subject to the adjustments required pursuant to RSA 77-A:3-b. To determine the IRC applicable to taxable periods beginning prior to January 1, 2018, please reference RSA 77-A:1, XX.

Additional information about the BPT can be obtained by referencing RSA 77-A and N.H. Code of Admin. Rules, Rev 300 and additional information about the BET can be obtained by referencing RSA 77-E and N.H. Code of Admin. Rules, Rev 2400, which can both be accessed on the Department’s website.

Individuals who need auxiliary aids for effective communication in programs and services of the Department of Revenue Administration are invited to make their needs and preferences known to the N.H. Department of Revenue Administration, 109 Pleasant Street, Concord, NH 03301 or by contacting them at (603) 230-5000.

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NEW HAMPSHIRE TAXES

For those of you who are interested in New Hampshire state tax:  The new ruling of the New Hampshire Department of Revenue Administration set forth below rules that a merger of three multi-member LLCs with identical memberships is subject to the NH Real Estate Transfer Tax.  To me, the ruling seems harsh and legalistic.  Furthermore, I suspect the LLCs could have gotten to where they need to go by transfers of the relevant real properties by two of the LLCs to the third.  But maybe life isn’t that simple.

 

Here, in quotes, is the text of the ruling:

 

IN THE MATTER OF THE PETITION OF
Member 1 and Member 2

STATE OF NEW HAMPSHIRE
DEPARTMENT OF REVENUE ADMINISTRATION

FOR A DECLARATORY RULING

REDACTED DOCUMENT

Effective 6-8-2017

Pursuant to RSA 541-A:1, V and RSA 541-A:16, II(b) and N.H. Code of Admin. Rules Rev 209.01, the Petitioners request a declaratory ruling with respect to real estate transfer tax.

Pursuant to N.H. Code of Admin. Rules Rev 209.02, this declaratory ruling is issued to the Petitioners with respect to the particular circumstances and facts discussed herein and represents a holding of the department on those circumstances and facts for Petitioners only.

FACTS PRESENTED BY THE PETITIONERS

ABC, LLC, DEF, LLC, and GHI, LLC (collectively, the “Companies”) are each multi-member New Hampshire limited liability companies with a principal business address located in New Hampshire. Member 1 and Member 2 (the “Petitioners”) are the only members of the Companies and each has a 50% membership interest in each Company. Each Company meets the definition of a “real estate holding company” pursuant to RSA 78-B:1-a, VI.

ABC, LLC owns multiple rental properties and there are mortgages on several of these properties. DEF, LLC owns multiple rental properties and there are mortgages on at least some of these properties. GHI, LLC owns one property.

In order to streamline management, reduce paperwork, and simplify filings, the Petitioners seek to merge the Companies into one limited liability company. The Petitioners represent that DEF, LLC and GHI, LLC will merge into ABC, LLC pursuant to RSA 304-C:155 (Mergers of Limited Liability Companies with Other Business Entities). The Petitioners further represent that:

  1. Petitioners will submit all necessary statutory documents to effectuate the merger.
  2. ABC, LLC will be the surviving limited liability company.
  3. Immediately following the merger, the Petitioners will hold all of the membership interests in ABC, LLC in the same percentage as existed pre-merger (Member 1, 50% and Member 2, 50%).
  4. The members of ABC, LLC will receive no consideration for the merger of their interests in DEF, LLC and GHI, LLC into ABC, LLC.
  5. The combined assets and liabilities of the Companies before the merger will be the same as all of the assets and liabilities of ABC, LLC after the merger.

DETERMINATION REQUESTED BY THE PETITIONERS

Petitioners request the following ruling:

The merger of DEF, LLC and GHI, LLC into ABC, LLC, under the provisions of RSA 304-C:155, shall not create a taxable transfer of the real estate owned by DEF, LLC or GHI, LLC for purposes of the real estate transfer tax, as the tax does not apply pursuant to RSA 78-B:2.

REVISED STATUTES ANNOTATED (RSA) AT ISSUE

The following New Hampshire statutes are relevant to the Petitioners’ request for a declaratory ruling:

RSA 78-B:1, I (1999)

RSA 78-B:2 (2016)

RSA 304-C:155 (2013)

OTHER LAWS OR RULES

N.H. Code of Admin. Rules Rev 209.01

N.H. Code of Admin. Rules Rev 209.02

PETITIONERS’ REPRESENTATIONS

To the best of the Petitioners’ knowledge, the issue and the particular circumstances which are the subject of the petition:

  1. Are not under examination by the Department;
  2. Have not been examined by the Department;
  3. Are not under consideration by the Department in connection with a return of a prior period; and
  4. Are not pending in litigation.

DISCUSSION

  1. Real Estate Transfer Tax

Pursuant to RSA 78-B:1, I(a), the RETT is “[a] tax . . . imposed upon the sale, granting and transfer of real estate and any interest therein including transfers by operation of law.” Further, each sale, granting and transfer of real estate, and each sale, granting and transfer of an interest in real estate “shall be presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” RSA 78-B:1, I(a).

Petitioners represent that the Companies are each multi-member New Hampshire limited liability companies. The Petitioners further represent that they are the only members of the Companies, and each Petitioner has a 50% membership interest in each Company. According to the petition, the Companies will be merged into one limited liability company pursuant to RSA 304-C:155 in order to streamline management, reduce paperwork, and simplify filings. Immediately following the merger, the Petitioners will hold all of the membership interests in the surviving entity in the same percentage as existed pre-merger. The surviving entity, ABC, LLC, will not only retain its pre-merger assets and liabilities, but after the merger will also possess the assets and liabilities that were formerly held by DEF, LLC and GHI, LLC.

The Petitioners seek a ruling that the merger of the Companies is exempt from RETT under RSA 78-B:2, without specifying which of the exceptions described in that section they believe applies to the merger. However, every sale, granting and transfer is “presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” RSA 78-B:1, I(a).

A previously existing exception listed in RSA 78-B:2, which has since been repealed, specifically exempted certain mergers from RETT. In 1992, the New Hampshire legislature adopted and the governor signed Chapter 203:2 into law, which amended the RETT statute by inserting RSA 78-B:2, XIV. This paragraph added an exemption from RETT covering “a transfer of title pursuant to a merger, consolidation or other reorganization qualifying as a tax-free reorganization as defined under the United States Internal Revenue Code of 1986, section 368, as amended.”

The exemption provided by paragraph XIV was repealed when the legislature adopted Chapter 158:27 in 2001, and has not been reenacted since. Additionally, none of the remaining exceptions in RSA 78-B:2 “specifically exempt,” as required by RSA 78-B:1, I(a), the merger of multiple entities with identical ownership. As none of the exceptions in RSA 78-B:2 specifically exempt transactions such as the Petitioners’, the merger described in the petition is not exempt from RETT under RSA 78-B:2.

RULING

Based on the facts represented by the Petitioners, as well as the statutory and regulatory provisions discussed above, the Department makes the following ruling:

The merger of DEF, LLC and GHI, LLC into ABC, LLC, under the provisions of RSA 304-C:155, are not exempt under RSA 78-B:2 from the real estate transfer tax.

Date

John T. Beardmore, Commissioner”

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SALE OF CONTRACT RIGHTS

If your client is a business owner who, individually or through his business, owns valuable contract rights and has an opportunity to sell those rights to a third party, when can he or she treat income from such a sale as capital gains?  Under the link below is a blog that provides a brief but excellent discussion of this difficult question.

Here’s the link:

http://www.taxlawforchb.com/2017/07/sale-of-a-contract-capital-gain-or-ordinary-income/

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NEW HAMPSHIRE TAX DEVELOPMENTS

For those interested in New Hampshire state taxation, the following update from CCH will be of interest:

———————–

S.10,New Hampshire—Corporate Income, Utilities Taxes: Correction: IRC Conformity Updated and BPT/BET Rates Reduced,(Jul. 12, 2017)

Governor Sununu of New Hampshire has approved legislation that reduces the tax rates of the business profits tax and the business enterprise tax, updates the state’s conformity with the Internal Revenue Code, increases the IRC Sec. 179 deduction limit, and repeals the electricity consumption tax. The legislation reduces in two steps the business profits tax and the business enterprise tax rates. The business profits tax will be imposed at the rate of 7.7% on the taxable business profits of every business organization for tax periods ending on or after December 31, 2019 and at the rate of 7.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 8.2%. The rate is scheduled to be reduced to 7.9% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The business enterprise tax will be imposed at the rate of 0.6% of the taxable enterprise value tax base for tax periods ending on or after December 31, 2019 and at the rate of 0.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 0.72%. The rate is scheduled to be reduced to 0.675% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The legislation also updates the state’s Internal Revenue Code (IRC) tie-in date for purposes of computing New Hampshire’s business profits tax liability to December 31, 2016 (currently, December 31, 2015). This change applies to tax periods beginning on or after January 1, 2018. It is effective June 28, 2017.

Further, IRC §179 (asset expense election) will be subject to a deduction limit of $500,000 for property placed in service on or after January 1, 2018. Currently, the limit is $100,000 for property placed in service on or after January 1, 2017. These changes are effective January 1, 2018.

The electricity consumption tax is repealed effective January 1, 2019.

Ch. 156 (H.B. 517), Laws 2017, effective July 1, 2017, except as noted above

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NEW ARTICLE ON TAX CHOICE OF ENTITY

Tax choice of entity is a critical task in any LLC formation.  Below is the cite to a new law journal article about LLCs and tax choice of entity:

9 Elon L. Rev. 311
Elon Law Review
2017
Article
Caolan J. Ronan
Copyright © 2017 by Elon University; Caolan J. Ronan
START-UPS: WHY INVESTORS PREFER THE CORPORATE FORM TO THE L.L.C. FOR TAX PURPOSES

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SELF-EMPLOYMENT TAX OF LLC MEMBERS

Most multi-member LLCs are taxable as partnerships.  A key task of lawyers forming LLCs is often to minimize the Self-Employment Tax exposure of the members of these LLCs.  The post under the link below discusses a recent Tax Court case addressing the SET liability of the members of a multi-member LLC whose members were lawyers, and it finds that because all of these functioned like general partners of their multi-member LLC, all were liable for that tax.

However, the post does not discuss the usefulness of Prop. Reg. § 1.1402(a)-2 (the “Prop. Reg.”) in protecting from SET liability the members of multi-member LLCs taxable as partnerships.  The IRS has twice stated in public forums that the Prop. Reg. is its audit guideline for the SET liability of partners in entities taxable as partnerships.  Thus, the Prop. Reg. is a powerful tax-avoidance tool for LLC lawyers and their clients.

Here’s the link:  http://www.taxlawforchb.com/2017/06/self-employment-tax-llcs-the-limited-partner-exclusion/

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S CORPORATION TAXATION

Many LLCs are taxable as S corporations, and far more should be.  The attached post under the link below addresses a couple of fundamental and pervasive S corporation issues about basis and losses.  The post applies, of course, as much to LLCs that are S corporations as to state-law business corporations that are S corporations.

Here is the link:   http://www.taxlawforchb.com/2017/05/s-corps-basis-loss-limitations/

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WHAT EVERY BUSINESS OWNER SHOULD KNOW ABOUT PRIVATE FOUNDATIONS

The post under the link below provides basic information that business owners should know about private foundations.

Here’s the link: http://www.taxlawforchb.com/2017/04/private-foundations-a-primer-for-the-business-owner/

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THE NEW PARTNERSHIP AUDIT RULES

Under the link below is a brief but fairly good post summarizing the new and draconian federal statutory partnership audit rules that, for most multi-member LLCs taxable as partnerships, will become effective on 1-1-18.  A few comments about the post:

  1. Puzzlingly, the post doesn’t mention the key fact that under the above rules, the federal tax on any partnership audit deficiency will be a terrifying 39.6 percent.
  2. The post doesn’t mention that even if your LLC qualifies as a “small partnership” exempt from the rules, you need to elect out of coverage by the rules in your annual federal tax return.
  3. The post suggests that LLCs with members that are trusts and single-member LLCs may still qualify as “small partnerships” under the rules.  Based on certain recent Treasury statements, this suggestion is very probably incorrect.
  4. The post does not describe even briefly the types of audit provisions that the operating agreements of LLCs taxable as partnerships and other partnership entities ought to include.
  5. The post does not address the issue whether tax professionals whose clients are partnership entities should offer or agree to be available to serve as partnership audit “partnership representatives” for their clients.  I think they should, as long as the governing operating agreement  provides them with adequate contractual protection.

Chapter 50A in Drafting Limited Liability Company Operating Agreements, my Wolters Kluwer LLC formbook and practice manual, addresses all of the above issues.  If anyone would like a summary of the chapter by e-mail. I will be glad to provide you with one.

Here is the link to the above post:   http://www.lexology.com/library/detail.aspx?g=6fea3fe5-9c8a-4b37-a766-ab1666cefd36&l=7UML737

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