John Cunningham’s free, three-CPE-credit seminar for New Hampshire accountants on the significance for LLCs of the U.S. Treasury Check-the-Box Regulations is presently scheduled for January 19, 2015 in the Chamber’s main conference room from 9 AM to 11 AM. Because of professional commitments, John has rescheduled the seminar for the same place and time on Thursday, May 21, 2015. Seating is limited. For more information and to enroll in the seminar, please call John at (603) 856-7172 or e-mail him at firstname.lastname@example.org.
Whenever you help a client form an LLC, you have to discuss with the client the Social Security Tax implications of the formation. Hence the importance of the note below from yesterday’s CCH Intelliconnect Tracker News:
The Social Security Administration (SSA) has announced that the maximum amount of earnings subject to OASDI Social Security tax will be $118,500 for 2015, up from $117,000 for 2014. The $1,500 increase reflects an overall rise in average total wages. Of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes because of the increase in the taxable maximum, SSA reported.
For those of you who form LLCs taxable as partnerships or have clients that are members of LLCs taxable as partnerships, here is a significant news item from the latest Tax Notes:
IRS Proposed Regs Address Distributions Treated as Sales or Exchanges
The IRS has issued proposed regulations on how a partner should measure its interest in a partnership’s unrealized receivables and inventory items and on the tax consequences of a distribution that causes a reduction in that interest. (REG-151416-06)
Whenever you form a multi-member LLC taxable as a partnership, protecting members from the Self-Employment Tax may be a critical here. Click here for an excellent discussion of this issue and of the usefulness of Internal Revenue Service Prop. Reg. § 1.1402(a)-2 in addressing it.
However, I am more confident than the author of the discussion with respect to the question whether you can rely on the Prop. Reg. to avoid Self-Employment Tax.
In case it’s of interest to you, here is a link to an excellent current follow-up article, by a first-rate financial writer named Jason Van Steenwky, to the article I posted here yesterday about the tax risks of flipping real estate.
Perhaps as many as a fourth of all LLCs are used primarily to invest in or to buy and sell real estate. A basic issue for the members of all of these LLCs is whether, through their LLCs, they are acting as real estate investors or as real estate brokers. In case it’s relevant in your practice, here is a brief, practical online article on this subject that seems to me to be generally accurate.
Accountants working with LLCs should have at least a basic understanding of multistate tax planning, since this planning may be important for some of their clients. The subject is addressed in an excellent new article by William C. Brown entitled “A Primer on Income Tax Compliance for Multistate Pass-Through Entities,” 67 The Tax Lawyer 821 (Summer 2014).
Estate planners sometimes advise their LLC clients to recapitalize their equity structure for estate planning reasons. The note below from today’s Tax Notes summarizes an IRS ruling that the IRS may treat some of these recapitalizations as gifts.
In a legal memorandum, the IRS concluded that the recapitalization of a limited liability company was a transfer from a donor to her two sons for gift tax purposes under section 2701(e)(5).
The donor and her sons formed the LLC, but only the donor made a capital contribution that consisted of real property. However, the donor later made gifts of membership interests to her sons and their children. The company was later recapitalized, and the sons agreed to manage the company in exchange for an amendment to the LLC operating agreement providing that all future profit and loss, including all gain or loss attributable to the company’s assets, would be allocated equally between the sons. After the recapitalization, the sole equity interest of the donor and her grandchildren in the company was the right to distributions based on their capital account balances as they existed immediately before the recapitalization.
Section 2501 imposes a tax on the transfer of property by gift by any individual. Under section 2511, the tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, and tangible or intangible. Section 2701 provides special valuation rules to determine the amount of a gift when an individual transfers an equity interest in a family-controlled corporation or partnership to a member of the individual’s family. Under section 2701(e)(5), a contribution to capital or a redemption, recapitalization, or other change in the capital structure of a corporation or partnership is treated as a transfer of an interest in that entity if the taxpayer or an applicable family member (1) receives an applicable retained interest in the entity in connection with the transaction; or (2) under regulations, otherwise holds, immediately after the transaction, an applicable retained interest in the entity.
The IRS noted that the donor and her family controlled the LLC at all relevant times and that she held an applicable retained interest — an equity interest in the company coupled with a distribution right — both before and after the recapitalization. The IRS said her interest, which carried a right to distributions based on an existing capital account balance, was senior to the transferred interests, which carried only a right to distributions based on future profit and gain. Accordingly, the IRS determined that the recapitalization constituted a transfer by the donor for purposes of section 2701.
Generally, the amount of a gift resulting from any transfer to which section 2701 applies is determined by a subtraction method of valuation. Under this method, the amount of the transfer is determined by subtracting the values of all family-held senior equity interests from the fair market value of all family-held interests in the entity determined immediately before the transfer. Reg. section 25.2701-3(b) provides a four-step method for determining the amount of the gift.
Here is the second part of Peter Mahler’s excellent new two-part discussion of marketability discount issues and related issues in the Zelouf case, including a discussion of control premiums.