Leave a comment


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.

Share this website
Leave a comment


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.

Share this website
Leave a comment


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.”

Share this website
Leave a comment



As you may know, my law practice is focused on forming LLCs and converting non-LLC entities to LLCs for New Hampshire and Massachusetts clients.  I am the chair of the committee that drafted the New Hampshire Revised Limited Liability Company Act (the “Revised Act”) and that is presently revising that act.  Drafting Limited Liability Company Operating Agreements, my Wolters Kluwer LLC formbook and practice manual, addresses LLC federal and state tax issues in substantial detail.

On Wednesday, September 24, 2014, from 9 AM to noon at the Greater Manchester Chamber of Commerce, 54 Hanover Street, Manchester NH 03101, I will teach a free, three-hour, three-CPE credit seminar on federal and New Hampshire taxation of LLCs and their members for New Hampshire accountants.  Off-street parking and public parking garages are readily available in the neighborhood of the Chamber’s offices.

The topics to be addressed in the seminar are as follows:

  1. LLC law under the Revised Act—what every New Hampshire accountant should know
  2. LLCs and the Check-the-Box Regulations
  3. Making tax-choice-of-entity analyses for LLCs and their members
  4. Protecting LLC members from the Self-Employment Tax on their shares of LLC income
  5. Protecting LLC members from the New Hampshire Interest and Dividends Tax on LLC distributions
  6. Making statutory conversions of New Hampshire corporations to New Hampshire LLCs to avoid the New Hampshire Interest and Dividends Tax and to obtain LLC legal protections
  7. Key partnership tax provisions in LLC operating agreements

In connection with the seminar, I will distribute extensive seminar materials to the attendees by e-mail.

I will provide coffee and Danishes to attendees at the seminar.

To enroll in the seminar, please send me an email.

For further information about the seminar, please feel free to contact me by e-mail or by phone at (603) 856-7172.

Best, John

John M. Cunningham
Law Offices of John M. Cunningham, PLLC
2 Kent Street
Concord, NH 03301
Telephone:  (603) 856-7172
Fax:  (603) 224-4929
Of counsel:
McLane, Graf, Raulerson & Middleton,
Professional Association 
Share this website
Leave a comment


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.


Share this website
Leave a comment


I chair a committee that is revising the New Hampshire Revised Limited Liability Company Act (the “Revised Act”).  I’m presently drafting a set of provisions to provide in the Revised Act for LLC domestications.  The Delaware and Florida acts contain these provisions.  In case you’re not sure what a domestication is:  it’s a statutory procedure by which an LLC formed under one LLC act changes the act that governs it to another act.  Thus, for example, the domestication of a foreign LLC means the change of the LLC act that governs it from the foreign act to the act of another jurisdiction.  If you domesticate an LLC, you can change the LLC act that governs it without having to use a merger, and the domestication eliminates any possibility of transfer taxes, since the domesticated entity will be the same after the domestication as before.

Share this website
Leave a comment


There is a large and rapidly growing body of LLC federal bankruptcy cases.  In case these cases should ever become relevant to one of your clients, there is a massive collection of them in Wooster, “Issues Concerning Bankruptcy Proceedings of Limited Liability Companies,” 37 A.L.R. Fed 2d 129.  This compilation is regularly updated.

Share this website
Leave a comment


Chapters 30 and 32 of my Wolters Kluwer LLC book address the above subject in great detail and cite all of the relevant cases and journal articles, some of which have appeared very recently.  In brief summary:

1.  Single-owner and multi-owner entities that are LLCs or other unincorporated business entities or that are state-law business corporations and that validly elect to be S corporations can use their S elections as a powerful tool for lawful Social Security Tax avoidance, regardless of the trade, business or profession of the entity in question.   However, under the relevant federal tax authorities, these entities must pay reasonable comp to their shareholders who work in the entity’s business.

2.  Prop. Reg. § 1.1402(a)-2 provides a powerful tool to protect from Social Security Taxes the members of non-professional LLCs and other unincorporated business entities that are taxable as partnerships, and reasonable comp standards probably don’t apply to these entities.  Although, the Prop. Reg. is merely “proposed,” it has been on the books since January 13, 1997, and the IRS has repeatedly stated that it views it as the governing federal tax authority.

Share this website
Leave a comment


Most multi-member LLCs are taxable as partnerships.  Thus, I follow developments in federal and state partnership taxation.  Most of the developments are technical, but here’s one from a CCH newsletter that every LLC lawyer  and accountant who deals with partnership tax issues should know:

Form 1065. The Chief Counsel advised that Form 1065 should not be referred to as a “Partnership tax return.”  It is not a tax return, it is an information return. Thus, it should be referred to as the Form 1065 or the partnership return.—CCA 201418052

Share this website
Leave a comment


Of all the issues New Hampshire business people should address when forming LLCs, the most important, but also the most neglected, is the issue of what to do when one or more members come to believe that one or more other members are breaching their LLC duties.  A very common situation of this kind is when LLC minority members claim they’re being “oppressed” (the technical term for “treated unfairly”) by the majority.

The New Hampshire Revised Limited Liability Company Act (the “Revised Act”) does a much better job in providing for oppression claims than the old act, but it doesn’t provide a magic bullet.

  • The old act provided that the minority would have to make its oppression claim in a “derivative action” against the majority—i.e., in a lawsuit not in the minority’s own name but in the name of the LLC itself.  The rules governing derivative actions are complex, they are expensive to comply with, and they’ve never made the slightest sense for small, informal LLCs—namely, for 95% of all New Hampshire LLCs.
  • The Revised Act didn’t eliminate the right of the minority to bring derivative actions, since, among other considerations, if these actions succeed, the minority will be entitled to reimbursement of their attorneys’ fees—a result otherwise difficult to achieve in New Hampshire courts.  However, in new Section 190, the Revised Act also permits minorities to bring “direct actions”—i.e., lawsuits in their own name.  In direct actions, successful plaintiffs won’t normally get reimbursement of their attorneys’ fees.  But they may get other forms of relief—e.g., generous money damages—that will make their lawsuits worthwhile.

However, direct actions, like derivative actions, have a problem that, for many LLC plaintiffs, can be very serious—namely, that they have to be brought in court.  It happens that in New Hampshire, we have a first-rate business court—technically, the “Business Docket” of the New Hampshire Superior Court.  This court is fair, smart, fast and reasonably affordable.  However, by definition, lawsuits in the Superior Court are public.  So they often involve a painful airing of an LLC’s dirty laundry.

So, in their operating agreements, how should New Hampshire business people address the possibility of eventual claims between minority and majority members of their LLCs?

The Revised Act provides the members with four main options for drafting these provisions.  Each of these options has major advantages and major disadvantages.  I’ve already discussed the main advantages and disadvantages of the first two options—namely, provisions for derivative and for direct actions.  The third and fourth options—namely, provisions for mediation and arbitration—aren’t expressly addressed in the Revised Act, but they are unquestionably permitted by it.

  • In mediation provisions, the members agree that if they have claims against one another, they must hire a mediator to resolve them.  Skilled mediators can work miracles.  But mediators can only mediate LLC disputes; they can’t decide them.  And often disputes among LLC members are so serious and so bitter that even the most skilled mediators can’t find solutions for them.  So mediation provisions in LLC operating agreements, valuable as they may be, should always be accompanied either by provisions for derivative or direct actions, as discussed above, or by arbitration provisions.
  • Arbitration provisions in operating agreements usually provide that if members make claims against other members that they can’t resolve among themselves and that mediators can’t resolve, these claims will be finally resolved, without any access to court appeal, by a single arbitrator.   In effect, this arbitrator will be a paid private judge for the members.  The operating agreement should provide comprehensive rules governing arbitration among the members—for example, rules as to the degree of discretion of the arbitrator in deciding what evidence to admit and what to address in writing arbitration orders.

If these arbitration rules are well drafted, arbitration can often be faster and cheaper than any possible litigation.  Furthermore, as in Las Vegas, what happens in arbitration stays in arbitration.  Arbitration, like litigation in court, can get very ugly.  But at least it will be confidential.

Share this website