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.
This latest post in Peter Mahler’s Business Divorce blog provides an excellent discussion of the marketability discount in the context of the sale of corporate shares. The post applies equally to LLC membership rights.
As an LLC specialist, I do my best to monitor current developments in LLC case law, legislation, federal and state tax, and secondary authorities (law journals, LLC blogs, bar newsletters, etc.), and I send e-mails to this list about these developments. In order to monitor LLC federal and state tax developments on a daily basis, I’ve recently subscribed to a superb daily tax publication called Tax Notes. I know that from time to time, I’ll be sending posts to this blog about current information I’ve learned from in Tax Notes. If you handle LLC tax matters, you may want to consider subscribing to Tax Notes yourself. Here’s a link with extensive information about it.
To avoid Social Security Taxes, many single-member and multi-member LLCs make S elections. The Check-the-Box Regulations facilitate these elections. LLC lawyers should follow S corporation developments, and I do so. Here, from the CCH weekly federal income tax reporter, is news about a potentially significant new regulation concerning qualified Subchapter S subsidiaries:
The IRS has requested public comment on information collections under final regulations (T.D. 8869) on the treatment of subchapter S corporation subsidiaries; comments are due by December 8, 2014.
The following quote about a recent NH DRA Business Profits Tax/BET development is from the current issue of the CCH LLC Advisor Newsletter:
The New Hampshire Department of Revenue Administration has issued a technical information release discussing the extended carryforward period for the credit against the business profits tax for business enterprise taxes paid. Enacted in July 2014, S.B. 243 provided that any unused business enterprise tax credit from taxable periods ending on or after December 31, 2014, may be carried forward for 10 years from the taxable period in which it was paid. Therefore, due to the effective date of the 2011 law extending the carryforward period, as of July 1, 2014, any unused business enterprise tax credit from taxable periods ending before December 31, 2014, may be carried forward for five years from the taxable period in which it was paid, and any unused business enterprise tax credit from taxable periods ending on or after December 31, 2014, may be carried forward for 10 years from the taxable period in which it was paid. Taxpayers and tax practitioners are reminded to keep appropriate records.
Technical Information Release TIR 2014-5, New Hampshire Department of Revenue Administration, September 8, 2014.