1 / 116

Use of State Law LLCs as S Corporations September 11, 2013

Use of State Law LLCs as S Corporations September 11, 2013. Bradley J. Sklar Sirote & Permutt, PC 2311 Highland Avenue South Birmingham, AL 35205

leone
Download Presentation

Use of State Law LLCs as S Corporations September 11, 2013

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Use of State Law LLCs as S Corporations September 11, 2013 Bradley J. Sklar Sirote & Permutt, PC 2311 Highland Avenue South Birmingham, AL 35205 205-930-5152 bsklar@sirote.com Ronald A. Levitt Sirote & Permutt, PC 2311 Highland Avenue South Birmingham, AL 35205 205-930-5274 rlevitt@sirote.com Birmingham Huntsville Mobile Fort Lauderdale Pensacola

  2. Use of State Law LLCs as S Corporations Statistics Regarding Choice of Entity 2012201320172020 Actual (Projected) (Projected) (Projected) Form1065 3,625,937 3,647,800 3,704,700 3,727,300 Form 1120S 4,579,669 4,585,700 4,601,100 4,607,100 Form 1120 1,912,012 1,856,000 1,732,700 1,645,700 Document 6292, Office of Research, Analysis and Statistics, Fiscal Year Return Projections for the United States: 2013-2020, Rev. 6/2013 sirote.com 2 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  3. Use of State Law LLCs as S Corporations Practitioners have the ability to select the best combination of state law attributes and federal tax treatment to achieve an entity structure specifically tailored for the particular needs of the business. sirote.com 3 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  4. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • For 2013, the maximum amount of wages subject to the OASDI portion of the FICA tax (and the self-employment tax) is $113,700. • OASDI = 6.2% on Employer and Employee. • HI = 1.45% on Employer and Employee. sirote.com 4 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  5. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • The Revenue Reconciliation Act of 1993 repealed the dollar limit on wages subject to the HI portion of the FICA tax and on self-employment income subject to the HI portion of the self-employment tax. sirote.com 5 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  6. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • In order for shareholder-employees of S corporations to realize employment tax savings by withdrawing funds in the form of distributions rather than compensation, such distributions must not be recharacterized as “wages” for FICA purposes or as “net earnings from self-employment” for purposes of the self-employment tax. sirote.com 6 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  7. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Dividends on shares of stock issued by a corporation are specifically excluded from the definition of net earnings from self-employment. Section 1402(a)(2). sirote.com 7 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  8. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Rev. Rul. 59-221, 1959-1 CB 225. S corporation’s income does not constitute net earnings from self-employment for purposes of the tax on self-employment income. sirote.com 8 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  9. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Consequently, neither a shareholder’s distributive share of income passed through from the S corporation under Section 1366 nor any S corporation distributions actually received by the shareholder from the S corporation constitute net earnings from self-employment. sirote.com 9 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  10. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Because wages paid to shareholder-employees of S corporations are subject to Social Security taxes while S corporation distributions are not, shareholder-employees have an opportunity for significant tax savings by withdrawing funds from the S corporation in the form of distributions rather than wages. sirote.com 10 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  11. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Where an S corporation has both employees who are shareholders and employees who are not shareholders, the increase in the amount of distributions received by the shareholders who are employees will be less than the amount by which their wages were reduced (since distributions must also be made to the shareholders who are not employees). sirote.com 11 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  12. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Additionally, a program that minimizes the amount of wages paid to shareholder-employees will increase • purchase price formulas based on earnings; • bonus formulas for employees who are not shareholders of the S corporation that are based on earnings. sirote.com 12 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  13. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Decreasing the amount of wages paid to shareholder-employees of S corporations also will reduce the contribution base for contributions to the corporation’s qualified plans. sirote.com 13 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  14. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Recharacterization of Distributions as Wages. • Rev. Rul. 74-44, 1974-1 CB 287. • Rev. Rul. 71-86, 1971-1 CB 285. • Rev. Rul. 73-361, 1973-2 CB 331. • PLR 7949022. sirote.com 14 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  15. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Radtke v. U.S., 895 F.2d 1196 (7th Cir. 1990). • Spicer Accounting, Inc. v. U.S., 918 F.2d 80 (9th Cir. 1990). • C.D. Ulrich v. U.S., 692 F. Supp. 1053 (D. Minn. 1988). sirote.com 15 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  16. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Veterinary Surgical Consultants, P.C. v. Comm’r, 117 TC 14 (2001) • Van Campand Brennion v. U.S., 251 F.3d 862 (9th Cir. 2001) • Old Raleigh Realty Corp. v. Comm’r, TC Summ. Op. 2002-61 • Donald G. Cave, A Professional Law Corp. v. Commissioner - F 3d - (5th Cir. 2012) • David E. Watson, P.C. v. U.S.. 668 F.3d 1008 8th Cir. (2012), aff'g 757 F. Supp. ... 2d 877 (S. D. Iowa 2010) • Herbert v. Comm’r, T.C. Summ. Op. 2012-124 • Sean McAlary Ltd. Inc. v. Comm’r, T.C. Summ. Op. 2013-62 sirote.com 16 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  17. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Treasury Inspector General for Tax Administration, “The Internal Revenue Service Does Not Always Address Subchapter S Corporation Officer Compensation During Examinations,” Reference No. 2002-30-125 (July 5, 2002). sirote.com 17 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  18. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • In non-abusive situations, the IRS may have difficulty in successfully asserting that distributions made by S corporations to shareholder-employees should be recharacterized as wages subject to Social Security taxes. sirote.com 18 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  19. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Limitation of Social Security Taxes • Lack of express authority for its position (unlike the express authority granted to the IRS under Section 1366(e) to recharacterize dividend distributions as wages in the family context); • Reluctance of the courts to recharacterize distributions as wages; and • Uncertainty surrounding the utilization of Section 162(a)(1) by the IRS in the employment context to bring salaries up to a reasonable level. sirote.com 19 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  20. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • The self-employment tax is the same as the total rate for the employers’ and employees’ FICA tax (2.9% HI tax rate and 12.4% OASDI tax rate). • For 2013, the maximum amount of self-employment income subject to the OASDI portion of the SECA tax is $113,700. sirote.com 20 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  21. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • “Net earnings from self-employment” includes: • net income from a sole proprietorship; and • the individual’s distributive share of income or loss from any trade or business carried on by a partnership of which he is a partner. sirote.com 21 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  22. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • There are several exceptions to the definition of “net earnings from self-employment,” including the following: • Rentals. • Dividends and Interest. • Gain or Loss. • Limited Partners. sirote.com 22 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  23. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • The application of the SECA tax to members of a limited liability company is problematic. The latest version of the proposed regulations were published in the Federal Register on January 13, 1997 (62 Fed. Reg. 1702 January 13, 1997). sirote.com 23 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  24. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • As a result of the controversy created by the proposed SECA tax regulations, the Taxpayer Relief Act of 1997, Pub. L. No. 105-34 Section 935 (1997), prohibits the issuance or effectiveness of temporary or final regulations with respect to the definition of a limited partner under Section 1402(a)(13) prior to July 1998. sirote.com 24 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  25. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • Prop. Reg. §1.1402-2(h) defines a “limited partner” for purposes of SECA taxes as an individual holding an interest in an entity classified as a federal tax partnership unless one of the following applies: • The individual has personal liability for the debt of or claims against the partnership by reason of being a partner. sirote.com 25 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  26. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • The individual has authority under the law of the jurisdiction in which the partnership is formed to contract on behalf of the partnership. • The individual participates in the partnership’s trade or business for more than 500 hours during the partnership’s tax year. sirote.com 26 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  27. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • Additionally, there are three exceptions to the general rule set forth in Prop. Reg. §1.1402-2(h), as follows: • Under the first exception, an individual who holds more than one class of interest in a partnership and who is not a limited partner under the general definition, may still be treated as a limited partner with respect to a specific class of interest. sirote.com 27 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  28. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • The second exception applies to an individual who holds only one class of interest and who cannot meet the general definition of limited partner because he or she participates in the partnership’s trade or business for more than 500 hours during the partnership’s tax year. sirote.com 28 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  29. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • The third exception applies to a service partner in a service partnership and provides that regardless of whether the individual can satisfy the general definition of a limited partner under one of the above-described exceptions, that individual may not be treated as a limited partner. sirote.com 29 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  30. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Partnerships and Limited Liability Companies • A partnership is a service partnership if substantially all of its activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting. • A service partner is a partner who provides services to or on behalf of the service partnership’s trade or business unless that individual’s services are de minimis. sirote.com 30 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  31. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Medicare Contribution Tax and Additional HI Tax • As a result of the Patient Protection and Affordable Care Act, the Medicare tax base for higher income taxpayers was expanded by the addition of two new taxes, which become effective in 2013. • First, a new Medicare Contribution Tax (the “MCT”) of 3.8% is imposed on the “unearned income” of certain individuals, estates and trusts, in an effort to agument and mirror the Medicare hospital insurance Tax under FICA and SECA which traditionally only applied to wages and net income from self-employment. However, the MTC will apply in 2013 to the lesser of (1) net investment income, or (2) the excess of modified adjusted gross income over a threshold amount. sirote.com 31 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  32. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Medicare Contribution Tax and Additional HI Tax • Second, also effective in 2013, an additional .9% hospital insurance tax (“HI Tax”) will be imposed on wages in excess of $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for all others (single or head of household), and an additional HI Tax will be imposed on an individual’s net earnings from self-employment in excess of the same threshold amounts. sirote.com 32 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  33. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Medicare Contribution Tax and Additional HI Tax • For the purposes of the MCT, “net investment Income” is defined as the excess of the sum of the following items, reduced by deductions properly allocable thereto: • Gross income from interest, dividends, annuities, royalties, and rents, other than income derived in the ordinary course of business that is not derived from either a passive activity as defined in Section 469 or from a trade or business of trading financial instruments or commodities (as defined in Section 475(e)(1)(B). sirote.com 33 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  34. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Medicare Contribution Tax and Additional HI Tax • Other gross income derived from a trade or business of trading financial instruments or commodities, and • Net gain (to the extent taken into account) attributable to the disposition of property other than property held in a trade or business to which the tax does not apply. sirote.com 34 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  35. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Employment Taxes • Medicare Contribution Tax and Additional HI Tax • The MCT is inapplicable to active trade or business activities conducted by sole proprietorships, partnerships and S Corporations, but income from active business activities (non-passive) is included in Net Earnings from Self Employment for non-S corporations and is therefore subject to the additional .9% HI Tax. • While planning in general to minimize the MCT and the HI Tax is needed and fact specific, S corporation status will impact a taxpayer’s planning for such taxes similarly to the way S Corporation status impacts planning for the SE Tax and employment taxes. sirote.com 35 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  36. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Tax-Free Reorganizations are Limited to Corporations • By complying with the reorganization provisions prescribed under Section 368(a), owners of an S corporation can effectively “sell” their S corporation to another corporation and receive stock in that corporation, including preferred stock, without incurring any federal income tax. sirote.com 36 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  37. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • In contrast, a similar transaction undertaken by a partnership would result in a taxable transaction. • Incorporation of the Partnership. A possible way to address the “corporate” requirements of Section 368 is to incorporate the partnership. See Rev. Rul. 84-111, 1984-2 CB 88 (which addresses three different forms for incorporating a partnership). sirote.com 37 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  38. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • Transfer by partnership of its assets and liabilities to corporation in exchange for stock of corporation followed by liquidation of partnership and distribution of stock to partners; sirote.com 38 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  39. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • liquidation of partnership followed by transfer by partners of assets and liabilities received from liquidating partnership to corporation in exchange for stock of corporation; and sirote.com 39 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  40. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • transfer by partners of their partnership interests to corporation in exchange for stock of corporation with partnership terminating upon transfer. sirote.com 40 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  41. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • Rev. Rul. 2004-59, 2004-24 IRC 1050. • Reg. §301.7701-3(g)(1)(i). sirote.com 41 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  42. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • Liabilities in Excess of Basis. Under Section 357(c), if the partnership’s liabilities exceed the aggregate basis of the transferred assets, the transferor recognizes gain equal to the amount of such excess. sirote.com 42 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  43. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Reorganization Provisions • Partnerships Not Eligible for Tax-Free Reorganization Treatment • Step-Transaction (Comm’r v. Court Holding Co., 324 U.S. 331 (1945). • Rev. Rul. 70-140, 1970-1 CB 73. • See also West Coast Marketing Corp. v. Comm’r, 46 TC 32 (1966). sirote.com 43 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  44. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Cancellation of Debt/Insolvency • In General • In many cases involving a financially distressed entity, the tax consequences to an owner of an S corporation may be more favorable than that of an owner of a partnership. sirote.com 44 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  45. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Cancellation of Debt/Insolvency • S Corporations • Under Section 108(d)(7), subsections (a) (exclusion from gross income), (b) (reduction of tax attributes), (c) treatment of discharge of qualified real property business indebtedness and (g) qualified farm indebtedness, of Section 108 are applied at the corporate level. sirote.com 45 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  46. Use of State Law LLCs as S Corporations • Tax Advantages of Operating as an S Corporation versus Partnership for Federal Tax Purposes • Cancellation of Debt/Insolvency • Partnerships • Under Section 108(d)(6), subsections (a), (b), (c) and (g) of Section 108 are applied at the partner level. See Merkel v. Comm’r, 192 F.3d 844 (9th Cir. 1999). sirote.com 46 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  47. Use of State Law LLCs as S Corporations • Non-Tax Advantages of Operating as an LLC Rather than a Corporation for State Law Purposes • Liability Protection (Charging Orders, etc.) • Limited Liability to Members • By statute, members, managers and managing members of an LLC are generally not liable for the debts, obligations or liabilities of the LLC. See e.g., Fl. Stat. §608.4227(1). • The liabilities of a member, manager or managing member of an LLC may be expanded through the Operating Agreement or the Articles of Organization. (See e.g., Fl. Stat. §608.4227(3).) sirote.com 47 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  48. Use of State Law LLCs as S Corporations • Non-Tax Advantages of Operating as an LLC Rather than a Corporation for State Law Purposes • Liability Protection (Charging Orders, etc.) • Limited Liability to Members • A manager or managing member can also be held liable for improper distributions made to the members and for transactions in which the manager or managing member obtains an improper personal benefit. (See e.g., Fl. Stat. §§608.4228 and 608.426.) sirote.com 48 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  49. Use of State Law LLCs as S Corporations • Non-Tax Advantages of Operating as an LLC Rather than a Corporation for State Law Purposes • Liability Protection (Charging Orders, etc.) • Limited Liability to Members • An LLC generally provides the same asset protection to its members for liabilities of the LLC as a corporation offers to its shareholders for liabilities of the corporation. • Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114 (Fla. 1984). The corporate veil could not be pierced without a showing of fraud or an improper purpose. sirote.com 49 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

  50. Use of State Law LLCs as S Corporations • Non-Tax Advantages of Operating as an LLC Rather than a Corporation for State Law Purposes • Liability Protection (Charging Orders, etc.) • Limited Liability to Members • The fact that LLCs are generally subject to less formalities than corporations could either make it easier or harder for a creditor to pierce the LLC veil. sirote.com 50 Birmingham Huntsville Mobile Fort Lauderdale Pensacola bsklar@sirote.com / rlevitt@sirote.com

More Related