• Selected
• Entire List

Abstract:
It is increasingly common for the older generation to form family limited liability entities (FLLEs), which are usually either limited partnerships or limited liability companies. The older generation then gifts the FLLE interests to the younger generation and/or leaves them to the younger generation as part of its estate. For estate or gift tax purposes, substantial valuation discounts are taken off what would be the proportional value of the underlying assets. These valuation discounts are commonly taken because the relevant FLLE interests lack control and are usually not as readily marketable as the underlying assets would have been. Discounts of 35% or greater are not unusual.

If unqualifiedly allowed, this technique would be an estate tax bonanza. With a bit of slight of hand, the value of an estate could be dramatically reduced with perhaps little change in the underlying beneficial ownership or use of the assets. Tax advisors and their clients love it. The Service does not. The Tax Court has taken a tough line, usually applying I.R.C. - 2036 to ignore the FLLE and include the assets contributed to the FLLE in the decedent's estate. The 3rd and 5th Circuits (and to a much lesser extent the 1st Circuit) have had something to say on the subject as well. They have not been particularly taxpayer-friendly either. The article discusses and analyzes the relevant case law and makes recommendations for reform.

family limitied liability entities, FLLEs, limited partnerships, limited liability companies, estate taxes, gift taxes, Internal Revenue Code, taxation

Abstract:
With the economy slowly recovering from recession, the restructuring and discharge of partnership debt continue to generate important tax questions. US versus Kirby Lumber Co. (1931), which established the principle that income is realized to the extent a debt is discharged without payment, has been routinely cited for the proposition that cancellation of indebtedness income (COD) must be recognized because the debt relief frees assets of the taxpayer for other uses. The Kirby holding was codified as section 61(a)(12) of the Internal Revenue Code, and exceptions to COD found in section 108 were overhauled with the Bankruptcy Tax Act of 1980. The Code quite properly makes a partnership insolvency calculation at the partner level, giving the partners ultimate responsibility for partnership debt to the extent of personal liability. On the other hand, the exception to COD for purchase price adjustments improperly looks to the partnership entity when calculating insolvency, often yielding inconsistent results.

partnership debt, partnership taxation, U.S. v. Kirby Lumber, Bankruptcy Tax Act of 1980, COD, partnership insolvency

Abstract:
The partnership allocation regulations under Section 704(b) are discussed and analyzed. These regulations provide rules under which a partnership may allocate items of income and deduction among its partners. The regulations are divided into 2 parts: 1. the substantial economic effect rules, which address allocations attributable to equity investments and recourse borrowings, and 2. the rules for allocating nonrecourse deductions, or allocations attributable to nonrecourse debt. The rules that provide for the allocation of partnership nonrecourse deductions and a host of others can be traced to a single source, the Supreme Court's decision in Crane v. Commissioner (1947), which permits nonrecourse debt used to acquire or improve property to be included in the basis of that property. The Crane decision has generated a plethora of rules designed to prevent abuses and attempt to make for a coherent system, all of which has dug a very deep hole. The answer is not to tinker with the code and regulations in the hope of making them more rational, but to throw in the towel, legislatively overrule Crane, and no longer permit nonrecourse debt to be included in basis.

partnership allocation regulations, substantial economic effect rules, nonrecourse deductions rules, Crane v. Commissioner, taxation

Abstract:
S corporations were once the entity of choice for small businesses, and sometimes for larger ones as well. Today, however, new partnership-type vehicles, specifically the limited liability company (LLC) and the limited liability partnership (LLP), have now come into their own. Attempting to make the S corporation a more competitive vehicle, the temporarily moribund S Corporation Reform Act of 1995 offered a number of helpful changes to subchapter S. The proposed changes would likely benefit few S corporation owners, however. The S corporation has served businesses well, but its time has passed. Poorly informed taxpayers might resort to the S corporation form when the LLC would better serve their purposes. The legal system, the goals of simplification, and the needs of the vast majority of taxpayers would be well served by the repeal of subchapter S.

S Corporations, small businesses, limited liability company, LLC, limited liability partnership, LLP

Abstract:
Family limited partnerships have been popular gift and estate tax planning vehicles for many years. In recent years, family limited liability companies (LLCs) have also become common, particularly in those states that have updated their statutes to take the check-the-box regulations into account. LLCs with more than one member are usually classified as partnerships for federal income tax purposes. In a typical structure, when there is adequate planning, the donors form a limited partnership or an LLC (jointly, 'family limited liability entity' or FLLE), to which they contribute assets expected to appreciate in value. This article will focus on such use of FLLEs as found in the Strangi case and offer proposals for reform.

family limited partnerships, estate tax planning, LLCs, limited liability companies, family limited liability entity, FLLE, Strangi

Abstract:
The article compares how the U.S. and Germany tax domestic corporations. Some of the differences between the systems are striking. For example, unlike in the U.S., financial accounting rules form the basis of German business taxation, and corporate income is calculated by comparing a corporation's net worth in the current year with the prior year (with many adjustments). Among the issues contrasted in the article are German corporate rates, corporate formation, taxation of dividends, reorganizations, capital gains and loss, and liquidations.

It is useful to see how another country's tax system can thrive using a model that at times is very different from our own. As we consider ways of reforming and improving our tax system, we may often benefit from learning how other countries approach raising revenue. They may have ideas that we, perhaps habituated to seeing things from a particular perspective, may not have considered. Indeed, the German system has lessons to teach us (and to be fair, we it). In some areas the German system is laudably simpler than our own. On the other hand, like the American system, at times it too suffers from excess complexity.

United States, Germany, taxation, corporations, financial accounting rules, taxation of dividends, capital gains, capital losses, liquidations, reorganizations

Abstract:
It has become increasingly common for partnerships to issue options that give the holder the right to acquire an interest in the partnership for a set price. The holder of the option will exercise it if he feels that the partnership interest to be acquired is worth more than the exercise price. There is a dearth of authority on the federal tax treatment of option transactions, and the Service has recently asked for guidance from the tax bar as to what approach it should take. This article focuses on one piece of the partnership option puzzle, options to acquire partnership interests where the option is received in exchange for services (services option). While the term "partnership" is used through the article, the reader is asked to recall that for federal income tax purposes, it normally includes limited liability companies provided they have more than one member.

partnerships, options, federal tax treatment, IRS, Internal Revenue Service, services option, limited liability companies

Abstract:
As part of the Tax Reform Act of 1986, Congress enacted Section 469 of the Internal Revenue Code, the passive loss rules. These rules are part of a largely successful effort by Congress to eliminate the incentive to invest in tax shelters. The regulations promulgated by the Internal Revenue Service (IRS) are amazingly complex and well beyond anything contemplated by Congress. Instead of focusing on passive losses, the IRS seems to be trying to prevent taxpayers from earning passive income. Since the activity regulations conflict with the legislative history in many areas, it is an open question whether the regulations are valid notwithstanding Congress' broad delegation of regulatory authority. Even if a court rules that portions of the regulations are invalid, other portions could be upheld. Choosing which regulations will survive and which will not, and in what manner, is too hazardous an undertaking on which to embark. Furthermore, the regulations constitute the only detailed guidance available.

Tax Reform Act of 1986, passive loss rules, passive income, legislative history, taxation, IRS, Internal Revenue Service

Abstract:
It has become increasingly common for partnerships to issue options. There is a dearth of authority on the federal tax treatment of options to acquire interests in partnerships. In this context, there are two main categories of options, services options and noncompensatory options. Services options, unsurprisingly, are options to acquire partnership interests where the option is received in exchange for services. Noncompensatory options cover the rest of the waterfront. The simplest version of the latter would be partnership analog to normal options found outside the partnership context: the option holder pays the partnership an option premium to acquire an option to purchase a partnership interest sometime in the future for a fixed price. A previous article by this author discussed services options (Walter D. Schwidetzky, Options to Acquire Partnership Interests, Can the Tax Law Keep Pace? 20(2) Journal of Investment Taxation 99 (Winter 2003)), and this article serves as a companion piece, focusing primarily on the recently issued proposed regulations on the tax treatment of noncompensatory options. The article will describe and analyze the proposed regulations and offer alternatives.

partnerships, noncompensatory options, services options, regulations, taxation

Abstract:
The Code contains two “pass-through” tax regimes for business entities. One is contained in Subchapter K, which applies to partnerships, the other in Subchapter S, which, unsurprisingly, applies to S corporations. In the main, both Subchapters tax the owners of the entities rather than the entities themselves. Having two pass-through tax regimes creates obvious administrative and other inefficiencies. There was a time when S corporations served a valuable purpose, particularly when taxpayers needed a fairly simple and foolproof pass-through entity that provided a liability shield. But limited liability companies (LL Cs), which are usually taxed as partnerships, 1 in most contexts make S corporations obsolete. LL Cs too can be fairly simple and foolproof, while providing the superior tax benefits of the partnership provisions of Subchapter K.2 The advent and popularity of LL Cs means that the inefficiency created by two separate pass-through tax regimes can no longer be justified. I propose that a new pass-through regime be created that retains Subchapter K and incorporates the best parts of Subchapter S, with the balance of Subchapter S repealed. Integrating these two pass-through regimes requires that some changes be made to the C corporation provisions of Subchapter C as well. I also make Subchapter K available to most nonpublic C corporations, putting most closely held businesses on a level playing field.

Part II of the Article discusses the tax entity selection process generally, as well as the basics of the taxation of C corporations, S corporations, and partnerships. Part III explores the tax advantages and disadvantages of partnerships and S corporations. Part IV looks at the data on the relative popularity of the major business entities and provides a possible explanation for the continued popularity of S corporations. Part V discusses H.R. 4137, a bill that was ahead of its time (and not unflawed). Part VI asks whether we should repeal Subchapter K instead. Part VII recommends that nonpublic corporations also be allowed to elect Subchapter K. Part VIII proposes taxpayer-friendly methods for getting to my version of the promised land, and Part IX gives a brief conclusion.

business entities, Subchaper K, Subchapter S, partnerships, S corporations, taxation, LLC's, limited liability companies, closely held businesses, H.R. 4137