ELLEN P. APRILL, Loyola Law School Los Angeles
Email: ellen.aprill@lls.edu
SANFORD HOLO, Musick Peeler & Garrett LLP
Email: s.holo@mpglaw.com

A small business seeking to start operations generally finds itself deciding among the following forms of operation: a sole proprietorship, a general partnership, a limited partnership, a limited liability company, a single member limited liability company, a Subchapter C corporation and a Subchapter S corporation. A wide variety of tax and non-tax considerations bears on this choice, including those related to long-term plans of the enterprise. This article gives an overview of these considerations, including key California concerns, and explains why limited liability companies have become the entity of choice for many small businesses.

HOWARD ABRAMS, Emory University - School of Law
Email: habrams@law.emory.edu

In this Article, three methods of exiting are partnership are examined. Each exit strategy offers significant tax advantages to the nonexiting partners. In two of the exit strategies, well-known defects in Subchapter K are exploited, and I conclude that the strategies cannot be attacked successfully by the government using either the detailed rules of Subchapter K or by resort to the partnership anti-abuse rules. However, the third of the exit strategies seeks to exploit language in a treasury regulation in a manner plainly not contemplated by the drafters and which yields a result inconsistent with the structure of subchapter K. I conclude that this exit strategy can be attacked successfully by the government. The two successful strategies show that in many cases the exit of a partner can be used to defer significant amounts of income.

PATRICIA A. CAIN, Santa Clara University - School of Law
Email: patricia-cain@uiowa.edu

On March 13, 2009, the Internal Revenue Service released Chief Counsel Advisory 200911007, concluding that unmarried co-owners of a residence were limited to mortgage interest deductions on $1 million of acquisition indebtedness. CCA 200911007 reasons that the $1 million limit should be applied per residence rather than per taxpayer. This article criticizes the IRS position.

LAWRENCE LOKKEN, University of Florida College of Law
Email: lokken@ufl.edu

U.S. shareholders of a controlled foreign corporation (CFC) are currently taxed by the United States on their ratable shares of the CFC's subpart F income, even if the CFC distributes none of its earnings to shareholders as dividends. The Treasury, in late 2008, revised its regulations on one category of subpart F income, foreign base company (FBC) sales income. The revisions address contract manufacturing arrangements, which U.S. multinationals often use in overseas production, at least sometimes with a purpose of avoiding the impact of the U.S. CFC rules. The revisions also restate some of the rules on branches of CFCs, which often operate in conjunction with the rules on contract manufacturing. This paper describes U.S. law on FBC sales income, after the regulation revisions. It is a draft of material that will be published in Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates & Gifts (Warren, Gorham & Lamont).

FRED B. BROWN, University of Baltimore - School of Law
Email: fbrown@ubalt.edu

Under section 351, a person transferring property to a controlled corporation generally recognizes no gain or loss on the transaction. An exception to tax-free treatment is contained in section 357(c), which generally provides that a transferor in a section 351 transaction recognizes gain to the extent that any liabilities assumed by the corporation on the transfer exceed the transferor's aggregate adjusted basis in the assets transferred. An issue under section 357(c) is whether the recognized gain should be capital gain or ordinary income. The statute suggests that the character of section 357(c) gain should be based on the character of the transferred assets, but this does not provide a clear answer when two or more assets of differing character are transferred to the corporation. The Treasury regulations prescribe a method for determining the character of section 357(c) gain that allocates the gain according to the relative fair market value of the transferred assets. However, a few U.S. Tax Court decisions have not followed this method, and several commentators have stated that the regulatory method is simply wrong; instead, these cases and commentators espouse an alternative method that determines the character of section 357(c) gain based on the relative amount of realized gain on the transferred assets.

This article analyzes the section 357(c) character issue and determines which of the competing methods and underlying constructs is more appropriate in light of the relevant tax rules and principles, and in particular those relating to nonrecognition. The article offers different ways of conceptualizing transfers to corporations in connection with the assumption of liabilities, each of which supports one of the competing methods for determining the character of section 357(c) gain. The relative fair market value allocation method is supported by an aggregate asset construct that combines the tax attributes of the transferred assets; the relative realized gain allocation method is supported by a modified separate assets construct that generally treats the transaction as transfers of separate assets. The article then evaluates the constructs and resulting methods, and determines that the modified separate assets construct and resulting relative realized gain allocation method is the more appropriate manner for determining the character of section 357(c) gain.