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Monday, April 25, 2016

Tennessee Series LLC Basics: Liability Separation with a Single Entity

What is a “Series LLC”?  It's a limited liability company that has elected to allow the creation of separate series.  According to the statute:
  • Notwithstanding anything to the contrary set forth in this chapter, or under other applicable law, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing, with respect to a particular series established . . . shall be enforceable against the assets of such series only, and not against the assets of the LLC generally, or any other series of the LLC . . .
T.C.A. § 48-249-309.  This broad provision allows for the segregation of liabilities into each series, without having to form separate LLCs. As stated above, the segregation is allowed notwithstanding other provisions of the Revised Limited Liability Company act, and it's even allowed regardless of other applicable law.
The main attraction of a Series LLC is this: separation of liability using only one entity and paying only one annual fee.  This easily creates and dissolves “series” without having to create new companies.
Although there are requirements as to how to establish a series, none of those requirements include having to file again with the Secretary of State. Thus, the ultimate benefit to utilizing a Series LLC is that it allows a business entity to form separate ‘‘series’’ between which an internal liability shield can be established.  It also minimizes legal, regulatory, accounting, transfer and recordation fees that might otherwise result when forming a new LLC or transferring assets between or among two or more LLCs.  Accordingly, the benefit of the use of a Series LLC in the context of real estate transactions is that it will allow an owner to segregate liabilities among its various properties.
Until 2013 there was some uncertainty as to Tennessee franchise and excise taxes, but this was resolved with guidance issued in 2013, which essentially treats each series separately for franchise and excise tax purposes. Significantly, this will allow each series to apply for the Family Owned Non-Corporate Entity exception if applicable residential real estate is held by a series and thereby avoid the franchise and excise tax.  This makes this structure ideal for someone holding a number of residential real estate properties.  The specific requirements of this exception are outside the scope of this update, but should be explored for family owned residential rental property.
What are the downsides?  Series LLC may not be a great choice if the LLC is going to have business in states (or countries) that do not explicitly recognize Series LLCs, since there would be too much uncertainty of law.  Another downside is that the Tennessee law, unlike Delaware’s Series LLC act, does not specifically state that each series can in and of itself hold real estate, so some title insurance companies will not insure property held that way.  A possible workaround is to hold the property in the name of the LLC but on behalf of a series, since the Tennessee Series LLC law allows the “LLC documents” to establish separate series with “specified property or obligations of the LLC”.  If certainty of law is of particular concern, one might consider using Delaware’s law, or simply using separate LLCs.  However, for many deals the Tennessee Series LLC will be better than simply holding everything in one LLC, when separate LLCs are not practical or economical.  
What are the requirements for the Series LLC? In addition to the notice requirement in the articles of organization filed with the Secretary of State and the requirements that the LLC documents establish a series, the LLC member also must make sure that:
  1. “Separate and distinct records are maintained for any such series”, and
  2. “the assets associated with any such series are reflected and held in such separate and distinct records, directly or indirectly, including through a nominee or otherwise”, and
  3.  the assets are accounted for in “separate and distinct records separately from the other assets of the LLC and the assets of any other series of the LLC”.  
Therefore, a Series LLC is only appropriate for a person willing to keep the proper records. 

Co-authored with J. David Wicker

Monday, March 28, 2016

Reporting Foreign Income: Eight Tax Tips from the IRS

Reporting Foreign Income: Eight Tax Tips from the IRS

https://content.govdelivery.com/accounts/USIRS/bulletins/13f2f30?reqfrom=share

Tuesday, March 22, 2016

Succession Planning for an International Business Upcoming Event

Our next meeting for Chattanooga Succession Planning Professionals will be at 8am to 8:50am on May 19, 2016 at Olsen Law Firm.  This event will be at Olsen Law Firm's brand new office in the James Building, 735 Broad St #708, Chattanooga, TN 37402

Terry Olsen will be speaking on "Succession Planning for an International Business".  In this presentation Terry will discuss the steps he has taken to help a new generation open a branch of a family business in the US as part of their plans for succession, modernization, and expansion in to the United States.  Included in this presentation will be actual case studies and warnings regarding traps for the unwary, particularly with increased and unpredictable regulation.  Special focus will be on how immigration issues control financial, tax, banking, and business law issues, and the penalties for failures to comply.

Please RSVP to mgoode5407@me.com and let me know if you will attend.

If anyone who like to host/present for a meeting, please let me know.


https://www.facebook.com/events/1145790955454414/

Monday, March 14, 2016

What to Do with an Estate with Foreign Assets (Even that “Little” Bank Account in Europe)

This article regards estates of decedents who owned foreign assets and the tax and reporting requirements.  Many people are quite shocked to learn about the reporting requirements for foreign bank accounts, in particular.  After all, tax is typically being paid in the foreign jurisdiction, or perhaps the foreign bank accounts generate little to no income that is taxable anyway.  There are, however, two categories to be concerned with, first, of course is taxation.  Second is reporting in and of itself.  How does this all relate to estates?  Well, if the estate has foreign assets and the proper reports are not made, then the personal representative of the estate could be liable.
One of the main reporting obligations is actually not an IRS form at all, it’s a treasury department Form FinCen 114, commonly called an FBAR (Foreign Bank Account Report). It’s part of the financial crime enforcement network, and if the foreign bank accounts in the aggregate exceed $10,000 at any point during the year (even very briefly) then this report must be electronically filed.  The penalties for failure to file can be quite draconian, including willful penalties of 50% or more of what is not reported.  Again, note that this filing has nothing to do with the amount of tax owed, if any.  If a person has signature authority of foreign financial accounts then there can also be a reporting requirement, even if there is no financial interest in the account.  As such, one should be careful about the accounts that a person has signature authority over.  Similarly, one should be careful about having a power of attorney over one’s parents who have a foreign account, as there could be a reporting requirement.
As for tax reporting, several years ago an act of Congress commonly called FATCA added Form 8938, Statement of Specified Foreign Financial Assets.  It is very important that this form is filed, since the statute of limitations never runs if it is not – meaning that there could be a potential tax problem forever.  The IRS recently released regulations requiring this form to be filed by certain domestic entities as well.
Foreign mutual funds held in an estate of a United States citizen or resident are particularly problematic. A United States citizen or resident should never own foreign mutual funds due to the extensive reporting under Form 8621, PFIC shareholder filings and the often very unfavorable tax treatment and the difficulties in obtaining information from often very reluctant foreign financial institutions (FATCA and PFICs are two of the main reasons it’s often hard for United States citizens and residents to open accounts overseas). Although there may be some elections available to alleviate some of the tax burden, foreign financial companies often refuse to supply the needed information.
Of course, some will wonder how the IRS would ever know about these accounts.  Well, FATCA requires foreign financial institutions to identify and report US holders of non-US financial accounts.  The US already has agreements with most countries for this reporting.
The major forms to be concerned with are set forth in the list below.  This is not an exhaustive list and not every form is needed in every circumstance.  The form number is listed with its title in parenthesis:
  • FinCen 114 (Foreign Bank Account Report),
  • Form 926 (Transfers to Foreign Corporations),
  • Form 1042 (Payments to Foreign Taxpayers),
  • Form 3520, 3520A (Foreign Trusts),
  • Form 5471 (US Owned Foreign Companies),
  • Form 5472 (Foreign Owned US Companies),
  • Form 8233 (Independent Personal Services by Nonresident),
  • Form 8621 (Passive Foreign Investment Corporations),
  • Form 8833 (Treaty Based Disclosure Form),
  • Form 8840 (Closer Connections Form),
  • Form 8858 (Foreign Disregarded Entities),
  • Form 8865 (Foreign Partnerships),
  • Form 8938 (Specified Foreign Financial Assets),
  • Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding).
Now, back to the subject of personal representative liability.  Pursuant to Title 31 U.S.C.§3713(b) any personal representative who pays “any part of a debt of the . . . estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.” Therefore, the personal representative may be liable for taxes, interest and penalties if the distribution leaves the estate unable to pay the government and the personal representative had notice of the government’s claim.  In terms of notice “the executor must have knowledge of the debt owed by the estate to the United States or notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.” United States v. Coppola, 85 F.3d 1015, 1020 (2d Cir.1996). Therefore, there is a duty of inquiry regarding the existence of these obligations, and as such important that the proper reporting is done and taxes paid.
The good news, however, is that much of the reporting, aside from the PFIC reporting of course, is actually not very difficult.  Moreover, there are generally tax credits that can be used due to foreign tax paid, meaning that the US tax liability is often quite small.  If there are past years that have not been reported, the government currently offers several different programs to settle the tax and reporting obligations for reduced penalties (provided that a person comes forward prior to receiving IRS notice).  Considering the severity of the penalties, proper reporting is obviously very advisable.

Monday, February 15, 2016

Estate Planning With Partnerships: Important New Considerations

Two recent acts of Congress (including the rather interestingly named Protection of Americans from Tax Hikes Act) created new audit rules for partnerships.  Normally one would not think that a change to “audit rules” would impact estate planning.  However, many estates have LLCs taxed as partnerships, or even limited partnerships or limited liability partnerships, which are used as family limited partnerships in order to obtain valuation discounts through lack of control and lack of marketability (provided that all of the proper procedures and documentation is followed).  Moreover, many estates have revocable trusts that own limited liability companies, which is a common way to avoid the often lengthy process of probate for business assets.  Again, these techniques are quite common.
So what are the new audit rules, and how do they impact estate planning?  Briefly, starting in 2018 the new audit rules allow for a partnership level determination of deficiencies if the partnership is audited as the default regime.  The problem with this determination is that if there are different partners currently than the year under audit, then the current partners could end up being liable for the past deficiency.  There also can be issues with allocation, since the IRS won’t undo erroneous allocation and will simply assess the net increase against the partnership.  Another problem is that this deficiency will be assessed at the highest tax rates.  The tax matters partner is no longer, and instead there is a partnership representative who does not even need to be a partner.  It will be important to select a partnership representative since the IRS gets to choose the representative if one is not selected.  Due to the possible negative consequences of the new laws, many partnerships will want to opt out (which will keep determinations at the partner level).  The issue is whether trustees that own partnership interests on behalf of trusts will be able to opt out.
The new audit rules allow opting out if there are less than 100 K-1s, and the “each of the partners of such partnership is an individual, a C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation[note that there are some additional rules for S Corps], or an estate of a deceased partner.”  Unfortunately the new code section does not mention trusts or trustees at all, so it is currently unclear as to whether partnership that have trusts as owners will be able to opt out.  I recently attended a tax conference, and the IRS representative on a panel there informally stated that there would likely be regulations regarding grantor trusts and the ability to opt out (the new audit rules do allow the IRS to prescribe similar rules for other partners not listed in the new code section).
What to do now?  For partnerships, family limited partnerships, limited partnerships, limited liability partnerships (and limited liability limited partnerships), as well as LLCs taxed as partnerships, that are currently being formed, it would be prudent to include some of the language from the new code in partnership and operating agreements in order to insure later that the entity is in compliance, in case the partners do not return to amend the agreements.  For existing partnerships, it makes more sense to wait to amend as more regulations are promulgated by the IRS.  Extra caution should be taken regarding trusts (particularly non-grantor trusts) as owners, since it is unclear how or if partnerships with trustee owners will be able to opt out.

Thursday, February 4, 2016

Do We Really Have to Change Every Operating Agreement? The New Partnership Audit Rules

The Bipartisan Budget Act of 2015 and the Protection of Americans for Tax Hikes Act of 2015 created new audit rules, which will in 2018 (unless for some generally ill-advised reason you want to opt in early) replace the current TEFRA regime.  The new default rule is that if a partnership (or an LLC, LP, etc. taxed as a partnership) is audited, there will be a partnership level determination, assessment and collection.  The problem with this default regime is what happens if you currently have different partners than who you had during the year being audited?  Also problematic is if certain allocations are challenged, the IRS will still assess the tax difference against the partnership (rather than simply undoing the allocations), which can create distortions. Notice comes solely to the partnership, and a partner individually cannot appeal.  The partnership only has 90 days from the date of final adjustment to appeal.  According to the new law, “imputed underpayments” will be determined “by netting all adjustments of items of income, gain, loss, or deduction and multiplying such net amount by the highest rate of tax in effect for the reviewed year.” (emphasis added).

What to do about the new audit regime?  Opt out! If you can….

If you elect out then the IRS has to pursue each separate partner.  However, you must have less than 100 K-1s (and if you have an S Corp member each shareholder is counted separately for purposes of this limit).  You also must have individuals, corporations, or estates of deceased partners as members.  A partnership that has a partnership (or an LLC taxed as a partnership) as a member (i.e. an upper tier partnership) cannot opt out.  It is unclear as to how trustees will be treated, although informally it has been suggested at a recent ABA tax conference that the IRS might deal with this issue through regulations.

We will also have to say goodbye to the tax matters partner.  There is now a Partnership Representative.  Unlike the tax matters partner, this person can be a non-partner and nonresident (but must have substantial US presence).  Interestingly enough, this flexibility might not actually be a good thing.  If a Partnership Representative has not been appointed, then the IRS can appoint one.  It is an open question as to whether the IRS would use this flexibility to appoint a non-partner who is favorable to the IRS.

So, in light of all of this, should current operating agreements be amended?  At this point, in many cases it might be better to wait for a bit more guidance.  However, for current deals, it would seem quite prudent to incorporate very flexible language that can take into account these new rules, especially since these rules can alter the economics of a deal, particularly between current and former partners.  Moreover, extra thought should be given as to which types of partners may join the partnership.

Monday, July 20, 2015

Minor Children and IRA/401Ks Beneficiary Designations: Dangers and Concerns

As a parent, one of the most difficult issues that I have had to deal with is what would happen to our young child should anything happen to my wife and I.  No one likes to contemplate their own mortality or the idea of not being there to watch their children grow up.  Unfortunately, mortality is inescapable, and proper planning is essential. Often people think that once they have their Will done everything will be settled. This is rarely the case.