Introduction To Partnerships And LLCs 1-4. Tax Impact of California Revised LLC Act

Transcription

1 Introduction To Partnerships And LLCs 1-4 Tax Impact of California Revised LLC Act 2

2 Default Rule For Sales : Unanimous consent is required for the sale or lease of all, or substantially all, of the LLC's property outside the ordinary course of the LLC's activities. The default rule can be overriden with a written agreement Default Rule for Member-Managed LLC: An LLC is member-managed unless: both the articles of organization and operating agreement provide otherwise.

3 The articles AND the operating agreement can override and declare that the entity is manager managed. SE Tax implications Entities Taxed Like a Partnership 1-5

4 General Partnership (GP) G Ptr Unlimited G Ptr Unlimited AB GP Partnership (LP) G Ptr Unlimited L Ptr AB LP

5 Partnership (LLP) Ltd. Except Malpractice AB LLP Architecture Ltd. Except Malpractice Company (LLC) Over of All Partnerships AB LLC

6 S Corporation AB S Corp. G Ptr with LP G Ptr SMLLC Unlimited L Ptr AB LP

7 G Ptr With SMLLC/GP G Ptr SMLLC L Ptr AB LP G Ptr 100% GP Ptr S Corp. AB LP L Ptr

8 Partnership (L3P) G Ptr Ltd. in some states LP Ltd. AB L3P L3P In California G Ptr SMLLC Unlimited L Ptr AB L3P

9 G Ptr G Ptr SMLLC L Ptr AB L3P Series Company (SLLC) Series LLC

10 State of California attributes of each of these entities: FTB Publication Partnership vs. Tenants in Common

11 TIC Rev. Proc No More than 35 Persons The co-owners must retain the right to approve: the hiring of a manager, sale of the property lease of the property *** Ann Carrino, T.C. Memo (February 25, 2014)

12 In 2002, she separated from H, but the partnership was funded with community funds. In 2003, they remained married and filed MFS. Holding: Whether or not Ann was considered a partner in 2003, she had income from the partnership in that year based on her community property interest in H s partnership interest (IRC sec. 66).

13 The Tax Court noted Ann's failure to argue for innocent-spouse relief in IRC sec. 66 on MFS returns. Innocent spouse relief in IRC sec. 66 is not available to California RDPs (unmarried) per IRS website Q&As What about employment tax on her half of the community income? IRC sec. 1402(a)(5)(B) pushes 100% of community property income, for spouses, to the partner H. If Ann is also a partner, then 50/50.

14 1-28 IRS website FAQ declares that IRC sec. 1402(a)(5) does not apply to non-spouse RDPs. Investment Service Partners' LLC Income Subject to Self-Employment Tax CCM (Sept 5, 2014) 28

15 A B LLC (originally an S Corp) Fees GP Mgt LP LP Services LP LP LP LP LP Trading/ Investing Funds -- LPs The partners were paid W-2 wages which were arguably reasonable compensation. The K-1s did NOT characterize the partners distributive share as SE income. 30

16 Renkemeyer and Reither: The partners, service partners, are not limited partners; therefore, they are subject to SE tax 31 Reither cited Rev. Rul for the rule that partners are not employees of the partnership" for SE purposes. 32

17 1-32 Appendix A Links to All Partnership Tax IRC Sections and Related Treasury Regulations 1-32 IRC Section and Title 701. Partners, not partnership, subject to tax 702. Income and credits of partner Regulation Section Regulation Heading Partners, not partnership, subject to tax Anti-abuse rule Income and credits of partner Net operating loss deduction of partner t 4-Year spread (temporary).