August 19, 2017 630-250-5700rcolombik@colombik.com

ADVANCED TAX ISSUES FOR LLC's

A.  Examination of the Check-the-Box Regulation

      Effective January 1, 1997, the IRS issued final regulations that implemented the entity classification system.  These “Check-the-Box” rules allow unincorporated organizations to elect to be treated as either corporations or partnerships for federal income tax purposes.  Certain business entities that are excluded from these rules are corporations organized under state statutes, foreign entities that resemble U.S. corporations, entities taxable as corporations under special Code provisions, and trusts.1

      An entity that does not elect a particular classification is classified under the default rules that state for federal tax purposes, non-corporate domestic organizations with more than one member are treated as partnerships, and single-member domestic entities are disregarded. 

      There are three steps that must be performed in order to determine if you qualify to choose your entity. 

1.   Identifying Separate Entities

      We must first determine if the organization is a separate entity.  The ?business entity? concept is the basis of the ?Check-the-Box? rules.  The federal tax law determines if the entity is separate from its owners for federal tax purposes and does not depend on the organization recognized as a separate entity under local law.2   “Business entity” is defined by the regulations as any entity recognized for federal tax purposes that is not classified as a trust or subject to special treatment under the Code.3 

Single-Owner Organizations

      Proprietorships

      A disregarded entity is a business entity that is not a corporation, has a single owner, and is disregarded as an entity separate from its owner.4  The check-the-box regulations allow a single owner to elect to be disregarded as an entity separate from its owner.  The disregarded entity may retain its entity status for state law purposes, but is disregarded for federal tax purposes.

      Community Property Entity

      The IRS has stated it will respect the taxpayers? choice of the entity as either a disregarded entity or a partnership in the case of a qualified entity owned exclusively by a husband and wife as community property.  This qualified entity is a business entity entirely owned by a husband and wife as community property under the law of a state, is not treated as a corporation, and one in which no other person would be considered an owner for tax purposes.5

      Partnerships

      The definition of a business entity other than a corporation is based on the number of members.  A “partnership” means it is a business entity with at least two members and is not a corporation.6

      Corporations

      An entity meeting the description in any of the following eight categories is classified as a corporation for federal tax purposes:7

      (1) a business entity organized under a federal or state statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic;

      (2) an association;

      (3) a business entity organized under a state statute, if the statute describes or refers to the entity as a joint-stock company or joint-stock association;8

      (4) an insurance company;9

      (5) a state-chartered business entity conducting banking activities, if any of its deposits are insured under the Federal Deposit Insurance Act or a similar federal statute;10

      (6) a business entity wholly owned by a state or any political subdivision thereof;

      (7) a business entity that is taxable as a corporation under a provision of the Code other than §7701(a)(3); or

      (8) a business entity formed in one of numerous designated foreign jurisdictions.

2.  Eligible Entities

      The second step is to determine whether the entity qualifies as an “eligible entity.”  Only the “eligible entity” may elect the federal tax classification it wishes.  The definition of an “eligible entity” is a business entity that is not classified as a corporation under Regs. §301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8).

Entity with Two or More Members

      An eligible entity having two or more members has the option of electing classification as either an association or a partnership.11

Single-Member Entity

      A single member eligible entity can elect to be classified as an corporation or as a disregarded entity separate from its owner.12  An entity electing to be disregarded, will be treated as a sole proprietorship.

Default Classification Rules

      An eligible entity will be classified under the default rules if it does not elect its desired entity classification.  Unless the ?eligible entity? elects otherwise, it will be classified as a disregarded entity if it has a single owner or a partnership if it has two or more members.13 

3.  Elections

      There are only two situations that require an eligible entity to file a classification election.14  The first situation is if the entity wishes to be classified differently than it would be under the default rules.  The second situation is if the entity wishes to change its classification.

Election Procedure

      In order to make a classification election, an eligible entity must file Form 8832, Entity Classification Election.15  A copy of Form 8832 must be attached to the federal tax or information return of the entity for the taxable year for which an election is made.16  Where an entity is not required to file a return for the year an election is made, a copy of the Form 8832 must be attached to the federal income tax or information return of all direct or indirect owners of the entity for the taxable year of the owner that includes the date on which the election was effective.17  Failing to attach a copy of a Form 8832 to the return will not invalidate the election. 

      An election must be signed by either (i) each member of the electing entity who is an owner at the time the election is filed, or (ii) an officer, manager, or member of the electing entity who is authorized to make the election.18

      An entity that has an employer identification number (EIN) will keep their EIN even if their entity’s federal tax classification changes under Regs. §301.7701-3.19  A single owner disregarded entity under must use the owner’s taxpayer’s identifying number (TIN) for federal tax purposes.20   When a single owner entity’s classification changes and becomes recognized as a separate entity for federal tax purposes, that entity must use the EIN, not the TIN of the single owner.

      An election is effective either on the date specified on Form 8832 or on the date the election is filed.  A specified effective date will be allowed as long as it is not more than 75 days before the filing date or more than 12 months after the filing date.  A specified date more than 75 days before the filing date will be effective only 75 days before the filing date.  A date specified more than 12 months from the filing date will be effective 12 months after the filing date.21

Restriction on Classification Changes

      An eligible entity that elects to change its classification cannot change its classification by election again during the 60 months following the effective date.  The IRS has the authority to waive the 60-month restriction if more than 50% of the ownership interests in the entity on the effective date of the election are owned by persons that did not own any interests on the filing date or on the effective date of the entity’s prior election.22

      Only an election to change classification will begin a 60-month waiting period.  If a new eligible entity elects out of its default classification effective from the beginning, that election is not a change in the entity’s classification and does not prevent the entity from changing its classification by election within the next 60 months.

Changing The Status Of Entities

      Organizations that are eligible and wish to change their classification may do so by filing an election.  Once the classification has changed, the organization must keep that classification for at least five years. 

Potential Tax Impact on Changing Classification

      A change in tax classification will have tax consequences.

Corporation Status Elected

      When a partnership elects to be classified as a corporation, it will be considered to have contributed all of its assets and liabilities to the corporation in exchange for stock in the corporation.23  The partnership is deemed to liquidate by distributing stock in the corporation to its partners.

Election by Disregarded Entity to Be a Corporation

      If a disregarded entity elects to be classified as a corporation, the owner of the eligible entity is considered to contribute all of the assets and liabilities of that entity to the corporation in exchange for stock of the corporation.24

Changing from Corporation to Partnership Status

      When a corporation elects to be classified as a partnership, it is considered to liquidate by distributing its assets and liabilities to its shareholders.  The shareholders are deemed to contribute all of the distributed assets and liabilities to the partnership.25

Corporation or Partnership Elects to Be Disregarded Entity

      When a corporation elects to be a disregarded entity, the corporation is deemed to have liquidated by distributing its assets and liabilities to its sole owner.26  If an LCC classified as a partnership becomes a single member LLC, the partnership status terminates.

      The IRS issued guidance in Rev. Rul. 99-627 on an LLC classified as a partnership that becomes a single member LLC.  The IRS ruled that §708(b)(1)(A)state the LLC’s partnership status will terminate since the operations of the partnership are no longer carried on by any of its partners as a partnership.  If no election is made to treat the LLC as a corporation for federal tax purposes, the LLC then becomes a disregarded entity.

Changing from Single Member Disregarded Entity to Partnership

      A single member disregarded entity may sell an interest in that business and become a partnership.  Both partners should treat the conversion of a single member entity to a multiple member entity as §721 contributions to the entity.

The IRS issued guidance on the conversion of a single member LLC that is a disregarded entity to a partnership in Rev. Rul 99-5.541.  Section 721(a) states no gain or loss is recognized by the previous sole owner or the unrelated purchaser as a result of the conversion to a partnership. 

B.  Compensation Planning and Use of Guaranteed Payments, Distributive Shares and Keogh Plans

Guaranteed Payments

      The payment to a partner for services or the use of capital that is determined without regard to the income of a partnership is classified as a guaranteed payment and generally is treated as non-partnership transaction.28 The partner includes the payments in income using the same standards as a non-partner.29  The partnership may be permitted to deduct the guaranteed payment.30  The guaranteed payment is treated as an ordinary partnership transaction.

Deferred Compensation Arrangements

      A nonqualified deferred compensation plan is a contractual arrangement between employer and employee providing for the deferred payment of compensation in the future.  An effective deferral requires avoiding constructive receipt.

      An LLC member’s distributive share of the LLC’s income and losses cannot be “deferred.” 31  These items pass through to the LLC member under §702 and are taxable.  Special allocations can be made in the LLC operating agreement to allocate certain items away from specific LLC members if the other partners agree.

      It is possible to set up a nonqualified arrangement to defer the guaranteed payments the LLC member is to receive under §707(c).  Reg. §1.707-1(c) states these payments will be ordinary income that is taxable to the member.  Because of the deferred compensation arrangement between the LLC and the member, the LLC may control when the payment is made. The deferred amounts will increase the distributable income of the LLC members based on the LLC agreement to allocate income.  Since the member cannot defer his allocable share of LLC income, a portion of the deferred income will flow through to him in the year of deferral.

Equity-Based Compensation for Members

      Equity based compensation is used by many corporate employers to motivate their employees.  An LLC can transfer an interest to an employee or existing member in the form of a capital and profits interest, a capital interest, or a profits interest, or as an option to acquire either a capital or profits interest or both.

      Options to Acquire LLC Interests

      LLCs can issue nonqualified options to purchase LLC units.  The grant of an option to purchase LLC units to either to an existing member or an employee does not have a taxable consequence for the LLC.  It would be treated as a guaranteed payment.  The difference between the fair market value of the option and the strike price would be a “payment” in the year received or the year the restriction lapses.  This creates a deduction for the LLC and income to the LLC member.

Distributive Shares

      Another alternative form of distribution from an entity to the owner is the distribution of ownership units in the entity, or of rights or options to acquire units in the entity.  This type of distribution may be treated as an ordinary income distribution of property, but in some cases it may be treated as a nontaxable distribution of unit interests.

Partnership Unit Distributions

      A partnership or limited liability company treated as a partnership may distribute ownership units to its partners.

(1) The partnership may reallocate the ownership percentages between the partners because of new partners, the retirement of partners, or an agreement between the partners to alter their interests.

(2) When the partnership has multiple levels of partnership interests, the partners at one level may receive additional interests and the partners at another level will not receive any additional interests, which will cause a reduction of their percentage interests in the partnership.

(3) Some partners may receive interests in the same partnership tier and other partners may receive interests in a higher or lower tier.  The income tax results will be dependent on whether the partnership interests being adjusted are income interests or capital interests.

      Changes in Income Interests

      Any change in income interests is recognized in the year the partner recognizes his distributive share of the partnership profits.  The amount recognized shows the change in the income interests.

      Changes in Capital Interests

      The acceptance by a partner of an additional capital interest in the partnership may be treated as an income event, the receipt of a gift from another partner, or be classified in accordance with its economic consequences. 

      Partnership Distributions

      Cash or property distributions received by a partner from a partnership will reduce the partner’s basis in his interest.  Unless the cash distribution is in excess of the basis, it will usually not be a taxable event to the partner or the partnership.  Property distributed to a partner takes the same basis and holding period it had in the partnership.  Cash distributions will reduce the partner’s basis in his interest dollar for dollar.32  Gain is recognized by the distributee partner only if the cash received exceeds his basis in his interest before the distribution.33 Gain recognized is taxed as gain from the sale or exchange of a partnership interest.34  Distributions of non-cash property will reduce the partner’s basis in the partnership interest to the extent of the adjusted basis of the property in the hands of the partnership.35

Non-Liquidating Distributions

      A partner does not recognize loss in a non-liquidating distribution.36 A partner also does not recognize gain as a result of a non-liquidating distribution, unless the amount of cash is greater than the partner’s outside basis.37  Cash distributed up to the amount of the basis represents amounts the partner has already accounted for under the income tax system. Only cash distributions in excess of outside basis represent income for the partner.

      A partner does not recognize gain with respect to property distributions in a non-liquidating distribution,  The partner’s previously unrecognized gain or loss in the partnership interest is preserved by allocating the adjusted basis to the distributed property and making a reduction to the partner’s basis. The basis of the distributed property in the partner’s hands is the same as the basis of the property in the partnership’s hands.  But it can not be greater than the partner’s adjusted basis in the partnership.38

      Since the goal is to preserve the partner’s tax position in regard to the partnership investment in a non-liquidating property distribution the partner’s basis is reduced by the amount of money distributed, and the adjusted basis of the distributed noncash property. 39  The partner is treated as having converted a single asset, a partnership interest, into multiple assets, the partnership interest, the distributed property, and the distributed money, and the partner’s basis is divided among these assets.

Keogh Plans

      Much of the planning concerning the use of and choice between different taxable entities has evolved from the historic differences between the treatment of employees and self-employed individuals for purposes of tax qualified retirement plans.  H.R. 10 or “Keogh” plans are the income deferral arrangements most commonly used by self-employed individuals.

      The Tax Equity and Fiscal Responsibility Act of 1987 (TEFRA) made modifications that included “top heavy plan” limitations.  As a result, tax qualified retirement plan choices are now a neutral factor in the decision concerning the choice of entity.

      The maximum amount that is deductible for a retirement plan contribution is limited to the individual?s net self-employment income when made by an unincorporated entity.40

      In the case of a defined benefit plan, these rules apply when more than 60% of the benefits are the benefit of key employees.41  The term “key employee” includes certain officers, a 5% or greater owner of the employer, a 1% owner of the employer having a high income level from the employer, and self-employed individuals.42

Other LLC Compensation Issues

      The use of LLC interests to compensate LLC employees may result in the employees being treated as members of the LLC rather than as employees for federal tax purposes.  There is a difference in the treatment of compensation paid to an employee and compensation paid to a LLC member. 

Employee or Member

      Section 707(a) states that if a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction will be considered as occurring between the partnership and one who is not a partner.  It is possible an LLC member could be classified as an employee if he provided services and there was a related allocation or distribution to him.

      If payments are made to a partner for services, without regard to partnership income, under §707(c) the partnership deducts such amounts and the partner has ordinary income.

      Compensation to a member must be analyzed to determine the relationship between the member and the LLC for tax purposes.  The following five factors must be considered:

? Entrepreneurial risk.  Whether the payment is subject to entrepreneurial risk.  An employer-employee relationship would be supported by a lack of entrepreneurial risk.

      ? Transitory status.  Whether partner status is transitory.

      ? Timing.  Whether the payment closely follows the performance of service.

? Tax motivation.  Whether the recipient became a partner primarily for tax benefits.

? Relative size.  Whether the recipient’s interest in the partnership is small in relation to the payment or allocation in question.

C.  Planning for Self-Employment Tax

   An individual is subject to either social security tax as an employee, or self-employment tax as an equivalent to the social security tax.  The employer is required to match the social security contribution of the employee.  The self-employed person is required to pay the full cost of this tax.

Self-Employment Tax

   Sole proprietors, members of a partnership, and members of a limited liability company treated as a partnership are subject to the self-employment tax.  The distributive share of partnership income is included in a partner?s net earnings from self-employment.  A limited partner does not include the distributive share of partnership income or loss from self-employment income.  Unless a limited partner?s distributive share of income or loss from the self-employment income is received as guaranteed payments, it will not be included in his self-employment income.43

   It is not clear how self-employment taxes apply to members of an LLC classified as a partnership.  The members are not either general partners or limited partners.  There are proposed regulations defining which partners of a federal tax partnership are considered limited partners.  These regulations apply to all entities that are classified as partnerships for federal tax purposes.

 ”Net earnings from self-employment” includes the gross income derived from any trade or business carried on by a sole proprietor or partner in a partnership, less any deductions. §1402(a)  Any partner’s share of income or loss from any trade or business carried on by a partnership is also considered as net earnings from self-employment.

   There are exceptions to what must be included in self-employment earnings.  Some of the exceptions are:

? Rentals from real and personal property (§1402(a)(1));

? Interest and dividends ( §1402(a)(2));

? Gains or losses from sales or exchanges of capital assets (§1402(a)(3));

? Distributive share of a limited partner (§1402(a)(13)); and

?  Partnership retirement benefits (§1402(a)(10).

Limited Partners Not Subject to Self-Employment Tax

   A limited partner’s distributive share of income or loss is excluded from self-employment net earnings.  A limited partner’s guaranteed payments in exchange for services are subject to the self-employment tax.44  When a partner is a general and a limited partner, only the general partnership income and loss is subject to self-employment tax.45

Is the LLC Member a General or Limited Partner?

   Proposed regulations define which partners are considered limited partners for purposes of §1402(a)(13).  They are to apply to all entities classified as a partnership for federal tax purposes.46  The same standards will apply when determining the status of an individual owning an interest in an LLC.  The proposed regulations will adopt an approach that depends on the relationship between the partner, the partnership, and the partnership’s business.47

   The proposed regulations will treat an individual as a limited partner unless the individual has personal liability for the debts of, or claims against, the partnership because he is a partner; has authority to contract on behalf of the partnership; or  participates in the partnership’s trade or business more than 500 hours during the year.48  If substantially all of the activities of a partnership involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting, the proposed regulations state an individual will not be considered a limited partner.49

   An individual who is not a limited partner is allowed to exclude from his net earnings from self-employment a portion of his distributive share if he holds more than one class of interest in the partnership.50

   The Taxpayer Relief Act of 1997 added a provision that prevented the IRS from finalizing these regulations until July 1, 1998.51  To date these regulations have not been finalized by the IRS.

Limited Liability Companies, Limited Liability Partnerships, and Other “New” Entities

      The exclusion for limited partners was incorporated into the statute at a time when there essentially were only two types of partnerships, the general partnership and the limited partnership.  With the advent of limited liability companies, limited liability partnerships, and other types of entities that are being treated as partnerships for federal tax purposes, a great amount of confusion has risen as to what type of partners may exclude their distributive share of income or loss in determining net earnings from self-employment.

Case Law

   The first case to consider is Johnson v. Comr.,52 This case involved the determination as to whether the taxpayer’s net income from oil and gas working interests should be taxed as net earnings from self-employment.  The taxpayer argued that she was not involved in a trade or business and her role was passive participation.  The Tax Court held her involvement in a trade or business to be irrelevant since she was a partner in a partnership.  The taxpayer also argued that if she is a partner, she should be considered a limited partner due to her limited involvement.  The court rejected her argument stating “limited partnerships are creatures of agreement cast in the form prescribed by State law … Petitioner’s argument is not persuasive because she and the other working interest owners did not take the necessary steps to comply with Texas law.?53

   The partnership in Mammoth Lakes Project, et al. v. Comr. was a general partnership.  These taxpayers argued they were entitled to include their share of net losses from the partnership in calculating their net earnings from self-employment.  The government argued that there was limited liability and they did not participate in the management of the partnership. The court considered the government’s argument to be a “superficially correct argument.”  Since the taxpayer did not address that argument, the court considered the taxpayer to have conceded the issue.

   The Tax Court in Perry v. Comr.,54 ruled on the status of a person holding a working interest in an oil and gas venture.  The court rejected the taxpayer’s argument that he should be treated as a limited partner.  The court stated, “State law requires that certain formalities be observed to create a limited partnership … There is no evidence of such formalities having been observed by the owners of interests in the wells.?55

   The status of a passive state law general partner for SECA tax purposes was ruled on by the Tax Court in Norwood v. Comr.56  The taxpayer previously had been an active partner in the medical supply partnership.  He had reduced his hours to only 41.  He still held a 50.95% capital and profits interest in the partnership.  He argued his interest in the partnership was passive and he should not be subject to SECA tax on his partnership income.  The court rejected this argument.  The court stated, “That petitioner spent a minimal amount of time engaged in the operations of [the partnership] is irrelevant … Petitioner’s lack of participation in or control over the operations of [the partnership] does not turn his general partnership interest into a limited partnership interest.  A limited partnership must be created in the form prescribed by State law.”57

Structures For Avoiding SECA Tax

S Corporation Leases Worker to Partnership

      A member forms an S corporation to hold his or her interest in an LLC.  The S corporation would then employ the individual and lease him to the LLC.  Because the S corporation is not an individual, there is no SECA tax due with respect to the S corporation’s distributive share of the LLC’s income or the lease payments made for the individual’s services.  Employment taxes are due on the individual’s salary paid by the S corporation, but the individual generally will take income from the S corporation in part as salary and in part as a distribution.  The distribution of S corporation income is not subject to SECA or employment tax. 

Segregate Service and Capital Intensive Portions of Business in Two Separate Entities

      A taxpayer’s business with both service and capital-intensive components may be segregated into separate entities.

D.  Transfer of Appreciated Property to the LLC

Changing the Status of Entities

Election by Disregarded Entity to Be an Association

When a disregarded entity elects to be classified as an association, the proprietor of that entity is considered to have contributed all of the assets and liabilities of his entity to the association in exchange for stock of the association.58

Changing from Association to Partnership Status

      When an association elects partnership classification, the association is considered to liquidate by distributing its assets to the shareholders.  The shareholders are considered to contribute all of the distributed assets and liabilities to the partnership.59

Association or Partnership Elects to Be Disregarded Entity

An association that elects to be a disregarded entity is considered to liquidate by distributing its assets and liabilities to its sole owner.60  When an LCC is classified as a partnership becomes a single member LLC, the partnership status ends.

Changing from Single Member Disregarded Entity to Partnership

      A disregarded entity may sell an interest in that business and become a partnership.  This conversion of a single member entity into a multiple member entity resulting from the issuance to the new member of an interest in the entity is considered Section 721 contributions to the entity by both partners.  No gain or loss is recognized by either the previous sole owner or the new partner because of the conversion to a partnership according to Section721(a).

Transfers of Property to New Entities

Partnership

There is no gain or loss recognized to a partner on the contribution of appreciated property to a partnership when exchanged for a partnership interest.61  The income tax basis of the transferred property is the tax basis to the partner of the partnership interest acquired in the exchange.62

      The partnership does not recognize gain or loss on the acquisition of property in exchange for a partnership interest.63  This property has the same basis after transfer into the partnership as it had with the transferor partner.

Limited Liability Company

      Contributions of property to an LLC are governed by §721, which provide no gain or loss will result when an LLC member contributes property to an LLC.

      An LLC classified as a partnership will have the same income tax consequences as those for the formation of a partnership.

Converting to LLC Status

      An existing business in the corporate form will find the tax burden imposed on a complete conversion to LLC status formidable.  Partnership conversions to an LLC may be structured with no serious tax liability.  Converting a proprietorship to an LLC may also occur without the imposition of tax.

Existing C Corporations

      Sections 331 and 336 require the shareholders and the corporation to recognize the gain on the distribution of corporate property to the shareholders when liquidated.  This is a double tax that is a very high a price to pay for converting to LLC status.  The double tax exposure will prove the corporate-to-LLC conversion to be economically impractical.

Form of Conversion

      A corporation may be converted to LLC status by having the corporation form an LLC entity, transfer the corporation’s assets to the LLC, and then liquidate the corporation out of existence.  The shareholders would receive LLC interests in exchange for their stock.  This is a physical transfer of assets.  In many states there is an alternative.  The physical transfer of assets may be avoided by a  “conversion” from corporate to LLC status.  This “conversion” requires filing with the state that the corporation is converting to LLC status.  The advantage is the assets are not transferred and do not need to be retitled.  The filing puts the public and creditors on notice the corporation has merely changed its business form.

      There are three ways to accomplish an actual transfer.  They are: liquidate the corporation and contribute the assets into a new LLC; have the corporation’s shareholders form a new LLC, contribute their corporate stock to the capital of the LLC, and liquidate the corporation into the LLC; and formation of an LLC by the corporation with a contribution in of its assets, followed by a liquidation of the corporation’s LLC interests to its shareholders.

Existing S Corporations

      An existing S corporation may subject its shareholders to tax if it liquidates in order to transfer its business into an LLC. Gain will be recognized at the corporate level on any appreciated property and this gain will flow through to the shareholders. 

      The same three alternatives are available in re-forming an S corporation as an LLC: liquidate the corporation and contribute the assets into a new LLC; have the corporation’s shareholders form a new LLC and contribute their stock which is then liquidated into the LLC; and the formation of an LLC by the corporation followed by a liquidation of the corporation’s LLC interests to its shareholders.

The IRS has ruled that if the transfer of all of an S corporation’s assets and liabilities into a new LLC qualified as a reorganization under  §368(a)(1)(F), and the LLC met the requirements of an S corporation under §1361, the reorganization will not terminate the corporation’s S election and the S election will apply to the LLC.64 

Liquidation-Reformation as LLC

      Changing the corporate business form to that of a limited liability company is becoming a more frequent transaction.  Because of the double taxation issues, changing the corporate form to LLC status generally does not occur if the corporation is a stand-alone entity.

      These transactions require either the liquidation of a corporate subsidiary, a merger under state law into an LLC, or a “conversion” of the corporate subsidiary into an LLC. All three transactions result in the same tax consequences.  The corporate subsidiary is treated as actually liquidated.  The liquidation is considered a non-recognition transaction under §§332 and 337.  This assumes the corporate subsidiary is solvent and at least 80% or more owned by the parent corporation.  The subsidiary’s assets are not stepped up to fair market value because the  §332 liquidation is a non-recognition transaction.

      In an actual liquidation, the subsidiary assets are physically transferred twice, first to the corporate parent and second to the LLC.  The second transfer is ignored for federal income tax purposes if the LLC is completely owned by the parent corporation and treated as a disregarded entity.  This transfer of the assets to the LLC is treated as a §721 formation of a partnership. 

      When a corporate subsidiary is either merged into the LLC or converted LLC, a  §332 liquidation is considered to have occurred with tax results the same as in an actual liquidation.65  In a merger, the assets are transferred once.  In a conversion, the assets are not transferred.  If the LLC has more than one member and is treated as a partnership, the assets will be considered contributed to the LLC in a §721 partnership formation without gain recognition.

Converting Partnerships to LLCs

      Converting an existing partnership to an LLC can be accomplished by contributing existing partnership interests to a newly formed LLC in a tax-free §721 contribution.66The partnership would end under §708(b) resulting in a liquidation of the partnership’s assets into the LLC. This transaction is usually allows non-recognition treatment.

Termination of Existing Partnership

Rev. Rul. 95-37 states that no §708 termination of the partnership has occurred because the formation of an LLC is considered a §721 transaction.  The contribution of a partnership interest to another partnership is not considered a sale or exchange of an interest in the first partnership.67 The partnership is not terminated, therefore, no liquidation is considered to have occurred.  The partnership may continue for tax purposes in LLC form.

      The conversion is determined to be a non-recognition transaction under §721 if the conversion does not change ownership interests in profits, losses, or capital. Rev. Rul. 95-3768 states the conversion of an existing partnership into an LLC is a non-event for tax purposes.

E.  Death or Retirement of a Member and Tax Alternatives

      Several issues are raised by the retirement or death of a partner.  First, the retired partner or the deceased partner’s estate receives payments in liquidation of the partner’s interest.  These payments are generally treated as distributions by the partnership to the partner.69  Except in the case of general partners in which capital is not a material income-producing factor.70  Distribution treatment will apply except in the case of the death or retirement of a general partner in service-oriented partnership.  Distribution treatment will apply to all payments except for those on account of (1) unrealized receivables, and (2) the value of the partnership’s goodwill.71  These are treated as either an allocation of partnership income or a guaranteed payment.

      Second, the person who inherits a partnership interest generally adjusts the outside basis to reflect its fair market value at the time of the partner’s death.  The death of a partner triggers an inside basis adjustment for the persons who inherit the partnership interests in the same manner as if the partnership interest had been sold if a partnership has made an election to adjust inside basis to reflect distributions and dispositions.

Alternatives Upon Death or Retirement

      Four alternatives are available to a partner who wishes to retire from active participation in a partnership and for the successors of a deceased partner.  These four alternatives have different federal income tax consequences.  The alternatives are as follows:

      1. The partnership liquidates the partner’s interest either for a lump sum distribution or for payments over time and the remaining partners continue the operations of the partnership.

      2. The remaining partners purchase the deceased or retiring partner’s interest either for a lump sum or for payments over time.

      3. The deceased or retiring partner’s interest is sold to a third party.

      4. The partnership is terminated, and the partnership interests of all partners are liquidated.

      If the partnership agreement so provides, the successors of a deceased partner continue as partners and share in partnership profits and losses on an ongoing basis.

      If a partner withdraws from a partnership by retiring or if the interest of a deceased partner is liquidated, and successors receive one or more payments from the partnership in liquidation of the partnership interest, §736 applies to the payments.

      The purpose of §736 is to classify payments to a withdrawing partner.  Section 736 does not determine the tax consequences.  Once the liquidating payments to a withdrawing partner are classified, other provisions of subchapter K govern the tax consequences to the withdrawing and continuing partners.

Section 736 generally classifies payments from a partnership to a withdrawing partner as: (1) payments in consideration for the withdrawing partner’s interest in partnership assets (§736(b)); (2) a distributive share of partnership income (§736(a)(1)); or (3) a guaranteed payment (§736(a)(2)). 

      The characterization of payments from a partnership to a withdrawing partner is significant because it determines: (1) whether the withdrawing partner recognizes capital gain or loss or ordinary income with respect to the payments; (2) the timing of the gain, loss or income recognition by the withdrawing partner; (3) whether the partnership is entitled to a deduction with respect to the payments; and (4) whether the remaining partners are entitled to an exclusion from their own share of partnership income with respect to the payments. Classification under §736 determines whether the amounts paid to the successors of a deceased partner constitute income in respect of a decedent under §§691 and 753.

§736

      Section 736 applies, according to its terms, to “payments made in liquidation of the interest of a retiring partner or a deceased partner.”  Section 761(d) states that the term “liquidation of a partner’s interest” means the termination of a partner’s entire interest in a partnership by means of a distribution, or a series of distributions, to the partner by the partnership.  The term includes a series of distributions whether they are made in one year or in more than one year as long as the partner’s entire interest is ultimately to be terminated.72

      Section 736 applies to payments by the partnership which are (1) in liquidation of the entire interest (2) of a retiring or deceased partner.73 A partner is considered to have retired when he ceases to be a partner under local law.74 Although a partner may cease to be considered a partner under local law, he continues to be a partner for purposes of subchapter K until his interest in the partnership is completely liquidated.75In order for §736 to apply to payments from a partnership to a withdrawing partner, the withdrawing partner must have ceased being a partner for local law purposes at the time of the payment.  Partnership distributions in partial liquidation of a partner’s interest are classified as current distributions subject to §731 rather than liquidation payments subject to §736.76

. Section 736 does not apply to a sale by one partner of his partnership interest to one or more of the remaining partners.  The economic consequences to both the withdrawing partner and the continuing partners may be identical whether the withdrawing partner is bought out by the partnership or by all of the remaining partners. Nevertheless, §736 applies to the former but not to the latter.77  If the estate or other successor in interest of a deceased partner continues as a partner in the partnership, §736 does not apply to payments from the partnership to the deceased partner’s successor.78  If one partner in a two-person partnership withdraws, §736 applies to payments made from the partnership to the withdrawing partner in liquidation of the withdrawing partner’s interest and the partnership will not terminate for federal income tax purposes until the final §736 payment is made.79

      With the withdrawal of one member of a two-person partnership, the parties should be particularly careful in the manner that payments to the withdrawing partner are made.  If §736 treatment is desired, the partnership agreement should provide the payments be made from the partnership in liquidation of the withdrawing partner’s interest and all payments should be made from funds of the business rather than from the separate funds of the remaining partner.  The §736 payments to the withdrawing partner should be reflected in the books of the continuing business.  These precautions are suggested because, upon the withdrawal of one of two partners, the “partnership” continues as a federal income tax fiction as long as §736 payments are made to the withdrawing partner by the partnership. 

      If a partner ceases to be a partner under local law and receives payments from the partnership in liquidation of his partnership interest, §736 applies regardless of the reason.80 The regulations under §736 are not concerned with the reasons or the circumstances surrounding a partner’s ceasing to be a member of the partnership and the courts have concluded that §736 applies whether the withdrawal is voluntary or involuntary.

      In Holman v. Comr.,81 two partners expelled from a law partnership received their respective shares of partnership capital according to the terms of the partnership agreement.  The expelled partners also received an amount based on their share of accounts receivable for work that had been billed and an amount based on unbilled services.  The expelled partners argued the full amount received by them was capital gain, asserting that §736 does not apply to an expulsion.  The Tax Court disagreed and held that the amounts received by the taxpayers attributable to the receivables and unbilled services were described in §736(b)(2) and therefore taxable as ordinary income.

      In Milliken v. Comr.,82 the taxpayer, expelled from an accounting firm, argued that §736 did not apply to payments he received from the partnership because his expulsion was illegal and, consequently, did not constitute a retirement for purposes of §736.  The Tax Court, however, held that the characterization of the payments was governed by §736.  According to the court, even if the taxpayer’s expulsion was wrongful under state law, it was effective to sever the taxpayer’s status as a partner.  Since the expulsion was effective to sever the taxpayer’s membership in the partnership under state law, the court held that §736 applied whether or not the expulsion was wrongful.

      Section 736 may apply to the withdrawal of a partner even where the partner receives neither cash nor property in connection with the withdrawal.  According to §752, a reduction in a partner’s share of partnership liabilities is treated as a distribution of cash from the partnership to the partner.  Regs. §1.736-1(a)(2) states that a deemed distribution of cash because of a reduction in a partner’s share of partnership debt in connection with the partner’s withdrawal is considered a payment subject to §736.83  The year of the constructive payment due to the reduction in liabilities is determined under the rules of §752.  If a partner withdraws from a partnership when the partnership has liabilities but receives no distribution in connection with the withdrawal, the partner is nevertheless considered to have received a payment for purposes of §736 because of the reduction in his share of partnership indebtedness.

      In Stilwell v. Comr.,84 the taxpayer withdrew from a two-person partnership and received nothing for his partnership interest.  The other partner agreed to pay all debts of the partnership.  The taxpayer argued that he was entitled to an ordinary loss in connection with the withdrawal measured by his basis in his partnership interest. The Tax Court disagreed and held that the loss was capital in nature, stating that the taxpayer received a deemed distribution of cash pursuant to §752 due to the relief from partnership indebtedness. The deemed payment was subject to §736 and, pursuant to §§736(b) and 731, the loss resulting from the withdrawal was capital in nature. The Tax Court held that relief of a partner’s share of liabilities with no distribution of either cash or property constitutes a §736 payment.

F.  Federal Income Tax Techniques Involved in the Use of Disregarded Entities (Single Member LLCs) in Mergers, Acquisitions and Dispositions

Mergers of Corporate Entities and Disregarded Entities

      A great increase of disregarded entities has raised issues regarding the ability to treat certain transactions as statutory mergers under  §368(a)(1)(A).85  Final regulations published in 2006 provide guidance on the merger of a disregarded entity into an acquiring corporation and the merger of a target corporation into a disregarded entity.

      Statutory merger transactions can involve disregarded entities under these regulations.86 The rules permit a target corporation to merge under state law into a disregarded entity wholly owned by another corporation. This transaction is the equivalent of merging a corporate target into a division of an acquiring corporation.  A disregarded entity is not allowed to merge on a tax-free basis with a corporate acquiror unless the disregarded entity’s owner is also merged into the acquiror.  These rules affect the treatment of disregarded LLCs being merged into acquiring corporations, and merging target corporations into disregarded LLCs.  These rules only apply to merger transactions under §368(a)(1)(A).  A transaction may be tax-free if it qualifies under other reorganization provisions such as “C,” “D,” or “F.”

Tax-free Disposition of a Business Enterprise Interest

      Owners of a business enterprise may wish to dispose of the business enterprise or its assets without generating an income tax liability.  There are many reasons for seeking deferral of gain recognition for income tax purposes, including:

      (1) Benefiting from the “time value of money.”; and,

      (2) The income tax potential on the property appreciation will disappear if the asset is held at the time of death of an individual owner.  On that event the tax basis of the asset is stepped up to its fair market value as of that date.87

      Sometimes the income tax provisions allow postponement of income tax recognition where only the form, not the substance, of the investment has changed.88   In those cases, gain recognition is deferred.  In the corporate situation, this nonrecognition treatment applies in the framework of certain transfers of assets to controlled corporations and tax-free corporate “reorganizations.”89

      In the sole proprietorship and partnership there are less precise rules to determine whether gain recognition postponement is possible on a disposition of an interest in the entity, the entity’s business interest, or investment property.  Gain postponement may be accomplished under the like-kind tax-free exchange provision.90 This result may be achieved between related entities if the entities are disregarded entities for income tax purposes.

      The “sole proprietorship” is not a separately identifiable asset that can be transferred for income tax purposes.91 Each of the assets of the sole proprietorship is treated as separately transferred.  The transfer of each asset constitutes a gain or loss; realization or non-realization; or recognition or non-recognition event.  The tax character of any gain or loss from each asset transfer is determined by reference to the tax nature of each of those assets.  The postponement of gain recognition is generally dependent on the tax characterization of each asset. 

      There are two choices available in transferring sole proprietorship assets without recognition of gain: the like kind exchange provision or a corporate tax-free acquisitive corporate reorganization provision, which is utilized after transferring the sole proprietorship assets into a corporation in a tax-free incorporation transaction.

a. Like-Kind Exchanges

Some assets of a sole proprietorship can be exchanged for other like kind assets without gain recognition being recognized. The assets eligible for this treatment could include land, buildings, machinery, technology, patents, trademarks and trade names.  Under this provision are inventory,92 stocks, bonds, or notes,93 other securities or evidences of indebtedness or interest,94 interests in a partnership,95 certificates of trust or beneficial interests,96 choses in action,97 and goodwill which are not eligible for like kind exchange treatment.98  Illiquid assets are ordinarily eligible for this gain postponement,

      Certain limiting rules do apply for using this gain postponement provision when the like kind property exchange is between related persons.99 If a person exchanges property with a related person, there is non-recognition of gain or loss to that exchanging person with respect to the exchange of such property, and before the date two years after the date of the last transfer which was part of such exchange then either the related person disposes of such property, or the exchanging person disposes of property received in the exchange from the related person which was of like kind to the property transferred by the transferor, non-recognition of gain or loss is not permitted to the taxpayer with respect to that exchange.100  This rule does not apply if the disposition occurs after the death of the taxpayer or the related person;101 in an involuntary conversion, if the exchange occurred before the threat or imminence of such conversion;102 or if it is established that neither the exchange nor the disposition of the asset had as one of its principal purposes the avoidance of federal income tax.103

      Transfer to Controlled Corporation

      If the sole proprietor wishes to transfer the entire proprietorship on a gain deferral basis, this can be accomplished by transferring the entity into corporate form in a tax-free incorporation and then exchanging those shares in a tax-free corporate reorganization. Unless the S corporation election is available, this incorporation transaction can eventually cause an additional layer of income tax to be incurred.

      Since the tax law definition of “corporation” (§7701(a)(3)) includes an “association” with corporate characteristics, the IRS has recognized that non-corporate entities taxable as corporations, including S corporations, may engage in tax-free reorganizations in the same manner as formally incorporated entities.  These rulings should apply to a merger or consolidation involving one or more noncorporate entities as well, as long as the parties to the transaction are taxable under federal law as corporations.104  The regulations refer to mergers as occurring between “combining units,” which can consist of an entity taxed as a corporation plus all of the disregarded entities it is treated as owning.  The merger of a corporation into a disregarded entity in exchange for stock of the disregarded entity’s owner can qualify as a statutory merger or consolidation.105

G.  Taxation on Sales of an Interest – Handling the Holding Periods and Hot Asset Issues

      Character and Holding Period of Distributed Property

      When property is distributed by a partnership to a partner, its character is determined under the Code’s general principles of characterization.106  A limited set of principles serves to prevent the conversion of ordinary income into capital gain.  First, unrealized receivables distributed to a partner are permanently classified as ordinary assets, and any gain or loss recognized from their disposition is treated as ordinary gain or loss.107  Second, inventory items distributed to a partner are subject to mandatory classification as ordinary assets for the first five years after distribution.  If a partner disposes of the inventory during the five-year period following the distribution, any gain or loss must be classified as ordinary gain or loss.108  After that five-year period, the gain is classified according to the general characterization rules. A partner’s holding period for distributed property includes the partnership’s holding period for that property.109

Disproportionate Distributions

      The “hot asset” rules limit the taxpayers’ ability to route capital gain and ordinary income selectively among the partners.110  The term “hot assets” refers to unrealized receivables, and substantially appreciated inventory items.111  Inventory is “substantially appreciated” if its fair market value is at least 120% of its basis.112

      The ?hot asset? rules apply to any disproportionate distribution of property that alters a partner’s share in the partnership’s ?hot assets?.  This can be accomplished by a disproportionate distribution of the ?hot assets? themselves or a disproportionate distribution of other assets.  The partner is treated as though he has received a proportional share of each partnership asset, to which the basic distribution rules apply, and then engaged in a taxable exchange with the partnership in which he exchanged a fractional interest in the assets received for a fractional interest in the assets the partnership retained.113  This is accomplished in a four-step process:114

      1. Identification of the assets for which the hypothetical exchange occurs;

2. A deemed distribution to the partner of the assets in which the partner’s proportionate share is reduced, but only to the extent of the reduced share of those assets;

3. A deemed taxable exchange in which the partner is deemed to transfer back the assets deemed received in exchange for assets in which the partner’s interest is increased, this is only to the extent of the increased share of those assets; and

4. The distribution of the partner’s pro-rata share of the partnership’s assets which is treated as an ordinary distribution.

      These ?hot asset? rules apply whether the distribution is a liquidation of the distributee partner’s complete interest but only to the extent that he either receives ?hot assets? in exchange for his interest in other property, or he receives other property in exchange for his interest in the ?hot assets?115

I. Dispositions of Partnership Interests

      The general rule is that the sale or exchange of a partnership interest is treated as the taxable sale of a single asset.116 The normal rule is the gain is the excess of the amount realized over the selling partner’s outside basis.117 The partnership interest is classified as a capital asset, which makes the gain or loss recognized as capital gain or loss.118

      This is then modified in two respects.  First, a portion of the sales price is allocated to the selling partner’s share of the partnership’s unrealized receivables and inventory, converting a portion of the capital gain or loss into ordinary income or loss.  Second, an adjustment of the partnership’s inside basis in its assets to reflect the gain or loss recognized by the disposition of the partnership interest.

Ordinary Income for “Hot Assets”

      A portion of the sales price for a partnership interest reflects the value of the selling partner’s share in the partnership’s unrealized receivables and inventory. If the partnership recognizes income with respect to these items, it is ordinary income, a portion of which is allocated to the selling partner.  The §751 “hot asset” rule ensures that a partner who accesses this value by selling his partnership interest does not convert ordinary income into capital gain.119

      This is very much like the ?hot asset? rule that applies to disproportionate distributions of property, but with two significant differences.  First, in the disproportionate distribution the rule applies only to inventory items that have substantially appreciated in value, but in the sale of partnership interests, the rule applies to all inventory items.120  Unrealized receivables are subject to the ?hot asset? rule in both cases.121

      Second, the application of the ?hot asset? rule is simpler in the disposition of a partnership interest.  Its implementation requires a four-step procedure:122

1. The partner calculates gain or loss as though the sale of the partnership interest were the sale of a single asset;

2. The partner calculates the amount of gain or loss the partnership would recognize if it disposed of all of its unrealized receivables and inventory at their fair market values;

3. The partner determines how much of the hypothetical gain or loss calculated in Step 2 would be allocated to the partner, and treats that amount as ordinary income or loss; and

4. The partner subtracts the amount determined in Step 3 from the amount determined in Step 1.  That amount is the capital gain or loss from the sale of the partnership interest.

      It is possible to generate ordinary income in a transaction that generates an overall loss, which would make the capital loss amount greater than the overall loss.

The ?hot assets? may generate an ordinary loss in a transaction that generates an overall gain, thereby making the capital gain amount greater than the overall gain.

H.  Using Elections to Make Optional Basis Adjustments to Minimize Tax in Distributions

      A partnership distribution of cash or property to a partner will generally have no effect on the partnership or on the remaining partners unless there is a §754 election or a “substantial basis reduction.”  This general rule states that the basis of partnership property is not adjusted as a result of a distribution by the partnership to a partner.

      If a §754 election is in effect when the partnership distributes property, the partnership usually makes an offsetting basis adjustment to remaining partnership assets under §734(b).  This adjustment is made if the partner recognizes a gain or loss or gets a different basis in the property than the predistribution basis.  When this occurs, the partner will either recognizes a gain or take a basis in the property that is less than the partnership’s predistribution basis.  The partnership will increase its basis in their retained assets by the same amount.  If the partner recognizes a loss on the liquidation of his interest or takes a greater basis in the property than the partnership had, the partnership is required to decrease its basis in their retained assets.  This is required if there is a §754 election or a “substantial basis reduction”.

      A partnership must adjust its basis in the their retained assets if there is a “substantial basis reduction” in reference to the distribution.  A “substantial basis reduction” occurs when the amount of loss recognized by the partner in a distribution in liquidation of his interest plus the excess of the basis of property distributed to him over the partnership’s adjusted basis in the property immediately before the distribution, totaled exceeds $250,000.  A substantial basis reduction is deemed to have occurred when a partnership is required to make a downward adjustment of more than $250,000 because of the §754 election.  This downward adjustment must also be made regardless of whether there is a §754 election.

      The procedure for making the §734 basis adjustment is the same, whether the partnership must make the adjustment because a §754 election or because there is a substantial basis reduction.

      Once a §754 election is made, it will apply to all subsequent distributions.  It may be revoked with consent of the IRS.123  The election is made by filing a written statement with the partnership’s tax return for the first year the election is to apply.124

§734(b)

      If a §754 election applies to a partnership distribution of property and the partner takes a basis in the property that is different from the partnership’s predistribution basis, or there is a substantial basis reduction with respect to a partnership distribution, then §734(b) and §734(b) will be used to calculate the amount the partnership must use to adjust the basis in its remaining assets.

      This adjustment calculation of the partnership’s basis in its assets under §734 involves two steps: (1) the amount of the total adjustment needs to be determined under §734(b); and (2) then that total adjustment must be allocated among the partnership’s assets.125

      If a partner recognizes either gain or loss in connection with a partnership distribution, the measure of the §734(b) adjustment is equal to the amount of gain or loss recognized by the partner.126 Gain recognition by the partner results in a positive adjustment to the partnership’s basis in undistributed property equal to the amount of the gain recognized.127 If a partner recognizes a loss on the distribution, the §734(b) adjustment is a negative adjustment equal to the distributee’s recognized loss.128

       Another situation that requires a §734(b) adjustment occurs when a partner’s basis in property distributed to him is greater or less than the partnership’s basis in the property immediately before the distribution.129  The partner?s basis in the property is not the same as the partnership’s pre-distribution basis in two circumstances.  The first circumstance is in the case of a current distribution.  A partner’s basis in distributed property may not exceed his basis in his partnership interest.130  If the partner’s basis in distributed property is less than the partnership’s predistribution basis in that property due to this limitation, a positive §734(b) adjustment may be made equal to that difference.  Therefore, the partnership is entitled to increase the basis of its remaining assets.131

      The second circumstance is when a partner’s basis in property is not the same as the partnership’s pre-distribution basis in the property.  This occurs with a liquidating distribution.  When the partner?s interest is liquidated, the partner’s basis in the property will equal the adjusted basis he had in his partnership interest, less any money distributed to him in the liquidating distribution.132If this causes the partner’s basis in distributed assets being less than the partnership’s predistribution basis, the partnership may increase the basis of its remaining property the amount of the difference.133  Also, if the partner receives a greater basis in the property than the partnership had, the partnership must reduce the basis of its remaining assets by an amount equal to that excess.134

Allocations Between Asset Classes

       A partnership property distribution resulting in an adjustment to the basis of undistributed partnership property requires the partnership to allocate the adjustment to the remaining partnership property.  This allocation must be of a character similar to that of the distributed property.135  When the partnership’s adjusted basis of distributed capital gain property immediately before the distribution exceeds the basis of the property to the partner, the partnership must increase the basis of the undistributed capital gain property by an equal amount.136  When the partnership’s adjusted basis of distributed capital gain property immediately before the distribution is less than the basis of the property to the distributee partner, the partnership must decrease the basis of the undistributed capital gain property by an equal amount.137  When a partnership distributes ordinary income property and the partner’s basis is not the same as the partnership’s basis in the property immediately before the distribution, the partnership must make the §734(b) adjustment only to undistributed property of the same class remaining in the partnership. When a partnership must adjust its undistributed property because the distributee partner recognized gain or loss, the partnership must allocate the adjustment entirely to capital gain property.138 The total §734(b) basis adjustment must be allocated first to the following classes of partnership property: (1) capital gain assets, including §1231(b) property; and (2) ordinary income assets.139A partner may not recognize gain or loss immediately if he receives payments over time in complete liquidation of his interest in a partnership.  The partner only recognizes gain to the extent the total amount of money distributed exceeds his adjusted basis in the partnership interest immediately before the distribution.140  The partner will only recognize a loss when he receives the final payment in a series of distributions in liquidation of his interest.141 The partner may elect to report a pro rata portion of each payment as gain or loss if the total amount of payments that the partner will receive over time is fixed.142

References

1Regs. §§ 301.7701-2(b)

2Regs. § 301.7701-1(a)(1); Regs. §301.7701-1(a)(3).

3Regs. §301.7701-2(a).

4Regs. §301.7701-2(c)(2)

Rev. Proc. 2002-69, 2002-45 I.R.B. 831.

Regs. §301.7701-2(c)(1).

7Regs. §301.7701-2(b).

8Regs. §301.7701-2(b)(3).

9Regs. §301.7701-2(b)(4).

10Regs. §301.7701-2(b)(5).

11Regs. §301.7701-3(a).

12Regs. §301.7701-3(a).

13Regs. §301.7701-3(b)(1).

14Regs. §301.7701-3(c)(1)(i).

15Regs. §301.7701-3(c)(1)(i).

16Regs. §301.7701-3T(c)(1)(ii)

17Regs. §301.7701-3T(c)(1)(ii).

18Regs. §301.7701-3(c)(2)(i).

19Regs. §301.6109-1(h)(1),

20Regs. §301.6109-1(h)(2)(i).

21Regs. §301.7701-3(c)(1)(iii).

22gs. §301.7701-3(c)(1)(iv).

23Regs. §301.7701-3(g)(1)(i)

24Regs. §301.7701-3(g)(1)(iv).

25Regs. §301.7701-3(g)(1)(ii).

26Regs. §301.7701-3(g)(1)(iii).

271999-6 I.R.B. 6.

28§707(c).

29§61.

30§707(c). See §§263, 263A.

31410 U.S. 441 (1973).

32§733.

33§731.

34See  §751(b).

35§§732, 733.

36§731(a)(2).

37§731(a)(1).

38§732(a).

39§733.

40§ 404(a)(8).

41§ 416(g)(1)(A).

42§ 416(i).

43§ 1402(a)(13).

44§1402(a)(13).

45Prop. Regs.  §1.1402(a)-2(h).

46Preamble to REG-209824-96, 62 Fed. Reg. 1702 (1/13/97).

47Prop. Regs.  §1.1402(a)-2(g).

48Prop. Regs.  §1.1402(a)-2(h)(2).

49Prop. Regs.  §1.1402(a)-2(h)(5).

50Prop. Regs.  §1.1402(a)-2(h)(3).

51P.L. 105-34, §935.

5260 T.C.M. 603 (1990).

5360 T.C.M. 603 (1990).

5467 T.C.M. 2966 (1994).

5567 T.C.M. 2966 (1994).

5679 T.C.M. 1642 (2000).

57Id.

58Regs. §301.7701-3(g)(1)(iv)

59Regs. §301.7701-3(g)(1)(ii).

60Regs. §301.7701-3(g)(1)(iii).

61§ 721(a).

62 § 722.

63§ 721(a).

64PLR 9636007

65 PLRs 9701029, 9543017, 9409014, and 9404021.

66Rev. Rul. 84-52.

67Regs.  §1.708-1(b)(2).

68 1995-1 C.B. 130.

69§736(b)(1).

70§736(b)(3).

71§736(b)(2).

72Regs. §1.761-1(d).

73Regs. §1.736-1(a)(1)(i).

74Regs. §1.736-1(a)(1)(ii).

75Id.

76Regs. §1.761-1(d)

77Regs. §1.736-1(a)(1)(i).

78Id.

79Regs. Sections 1.736-1(a)(6) and 1.708-1(b)(1)(i)(b).

80Regs. §1.736-1(a)(1)(ii).

8166 T.C. 809 (1976), aff’d, 564 F.2d 283 (9th Cir.1977).

8272 T.C. 256 (1979), aff’d in unpub. opin. (1st Cir. 1979).

83Regs. §1.736-1(a)(2)

8446 T.C. 247 (1966).

85T.D. 9242, 71 Fed. Reg. 4259 (1/26/06).

86Regs. §1.368-2(b)(1), T.D. 9242, 71 Fed. Reg. 4259 (1/26/06). 

87Section 1014(a)

88§1031.

89§§354(a)1), 368(a)(1).

90§ 1031.

91Williams v. McGowan, 152 F.2d 570 (2d Cir. 1945).

92§ 1031(a)(2)(A).

93§ 1031(a)(2)(B).

94§ 1031(a)(2)(C).

95§ 1031(a)(2)(D).

96§ 1031(a)(2)(E).

97§ 1031(a)(2)(F).

98Regs. § 1.1031(a)-2(c)(2).

99Section 1031(f)(3)

100§ 1031(f)(1)

101§ 1031(f)(2)(A).

102§ 1031(f)(2)(B)

103§ 1031(f)(2)(C).

104Regs. §1.368-2(b)(1)(i)(B) (T.D. 9242, 71 Fed. Reg. 4259 (1/26/06))

105Regs. §1.368-2(b)(1)(iii) Ex. 2, T.D. 9242, 71 Fed. Reg. 4259 (1/26/06).

106§1221.

107§735(a)(1).

108§735(a)(2).

109§735(b).

110§751.

111§751(b)(1).

112§751(b)(3)(A).

113§751(b)(1).

114Regs. §1.751-1(b).

115Regs. §1.751-1(b)(1)(i).

116§741.

117§1001.

118§741.

119§751(a).

120 §751(b)(1)(A)(ii

121§751(a)(1),  (b)(1)(A)(i).

122Regs. §1.751-1(a).

123Regs. §1.754-1(a).

124Regs. §1.754-1(b).

125§734(c).

126§§ 734(b)(1)(A), 734(b)(2)(A).

127§ 734(b)(1)(A).

128 §734(b)(2)(A).

129§§734(b)(1)(B), 734(b)(2)(B).

130§732(a)(2).

131§734(b)(1)(B).

132

§732(b)

133

§734(b)(1)(B).

134§734(b)(2).

135§ 755(b) and Regs. §1.755-1(c)(1)(i).

136§ 734(b)(1) and Regs. §1.755-1(c)(1)(i)

137

§ 734(b)(2) and Regs. §1.755-1(c)(1)(i)

138.Regs. §1.755-1(c)(1)(ii).

139

Regs. §1.755-1(a).

140Regs. §1.731-1(a)(1)(i).

141 Regs. §1.731-1(a)(2).

142 Regs. §1.736-1(b)(6).

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