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I.R.S. Breaks the Silence with Rev. Rul. 2017-09, Issues Guidance on “North-South” Transactions

I.R.S. Breaks the Silence with Rev. Rul. 2017-09, Issues Guidance on “North-South” Transactions

In Rev. Rul. 2017-09, the I.R.S. addressed “north-south” transactions.  In these transactions, a shareholder transfers property to a corporation in a transaction structured to be free of tax under Code §351.  At about the same time, the corporation distributes shares of its subsidiary to the shareholder in a spinoff.  If the transactions are considered separate for income tax purposes, each can be effected free of gain recognition and the imposition of income tax.  On the other hand, if the transactions are integrated into a single multi-step transaction, gain will be recognized and tax imposed on each step of the arrangement.  The ruling announces that the I.R.S. will once again rule on the status of these transactions and provides guidance on the standard that the I.R.S. will apply.  Rusudan Shervashidze and Nina Krauthamer explain the factual context and the approach of the I.R.S. in granting relief.

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Purchasing a Partnership/LLC Interest: Tax Tip #1–Requiring Tax Distributions

Published by the American Bar Association in the Real Property Trust & Estate eReport, May 2015.

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Corporate Matters: Limited Liability Company Agreements

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In a previous issue, we discussed shareholder agreements and set out items that one should look for in such an agreement. A related topic, but one with subtle differences – particularly on the tax side – concerns the agreements used to govern the management and operation of limited liability companies. In the Delaware Limited Liability Company Act, these agreements are referred to as “limited liability company agreements,” and in the New York Limited Liability Company Law, they are referred to as “operating agreements.” In practice, however, the terms are used interchangeably. For purposes of this article, we will use limited liability company agreement (“L.L.C. Agreement”), as Delaware is the state most frequently used for limited liability company formation.

STATE REQUIREMENTS

Although many states do not require a limited liability company to have an executed L.L.C. Agreement, it is prudent to outline the internal governance procedures of the entity in a legal document. There really is no reason why the members of a limited liability company should not have a functioning governing document. An L.L.C. Agreement does not necessarily have to be a long or complicated document; it will allow you to effectively structure your financial and working relationship with your co-owners in a way that is suited to the type of business you are engaged in. Furthermore, having an agreement will help protect your limited liability status, particularly for single-member limited liability companies, as well as prevent management disagreements and ensure that the business is governed by rules of your making, rather than as stipulated by a particular state statute.

Care should be taken in drafting the agreement, however, as although many statutes provide a lot of discretion for members of a limited liability company to define the terms of their relationship – state statutes contain fundamental governing provisions that members of a limited liability company can contract out of – courts have relied on the plain language contained in the contracts and have resisted creating ambiguities based on extrinsic evidence.