FLORIDA ESTATE PLANNING AND PROBATE LAW BLOG

The Florida Estate Planning and Probate Law Blog is focused on recent federal and state case law and planning ideas.

Showing posts with label Florida Corporate Attorney. Show all posts
Showing posts with label Florida Corporate Attorney. Show all posts

CAN MY REVOCABLE TRUST OWN S-CORPORATION STOCK

♠ Posted by Marc J. Soss in ,,,,,,,
A Florida Revocable Trust (“Trust”) is a common tool utilized by individuals when creating their Florida estate plans. A Trust is designed to hold assets during the Grantor (the individual who creates the Trust) lifetime and then dispose of those assets at their death (the terms of the Trust will contain the individual’s specific directions as to how the assets will be distributed). In order for a Trust to accomplish its objective it must be funded (assets retitled into the name of the Trust) with all of the Grantor’s assets during their lifetime. This will require the Grantor to retitle real property, bank and investment accounts, and any business interests (LLC interests or stock in an S-Corporation) into the Trust. If a Grantor intends to title S-Corporation stock into the name of their Trust there are specific guidelines which must be adhered to. While a Trust is a permitted shareholder of an S-Corporation, Section 1361 of the Internal Revenue Code only permits certain kinds of trusts (a Qualified Subchapter S Trust or Electing Small Business Trust) from owning the stock. If an unauthorized Trust becomes a S-Corporation stock shareholder, the Corporation will cease to be a qualified S-Corporation and will be taxed as an ordinary C Corporation. Additional pitfalls must be avoided when a married Grantor dies. Upon a Grantor’s death, the Trust assets may be divided and distributed into separate trusts (share for the surviving spouse and one for the deceased spouse). The deceased spouse’s share is typically held in an irrevocable trust for the survivor’s benefit (a “Credit Shelter Trust” or “Bypass Trust”). If the S-Corporation stock is utilized to fund the Credit Shelter Trust, not a grantor trust, then it must qualify as either a Qualified Subchapter S Trust or Electing Small Business Trust and make a timely election with the IRS.
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FLORIDA LLC TAX ISSUES

♠ Posted by Marc J. Soss in ,,,,,,
Under the IRS “check the box” regulations, a Florida Limited Liability Company with two or more members is automatically taxed for income tax purposes as a partnership. As a result, all income that passes through a partnership to a partner is classified as self-employment income subject to payroll taxes. The entity may alternatively elect to be taxed as an S corporation for income tax purposes. The election can be made by filing Form 2553 with the IRS. The benefits of an LLC electing to be taxed as an S corporation, for income tax purposes, include treating a substantial portion of earnings as wages subject to payroll taxes, and the balance as dividends that are not subject to payroll taxes. To maintain this income tax status, the LLC is required to satisfy all of the qualifications for a “small business corporation.” If the LLC fails to meet all of the required qualifications, the S election will not be valid and the LLC will be taxed as a C corporation and subject to double taxation. Problems can also arise when drafting an LLC Operating Agreement. Standard partnership law concepts and verbiage (treasury regulations that govern partnerships, capital accounts and capital account maintenance, special and regulatory allocations of income and loss, and liquidating distributions in accordance with capital account balances) are included in most LLC Operating Agreements. These provisions should not be included in a qualifying “small business corporation” and their inclusion may disqualify the LLC from making an S election.
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CHANGES TO THE PARTNERSHIP RULES COMING IN 2017

♠ Posted by Marc J. Soss in ,,,,,,


The Bipartisan Budget Act of 2015 has strengthened the IRS’s ability to audit partnerships (including multi-member LLCs). The new rules apply to tax years beginning after 2017, and will apply to partnerships of 100 or more partners. To prepare for these changes, Partnerships should amend their Partnership Agreements and select a “Partnership Representative” (sole contact individual with the IRS auditor and someone authorized to make all decisions regarding how to handle the audit).

The new rules require the IRS to assess the partnership if filing errors are detected during an audit. The Partnership Representative will then be responsible to determine whether the partnership itself (the current partners, indirectly), or those who were partners during the audit period, should pay the assessment. The Partnership Representative will also be able to determine whether the entity could opt-out of the new rules (if it has 100 or fewer partners, individuals, S corporations, C corporations, or estates of deceased partners). If you have an S corporation partner, then you must count each of its shareholders for this purpose. If a Partnership Representative is not designated by the entity, the IRS reserves the right to appoint one for the entity.

Partnerships should begin planning for 2017 today by determining: (i) who will serve as the Partnership Representative; (ii) the level of indemnification they will receive against any costs or liabilities that may be incurred in that role, and (3) the level of accountability they will have to the company and its partners. It is important to note that Partnership Representative does not need to be a partner of the entity.
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LLC CASE OF INTEREST IN THE BANKRUPTCY REALM

♠ Posted by Marc J. Soss in ,,,,,,
Walro v. The Lee Group Holding Co., LLC (In re Lee), 524 B.R. 798 (Bankr. S.D. Ind. 2014) –

A chapter 7 trustee sought a court determination that (1) a debtor’s voting rights in a limited liability company (LLC) were property of the bankruptcy estate, and (2) other members of the LLC violated the automatic stay by taking action to remove the debtor as a member and terminating his voting rights. The operating agreement for the limited liability company (Lee Group) provided that the debtor had a 0% economic interest, but held 51 out of 101 votes.  The agreement further provided that his voting rights would expire upon his death or withdrawal from the LLC.

The debtor signed the operating agreement as a member.  The debtor was also designated as the manager of the LLC, which meant that he was in control of the company’s business and affairs.  The members were entitled to vote on certain matters, including “alienation of interest of individual members.” After the bankruptcy was filed, the trustee’s counsel wrote a letter to the LLC’s counsel contending that the debtor’s non-economic voting right interests became property of the bankruptcy estate subject to the trustee’s control. After receipt of this letter, the members adopted a resolution accepting withdrawal of the debtor from the LLC as of December 31 of the prior year.  The resolution acknowledged termination of the debtor’s voting rights and his resignation as a manager.  The remaining members subsequently designated the debtor’s son as the new manager and reallocated voting rights based on economic interests.  They also agreed that the debtor would continue to work for the LLC as a “consultant.”


The trustee argued that the voting rights were property of the estate, and that the postpetition action taken by the other members to terminate the debtor’s membership violated the automatic stay.  The defendants responded that (1) the debtor’s voting rights were derivative of his role as a manager, (2) he had no other property interest in the LLC, and that (3) their actions did not violate the automatic stay. The court began by noting that “property of the estate” has been “construed most generously” so that it includes “[e]very conceivable” interest of the debtor.  While determination of whether an interest is part of the bankruptcy estate is a federal question, courts look to state law to define the debtor’s interests. Reviewing the operating agreement and applicable state law, the court concluded that the debtor was a member of the LLC and that his voting rights were incident to that membership.  In response to the defendants’ contention that the debtor was not a member because he did not have a right to any distributions, the court concluded that “interest” was broadly defined so that the debtor did have a qualifying economic right.

As the holder of a majority of the votes, he could ensure that he was not removed as a manager, and as a manager and majority member, he had “unfettered control,” including the right to award incentives and bonuses and to provide for indemnification of expenses and liability in any proceeding.  Further, under the operating agreement, if his wife divorced him he could purchase her interest for a substantial discount. And regardless, the debtor was not required to have any economic rights in order to be a member.  The court then reviewed a series of cases in which courts held that both economic and non-economic rights in an LLC are property of the bankruptcy estate.
 
Once the court concluded that the debtor’s voting rights were property of the estate, it turned to whether the defendants had violated the automatic stay.  The court held that when the other LLC members voted postpetition to remove the debtor as manager and to appoint a new manager they were exercising control over property of the estate in violation of the stay. The defendants next tried to argue that the debtor’s 51% voting rights applied only to routine management of the LLC and not actions that require a vote by a majority in interest of the members.  However, the court did not find this argument to be supported by the operating agreement.  In addition, it was irrelevant whether the debtor was entitled to a vote on his own removal. Thus, the court granted the trustee’s motion for summary judgment and held that the debtor was a member as of the petition date, he had voting rights pursuant to the operating agreement, and actions of the other members in terminating his membership and voting rights violated the automatic stay so that those actions were invalid.

On a positive note, the court did not go on to hold that the trustee was entitled to step into the debtor’s shoes as manager or to compel the debtor to remain as manager.  However, this does not provide a lot of comfort since this was because that the trustee did not request this type of relief and does not indicate how the court would have ruled if it had been asked to address these issues.
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