DELAWARE LLCS

By , August 15, 2017 12:05 pm

Under the link below is an excellent discussion by Dan Kleinberger, a leading LLC scholar, about the pros and cons of forming Delaware LLCs.  Here’s the link:

https://www.americanbar.org/publications/blt/2017/07/ulc.html

NEW HAMPSHIRE TAX

By , August 10, 2017 9:00 am

For those of you who are interested in New Hampshire state tax:  The new ruling of the New Hampshire Department of Revenue Administration set forth below rules that a merger of three multi-member LLCs with identical memberships is subject to the NH Real Estate Transfer Tax.  To me, the ruling seems harsh and legalistic.  Furthermore, I suspect the LLCs could have gotten to where they need to go by transfers of the relevant real properties by two of the LLCs to the third.  But maybe life isn’t that simple.

 

Here, in quotes, is the text of the ruling:

 

IN THE MATTER OF THE PETITION OF
Member 1 and Member 2

STATE OF NEW HAMPSHIRE
DEPARTMENT OF REVENUE ADMINISTRATION

FOR A DECLARATORY RULING

REDACTED DOCUMENT

Effective 6-8-2017

Pursuant to RSA 541-A:1, V and RSA 541-A:16, II(b) and N.H. Code of Admin. Rules Rev 209.01, the Petitioners request a declaratory ruling with respect to real estate transfer tax.

Pursuant to N.H. Code of Admin. Rules Rev 209.02, this declaratory ruling is issued to the Petitioners with respect to the particular circumstances and facts discussed herein and represents a holding of the department on those circumstances and facts for Petitioners only.

FACTS PRESENTED BY THE PETITIONERS

ABC, LLC, DEF, LLC, and GHI, LLC (collectively, the “Companies”) are each multi-member New Hampshire limited liability companies with a principal business address located in New Hampshire. Member 1 and Member 2 (the “Petitioners”) are the only members of the Companies and each has a 50% membership interest in each Company. Each Company meets the definition of a “real estate holding company” pursuant to RSA 78-B:1-a, VI.

ABC, LLC owns multiple rental properties and there are mortgages on several of these properties. DEF, LLC owns multiple rental properties and there are mortgages on at least some of these properties. GHI, LLC owns one property.

In order to streamline management, reduce paperwork, and simplify filings, the Petitioners seek to merge the Companies into one limited liability company. The Petitioners represent that DEF, LLC and GHI, LLC will merge into ABC, LLC pursuant to RSA 304-C:155 (Mergers of Limited Liability Companies with Other Business Entities). The Petitioners further represent that:

  1. Petitioners will submit all necessary statutory documents to effectuate the merger.
  2. ABC, LLC will be the surviving limited liability company.
  3. Immediately following the merger, the Petitioners will hold all of the membership interests in ABC, LLC in the same percentage as existed pre-merger (Member 1, 50% and Member 2, 50%).
  4. The members of ABC, LLC will receive no consideration for the merger of their interests in DEF, LLC and GHI, LLC into ABC, LLC.
  5. The combined assets and liabilities of the Companies before the merger will be the same as all of the assets and liabilities of ABC, LLC after the merger.

DETERMINATION REQUESTED BY THE PETITIONERS

Petitioners request the following ruling:

The merger of DEF, LLC and GHI, LLC into ABC, LLC, under the provisions of RSA 304-C:155, shall not create a taxable transfer of the real estate owned by DEF, LLC or GHI, LLC for purposes of the real estate transfer tax, as the tax does not apply pursuant to RSA 78-B:2.

REVISED STATUTES ANNOTATED (RSA) AT ISSUE

The following New Hampshire statutes are relevant to the Petitioners’ request for a declaratory ruling:

RSA 78-B:1, I (1999)

RSA 78-B:2 (2016)

RSA 304-C:155 (2013)

OTHER LAWS OR RULES

N.H. Code of Admin. Rules Rev 209.01

N.H. Code of Admin. Rules Rev 209.02

PETITIONERS’ REPRESENTATIONS

To the best of the Petitioners’ knowledge, the issue and the particular circumstances which are the subject of the petition:

  1. Are not under examination by the Department;
  2. Have not been examined by the Department;
  3. Are not under consideration by the Department in connection with a return of a prior period; and
  4. Are not pending in litigation.

DISCUSSION

  1. Real Estate Transfer Tax

Pursuant to RSA 78-B:1, I(a), the RETT is “[a] tax . . . imposed upon the sale, granting and transfer of real estate and any interest therein including transfers by operation of law.” Further, each sale, granting and transfer of real estate, and each sale, granting and transfer of an interest in real estate “shall be presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” RSA 78-B:1, I(a).

Petitioners represent that the Companies are each multi-member New Hampshire limited liability companies. The Petitioners further represent that they are the only members of the Companies, and each Petitioner has a 50% membership interest in each Company. According to the petition, the Companies will be merged into one limited liability company pursuant to RSA 304-C:155 in order to streamline management, reduce paperwork, and simplify filings. Immediately following the merger, the Petitioners will hold all of the membership interests in the surviving entity in the same percentage as existed pre-merger. The surviving entity, ABC, LLC, will not only retain its pre-merger assets and liabilities, but after the merger will also possess the assets and liabilities that were formerly held by DEF, LLC and GHI, LLC.

The Petitioners seek a ruling that the merger of the Companies is exempt from RETT under RSA 78-B:2, without specifying which of the exceptions described in that section they believe applies to the merger. However, every sale, granting and transfer is “presumed taxable unless it is specifically exempt from taxation under RSA 78-B:2.” RSA 78-B:1, I(a).

A previously existing exception listed in RSA 78-B:2, which has since been repealed, specifically exempted certain mergers from RETT. In 1992, the New Hampshire legislature adopted and the governor signed Chapter 203:2 into law, which amended the RETT statute by inserting RSA 78-B:2, XIV. This paragraph added an exemption from RETT covering “a transfer of title pursuant to a merger, consolidation or other reorganization qualifying as a tax-free reorganization as defined under the United States Internal Revenue Code of 1986, section 368, as amended.”

The exemption provided by paragraph XIV was repealed when the legislature adopted Chapter 158:27 in 2001, and has not been reenacted since. Additionally, none of the remaining exceptions in RSA 78-B:2 “specifically exempt,” as required by RSA 78-B:1, I(a), the merger of multiple entities with identical ownership. As none of the exceptions in RSA 78-B:2 specifically exempt transactions such as the Petitioners’, the merger described in the petition is not exempt from RETT under RSA 78-B:2.

RULING

Based on the facts represented by the Petitioners, as well as the statutory and regulatory provisions discussed above, the Department makes the following ruling:

The merger of DEF, LLC and GHI, LLC into ABC, LLC, under the provisions of RSA 304-C:155, are not exempt under RSA 78-B:2 from the real estate transfer tax.

Date

John T. Beardmore, Commissioner”

ARBITRATION VENUE

By , August 8, 2017 9:06 am

LLC operating agreements often do and should provide for the resolution of disputes among members and managers by arbitration.  However, arbitration clauses have to address many key issues, including the issue of venue.  Failure to properly address the issue of venue can have grave negative results, as shown in the post under the following link:

http://www.lexology.com/library/detail.aspx?g=135b9668-092e-4f50-9240-53673a3da806&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2017-07-12&utm_term=

SALE OF CONTRACT RIGHTS

By , August 1, 2017 8:25 am

If your client is a business owner who, individually or through his business, owns valuable contract rights and has an opportunity to sell those rights to a third party, when can he or she treat income from such a sale as capital gains?  Under the link below is a blog that provides a brief but excellent discussion of this difficult question.

Here’s the link:

http://www.taxlawforchb.com/2017/07/sale-of-a-contract-capital-gain-or-ordinary-income/

EXCULPATORY PROVISIONS

By , July 28, 2017 8:11 am

It is often appropriate to include exculpatory provisions in the operating agreements of multi-member LLCs.  The post under the link below discusses a Delaware case concerning an exculpatory provision under the Delaware Limited Liability Company Act, but the post is also relevant to the drafting of these provisions under LLC acts other than the Delaware Act.

Here is the link:

https://www.natlawreview.com/article/exculpatory-provisions-under-delaware-law-say-what-you-mean-and-mean-what-you-say

INDEPENDENT CONTRACTORS

By , July 25, 2017 9:13 am

The issue whether an individual is an independent contractor or an employee comes up all the time for business lawyers, including LLC lawyers.  The following post is a useful update about current developments in federal and state independent contractor law:  http://www.lexology.com/library/detail.aspx?g=4de84c6e-391f-41e0-b3f7-18e67fc505fd&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2017-06-13&utm_term=

NEW HAMPSHIRE TAX DEVELOPMENTS

By , July 19, 2017 8:23 am

For those interested in New Hampshire state taxation, the following update from CCH will be of interest:

————————-

S.10,New Hampshire—Corporate Income, Utilities Taxes: Correction: IRC Conformity Updated and BPT/BET Rates Reduced,(Jul. 12, 2017)

Governor Sununu of New Hampshire has approved legislation that reduces the tax rates of the business profits tax and the business enterprise tax, updates the state’s conformity with the Internal Revenue Code, increases the IRC Sec. 179 deduction limit, and repeals the electricity consumption tax. The legislation reduces in two steps the business profits tax and the business enterprise tax rates. The business profits tax will be imposed at the rate of 7.7% on the taxable business profits of every business organization for tax periods ending on or after December 31, 2019 and at the rate of 7.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 8.2%. The rate is scheduled to be reduced to 7.9% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The business enterprise tax will be imposed at the rate of 0.6% of the taxable enterprise value tax base for tax periods ending on or after December 31, 2019 and at the rate of 0.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 0.72%. The rate is scheduled to be reduced to 0.675% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The legislation also updates the state’s Internal Revenue Code (IRC) tie-in date for purposes of computing New Hampshire’s business profits tax liability to December 31, 2016 (currently, December 31, 2015). This change applies to tax periods beginning on or after January 1, 2018. It is effective June 28, 2017.

Further, IRC §179 (asset expense election) will be subject to a deduction limit of $500,000 for property placed in service on or after January 1, 2018. Currently, the limit is $100,000 for property placed in service on or after January 1, 2017. These changes are effective January 1, 2018.

The electricity consumption tax is repealed effective January 1, 2019.

Ch. 156 (H.B. 517), Laws 2017, effective July 1, 2017, except as noted above

NEW ARTICLE ABOUT TAX CHOICE OF ENTITY

By , July 11, 2017 2:46 pm

Tax choice of entity is a critical task in any LLC formation.  Below is the cite to a new law journal article about LLCs and tax choice of entity:

9 Elon L. Rev. 311
Elon Law Review
2017
Article
Caolan J. Ronan
Copyright © 2017 by Elon University; Caolan J. Ronan
START-UPS: WHY INVESTORS PREFER THE CORPORATE FORM TO THE L.L.C. FOR TAX PURPOSES

SELLING LLCS

By , July 7, 2017 8:33 am

LLC lawyers sometimes need expertise about the special issues involved in buying or selling family-owned businesses.  The post under the following link contains excellent advice about valuing these businesses:

http://www.taxlawforchb.com/2017/06/unreasonable-compensation-the-family-business/

TEXAS SHOOT-OUT PROVISIONS

By , July 5, 2017 12:00 pm

Texas shoot-out provisions, also known as “shotgun” provisions, are very common in the operating agreements of multi-member LLCs, but they are often inappropriate.  Under the link below, in a post by Peter Mahler, is the best short discussion of these provisions I’ve ever read.

Aim Carefully Before Pulling Trigger on Shotgun Buy-Sell Agreement