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The Asset Protection Law Letter
A Service of Klueger & Stein, LLP


               THE ASSET PROTECTION LAW LETTER            

Treasury Issues Proposed Regulations on Series LLCs

The Treasury Department has issued proposed regulations on taxation of series limited liability companies. While we have set out the text of the proposed regulation below, here is a summary of what the Treasury has proposed.

A series will be treated as a separate entity for federal tax purposes, as if it had its own juridical existence under applicable local law. This means that while there is only one limited liability company that was chartered by a Secretary of State of Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah or Puerto Rico, there are multiple entities for tax purposes.

Because each series will be treated as a separate entity, the traditional tax analysis will be applied to determine how such separate entity is treated for federal tax purposes. The analysis is completed under Treasury Regulations Section 301.7701-1(b). Thus, for example, if a series has one member it will be a disregarded entity, and if it has two members, it will be a partnership.

The new regulations will have a tremendous impact on the currently existing series LLCs. For example, if an existing series LLC was treated by the taxpayer as a single tax partnership and should now be reclassified as multiple tax partnerships (with each series being a separate partnership), then for income tax purposes that would be treated as a partnership division under IRC Section 708, and may carry certain adverse tax consequences. Even more problematic will be reclassification of a series LLC taxed as a corporation into multiple corporations. That is usually a taxable event unless IRC Section 355 applies.

The proposed regulations will grandfather certain existing series LLCs, if their existing tax classification has a reasonable basis.

What is interesting to note is that now in a single LLC one may have various types of tax entities. One series may be taxed as a disregarded entity, one as a partnership and another as a corporation (if the check the box election is made).

The proposed regulations have also taken aim at the offshore protected cell insurance companies, treating each cell as a separate tax entity.

The text of the proposed regulations follows. Click here to download a full copy of the proposed regulations, including drafter’s comments and explanation.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 is amended by adding entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6011-6 also issued under 26 U.S.C. 6011(a). * * *
Section 301.6071-2 also issued under 26 U.S.C. 6071(a). * * *
Par. 2. Section 301.6011-6 is added to read as follows:

§301.6011-6 Statements of series and series organizations.

(a) Statement required. Each series and series organization (as defined in paragraph (b) of this section) shall file a statement for each taxable year containing the identifying information with respect to the series or series organization as prescribed by the Internal Revenue Service for this purpose and shall include the information required by the statement and its instructions.

(b) Definitions--(1) Series. The term series has the same meaning as in §301.7701-1(a)(5)(viii)(C).

(2) Series organization. The term series organization has the same meaning as in §301.7701-1(a)(5)(viii)(A).

(c) Effective/applicability date. This section applies to taxable years beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 3. Section 301.6071-2 is added to read as follows: §301.6071-2 Time for filing statements of series and series organizations. (a) In general. Statements required by §301.6011-6 must be filed on or before March 15 of the year following the period for which the return is made.

(b) Effective/applicability date. This section applies to taxable years beginning after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register.

Par. 4. Section 301.7701-1 is amended by: 1. Adding paragraph (a)(5). 2. Revising paragraphs (e) and (f). The additions and revisions read as follows: §301.7701-1 Classification of organizations for Federal tax purposes.

(a) * * * (5) Series and series organizations--(i) Entity status of a domestic series. For Federal tax purposes, except as provided in paragraph (a)(5)(ix) of this section, a series (as defined in paragraph (a)(5)(viii)(C) of this section) organized or established under the laws of the United States or of any State, whether or not a juridical person for local law purposes, is treated as an entity formed under local law.

(ii) Certain foreign series conducting an insurance business. For Federal tax purposes, except as provided in paragraph (a)(5)(ix) of this section, a series organized or established under the laws of a foreign jurisdiction is treated as an entity formed under local law if the arrangements and other activities of the series, if conducted by a domestic company, would result in classification as an insurance company within the meaning of section 816(a) or section 831(c).

(iii) Recognition of entity status. Whether a series that is treated as a local law entity under paragraph (a)(5)(i) or (ii) of this section is recognized as a separate entity for Federal tax purposes is determined under this section and general tax principles.

(iv) Classification of series. The classification of a series that is recognized as a separate entity for Federal tax purposes is determined under paragraph (b) of this section.

(v) Jurisdiction in which series is organized or established. A series is treated as created or organized under the laws of a State or foreign jurisdiction if the series is established under the laws of such jurisdiction. See §301.7701-5 for rules that determine whether a business entity is domestic or foreign. (vi) Ownership of series and the assets of series. For Federal tax purposes, the ownership of interests in a series and of the assets associated with a series is determined under general tax principles. A series organization is not treated as the owner for Federal tax purposes of a series or of the assets associated with a series merely because the series organization holds legal title to the assets associated with the series.

(vii) Effect of Federal and local law treatment. To the extent that, pursuant to the provisions of this paragraph (a)(5), a series is a taxpayer against whom tax may be assessed under Chapter 63 of Title 26, then any tax assessed against the series may be collected by the Internal Revenue Service from the series in the same manner the assessment could be collected by the Internal Revenue Service from any other taxpayer. In addition, to the extent Federal or local law permits a debt attributable to the series to be collected from the series organization or other series of the series organization, then, notwithstanding any other provision of this paragraph (a)(5), and consistent with the provisions of Federal or local law, the series organization and other series of the series organization may also be considered the taxpayer from whom the tax assessed against the series may be administratively or judicially collected. Further, when a creditor is permitted to collect a liability attributable to a series organization from any series of the series organization, a tax liability assessed against the series organization may be collected directly from a series of the series organization by administrative or judicial means.

(viii) Definitions--(A) Series organization. A series organization is a juridical entity that establishes and maintains, or under which is established and maintained, a series (as defined in paragraph (a)(5)(viii)(C) of this section). A series organization includes a series limited liability company, series partnership, series trust, protected cell company, segregated cell company, segregated portfolio company, or segregated account company.

(B) Series statute. A series statute is a statute of a State or foreign jurisdiction that explicitly provides for the organization or establishment of a series of a juridical person and explicitly permits-- (1) Members or participants of a series organization to have rights, powers, or duties with respect to the series; (2) A series to have separate rights, powers, or duties with respect to specified property or obligations; and (3) The segregation of assets and liabilities such that none of the debts and liabilities of the series organization (other than liabilities to the State or foreign jurisdiction related to the organization or operation of the series organization, such as franchise fees or administrative costs) or of any other series of the series organization are enforceable against the assets of a particular series of the series organization.

(C) Series. A series is a segregated group of assets and liabilities that is established pursuant to a series statute (as defined in paragraph (a)(5)(viii)(B) of this section) by agreement of a series organization (as defined in paragraph (a)(5)(viii)(A) of this section). A series includes a series, cell, segregated account, or segregated portfolio, including a cell, segregated account, or segregated portfolio that is formed under the insurance code of a jurisdiction or is engaged in an insurance business. However, the term series does not include a segregated asset account of a life insurance company. See section 817(d)(1); §1.817-5(e). An election, agreement, or other arrangement that permits debts and liabilities of other series or the series organization to be enforceable against the assets of a particular series, or a failure to comply with the record keeping requirements for the limitation on liability available under the relevant series statute, will be disregarded for purposes of this paragraph (a)(5)(viii)(C). (ix) Treatment of series and series organizations under Subtitle C – Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24 and 25 of the Internal Revenue Code). [Reserved.]

(x) Examples. The following examples illustrate the principles of this paragraph (a)(5):

Example 1. Domestic Series LLC. (i) Facts. Series LLC is a series organization (within the meaning of paragraph (a)(5)(viii)(A) of this section). Series LLC has three members (1, 2, and 3). Series LLC establishes two series (A and B) pursuant to the LLC statute of state Y, a series statute within the meaning of paragraph (a)(5)(viii)(B) of this section. Under general tax principles, Members 1 and 2 are the owners of Series A, and Member 3 is the owner of Series B. Series A and B are not described in §301.7701-2(b) or paragraph (a)(3) of this section and are not trusts within the meaning of §301.7701-4.

(ii) Analysis. Under paragraph (a)(5)(i) of this section, Series A and Series B are each treated as an entity formed under local law. The classification of Series A and Series B is determined under paragraph (b) of this section. The default classification under §301.7701-3 of Series A is a partnership and of Series B is a disregarded entity. Example 2. Foreign Insurance Cell. (i) Facts. Insurance CellCo is a series organization (within the meaning of paragraph (a)(5)(viii)(A) of this section) organized under the laws of foreign Country X. Insurance CellCo has established one cell, Cell A, pursuant to a Country X law that is a series statute (within the meaning of paragraph (a)(5)(viii)(B) of this section). More than half the business of Cell A during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. If the activities of Cell A were conducted by a domestic company, that company would qualify as an insurance company within the meaning of sections 816(a) and 831(c). (ii) Analysis. Under paragraph (a)(5)(ii) of this section, Cell A is treated as an entity formed under local law. Because Cell A is an insurance company, it is classified as a corporation under §301.7701-2(b)(4). * * * * * (e) State. For purposes of this section and §§301.7701-2 and 301.7701-4, the term State includes the District of Columbia. (f) Effective/applicability dates--(1) In general. Except as provided in paragraphs (f)(2) and (f)(3) of this section, the rules of this section are applicable as of January 1, 1997. (2) Cost sharing arrangements. The rules of paragraph (c) of this section are applicable on January 5, 2009. (3) Series and series organizations--(i) In general. Except as otherwise provided in this paragraph (f)(3), paragraph (a)(5) of this section applies on and after the date final regulations are published in the Federal Register. (ii) Transition rule--(A) In general. Except as provided in paragraph (f)(3)(ii)(B) of this section, a taxpayer’s treatment of a series in a manner inconsistent with the final regulations will be respected on and after the date final regulations are published in theFederal Register, provided that-- (1) The series was established prior to[INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER]; (2) The series (independent of the series organization or other series of the series organization) conducted business or investment activity, or, in the case of a series established pursuant to a foreign statute, more than half the business of the series was the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies, on and prior to [INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER]; (3) If the series was established pursuant to a foreign statute, the series’ classification was relevant (as defined in §301.7701–3(d)), and more than half the business of the series was the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies for all taxable years beginning with the taxable year that includes [INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER]; (4) No owner of the series treats the series as an entity separate from any other series of the series organization or from the series organization for purposes of filing any Federal income tax returns, information returns, or withholding documents in any taxable year; (5) The series and series organization had a reasonable basis (within the meaning of section 6662) for their claimed classification; and (6) Neither the series nor any owner of the series nor the series organization was notified in writing on or before the date final regulations are published in the Federal Register that classification of the series was under examination (in which case the series’ classification will be determined in the examination). (B) Exception to transition rule. Paragraph (f)(3)(ii)(A) of this section will not apply on and after the date any person or persons who were not owners of the series organization (or series) prior to [INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE FEDERAL REGISTER] own, in the aggregate, a fifty percent or greater interest in the series organization (or series). For purposes of the preceding sentence, the term interest means-- (1) In the case of a partnership, a capital or profits interest; and (2) In the case of a corporation, an equity interest measured by vote or value.

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