Key LLC issues and answers.

EXECUTIVE SUMMARY

While the use of limited liability companies has become more widespread, as evidenced by the enactment of LLC legislation in almost every state, the Federal tax treatment of such entities and their members has been defined only in very limited ways. Questions such as the ability of LLC members to use passive activity losses, the computation of at-risk basis and the taxability of single-member LLCs remain unanswered. This article analyzes the law in these and other heretofore unexplored areas and proffers guidance.

With the recent adoption of limited liability company (LLC) legislation in Massachusetts, 49 jurisdictions (including the District of Columbia and excluding Hawaii and Vermont) now legally recognize LLCs. In comparison with the use of an S corporation, although the proposed S Corporation Reform Act(1) (SCRA) recommends liberalization of the S requirements, LLCs continue to offer members the advantages of (1) increased basis for entity-level debt, (2) a step-up in the basis of LLC assets on the taxable transfer of an interest and (3) multiple levels of participation. The SCRA does not contemplate such benefits; thus, when combined with the feature of limited liability, the LLC becomes an attractive option for many business ventures.

Although the IRS has published some guidance regarding LLCs in the form of revenue rulings and proposed regulations, most ruling requests ask whether the LLC is a partnership for tax purposes(2); seldom are the tax aspects of practical and operational issues addressed. Even when much-needed direction is provided (e.g., whether LLC income is earnings for self-employment (SE) tax purposes), many unanswered questions remain.

This article addresses some of the key operational tax issues pertaining to LLCs, focusing on areas for which specific guidance is not yet available: passive activities, at-risk basis calculations, taxability of single-member LLCs and other matters; state tax considerations are also discussed.

Background

The LLC concept originated in Germany in 1892. Although the U.S. did not pass LLC legislation until 1977, many foreign countries based their LLC laws on a common-law provision enacted by Pennsylvania in 1824. Germany's law served as the model for businesses in Europe and Latin Amrican that adopted the LLC form of entity ownership.(3) Foreign LLCs share the basic characteristics of limited liability, dissolution on a member's death, controlled admission of new members and recognition as a separate legal entity.

In 1977, Wyoming passed the first LLC legislation,(4) followed by Florida in 1982.(5) However, LLCs were not considered viable entities until the IRS ruled that they would be taxed as partnerships rather than corporations.(6) Accordingly, LLCs combine the unique benefits of limited liability with flowthrough taxation to members.

Comparison With Other Types of Entities

LLCs are an attractive alternative to partnerships and corporations, because they provide limited personal liability to members with a single level of tax; in contrast, general partners have personal liability for partnership debts, while limited partners cannot participate in partnership management without jeopardizing their limited liability. Unlike partners, LLC members can participate in the entity's management without risking loss of limited liability. While S corporations limit the number and type of shareholders, LLCs have no such limits. Additionally, because LLCs are treated as partnerships for tax purposes, LLC members receive various tax advantages not available to S corporation shareholders, such as: a basis increase for their share of certain LLC liabilities, special allocations of income and expenses, and the ability to elect to step up the basis in LLC property to reflect the outside basis in membership interests. Finally, while C corporations impose a double tax on corporate earnings distributed to shareholders, LLCs pass through to members items of income, gain, loss, deduction and credit.

LLCs are flexible in that they permit any economic or management-sharing relationship desired; LLC operating agreements can establish preferred interests, special allocations or other forms of ownership. All LLC statutes characterize a member's interest in the LLC as personal property and permit the assignment of an economic interest in the LLC to third parties; however, third-party transferees cannot become LLC members without the consent of other members, under either the LLC's operating agreement or state statute.

In ruling on whether an LLC is treated as a partnership for tax purposes, the IRS applies the entity classification criteria of Regs. Sec. 301.7701-2. Under that regulation, an unincorporated business is a partnership for Federal tax purposes only if it lacks at least two of the four major corporate characteristics--limited liability, continuity of life, centralization of management and free transferability of interests. By definition, all LLCs have limited liability; a given LLC must lack two of the remaining three criteria to achieve partnership status and tax treatment.

SE Tax Considerations

Sec. 1401 imposes Social Security and Medicare taxes on SE income; Sec. 1402(a) provides that net earnings from SE include the gross income derived by an individual or partner from any trade or business. Sec. 1402(a) (13) excludes a limited partner's distributive share of any item of income or loss from SE income, although guaranteed payments to limited partners are included in such income under Regs. Sec. 1.1402(a)-1 (b); this rule was originally intended to prevent passive investors in limited partnerships from including investment income in Social Security earnings.

Recently issued Prop. Regs. Sec. 1.1402(a)-18(7) addresses the determination of SE earnings for certain LLC members and clarifies whether an LLC member will be treated as a limited or general partner; the latter is helpful in that the Code, regulations and rulings do not define those terms. An LLC member is treated as a limited partner whose distributive share of partnership income is excluded from SE earnings if (1) the member is not a manager and (2) the entity could have been formed as a limited partnership rather than an LLC in the same jurisdiction and the member could have qualified as a limited partner (the exclusion test). Prop. Regs. Sec. 1.1402(a)-18(c) (3) defines a "manager" as one who (alone or together with others) is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the LLC was formed. According to the preamble to the proposed regulations, the exclusion test is intended to ensure that a business operating through an LLC cannot obtain a better result for SE tax purposes than would be available by operating as a limited partnership, because some states prohibit the conduct of certain activities through limited partnerships.

The proposed regulations are helpful in addressing the classification of SE earnings for LLC members, but numerous questions remain. Are members managers if they have the power to elect managers? Can management authority be waived without jeopardizing an LLC member's treatment as a limited partner? Will management authority be imputed to LLC members who do not use it? If a partnership recently converted to an LLC, will bifurcated general and limited partnership interests be aggregated in determining whether a member's distributive share of partnership income is subject to SE tax?

Under Prop. Regs. Sec. 1.1402(a)-18(c) (3), members having continuing exclusive authority to make the management decisions of the LLC are treated as general partners for SE tax purposes. Thus, if a limited partnership converts to an LLC, all business income allocated to general partners also having limited partnership interests will be subject to SE tax; this is a costly disadvantage for partners who before the conversion could exclude their limited partnership share of income from SE tax. After the conversion, the LLC members with management authority are treated as general partners receiving an allocable share of the business income generated by the LLC, which is subject to SE tax.

The exclusion test is also troubling because some states may bar limited partnership status for certain professions (the same professions that are included in LLC statutes). In such cases, the preamble to the proposed regulations provides that the effect of the proposed regulation would be to bar the members of an LLC formed in those jurisdictions from being treated as limited partners, so that their distributive shares of partnership income would be subject to SE tax. This treatment is clearly inappropriate for LLC members whose partnership activities are comparable to that of limited partners, not general partners.

A more consistent approach might be to analyze the services that each LLC member performs to determine whether those activities are in the nature of LLC remuneration or passive income. This approach would solve the problem faced by many professional firms having both equity and nonequity members; management authority in those firms typically rests with the equity members. In such a case, rather than excluding from SE tax the income allocated to nonequity members, the distributive share of partnership income earned by LLC members actively involved in rendering personal service activities would be treated as SE earnings. Hopefully, this approach will be considered in the final regulations.

Passive Activity Loss Treatment

Under Sec. 469(a), passive activity losses (PALs) may be restricted for LLC members that are individuals, trusts, estates, professional service corporations or closely held C corporations. Sec. 469(c) defines a passive activity as a rental activity or a trade or business activity in which the taxpayer does not materially participate. Currently, there is no guidance on the level of management activity required for an LLC member to meet the material participation test to allow the deduction of PALs against nonpassive income; guidance would be very welcome, because the definition of "limited partner" under Sec. 469(h) (2) precludes most LLC members from becoming material participants in the activity (unless they can meet a highly restrictive material participation test).

Under Temp. Regs. Sec. 1.469-5T(e) (3) (i) (B), a limited partnership interest includes a "partnership interest" if the liability of the holder of the interest for partnership obligations is limited under state law to determinable fixed amounts. Since by definition, an LLC member's liability is so limited, an LLC member is a limited partner for Sec. 469 purposes.

However, an LLC member can deduct PALs if he meets one of the Temp. Regs. Sec. 1.469-5T(a) material participation tests:

* The member participates in the activity for more than 500 hours during the year (Temp. Regs. Sec. 1.469-5T(a) (1)).

* The member materially participated in the activity for any five of the 10 preceding tax years (Temp. Regs. Sec. 1.469-5T(a) (5)).

* The activity is a personal service activity that the member materially participated in for any three preceding tax years (Temp. Regs. Sec. 1.469-5T(a) (6)).

For this purpose, Regs. Sec. 1.469-4(c) (1) provides that one or more trade or business activities can be aggregated or separated into appropriate economic units for the measurement of gain or loss; under Regs. Sec. 1.469-4(c) (2)), the member may use any reasonable method of applying the relevant facts and circumstances in grouping activities. Combining LLC activities into appropriate economic units that include other activities of the member could prove advantageous in meeting the 500-hour test.

The treatment of an LLC interest as a limited partnership interest under Sec. 469(h) (2) seems clear, because all LLC members have limited liability. When Sec. 469 was enacted, however, it defined the relationship between partners whose economic risk was already largely determined by their status as either general or limited partners. Because LLC members can participate in the LLC without losing limited liability, the rule applicable to limited partners who cannot participate in the management of the partnership without losing their limited liability should not apply. In the case of LLCs, it would be more appropriate to permit members to use the (more liberal) seven tests of material participation in Temp. Regs. Sec. 1.469-1T(e) (2) that apply to S shareholders and general partners. The IRS had previously ruled that partners with significant management authority relative to other partners would be treated as general partners.(8) If this concept were applied to LLCs, member-managers would be treated as general partners and qualify for less stringent material participation rules. More liberal IRS guidance on this point would be very welcome.

At-Risk Basis Calculations

LLC members that are either individuals or closely held C corporations(9) can deduct LLC losses only to the extent such losses do not exceed the member's at-risk basis under Sec. 465. At-risk basis generally equals a member's basis in his LLC interest under Sec. 705, except that his share of nonrecourse liabilities is typically excluded. Because LLC members are not personally obligated for LLC debt, LLC liabilities are nonrecourse except to the extent of member guarantees. LLC members do not receive at-risk basis for nonrecourse liabilities, but do for capital contributions (as adjusted for subsequent distributions and allocations of profit and loss); at-risk basis is also created to the extent that a member guarantees LLC debt. Under Sec. 465(b) (6) (C), a partner's share of "qualified nonrecourse financing" is based on the partner's share of liabilities incurred in connection with such financing (as defined in Sec. 752).

Prop. Regs. Sec. 1.465-6(d) provides that if a taxpayer guarantees repayment of an amount borrowed by another person (or entity) for use in an activity, the guarantee does not increase the taxpayer's at-risk basis until the taxpayer repays such debt and has no remaining rights against the primary obligor. An exception, contained in Prop. Regs. Sec. 1.465-25(b) (1), (i), permits an increase in at-risk basis when property used outside the activity has been pledged as security for the guarantee. Under this rule, an unsecured guarantee is a contingent liability that does not create at-risk basis for the guarantor. However, Regs. Sec. 1.752-2(d) (2), issued two years before the Sec. 465 proposed regulations, permits a guarantee of nonrecourse debt to increase the guarantor's at-risk basis. Although taxpayers can rely on the position taken in the Sec. 752 regulations and treat guaranteed nonrecourse debt as an at-risk amount, this treatment is somewhat uncertain until the IRS addresses the inconsistency between the two sets of regulations.

Members of LLCs holding real property receive limited relief from the at-risk rules; at-risk basis is generated to the extent that qualified nonrecourse financing is secured by real property used in the LLC activity. Sec. 465(b) (6) defines "qualified nonrecourse financing" as financing borrowed by the taxpayer with respect to the activity of holding real property, from a person actively and regularly engaged in the business of lending money. This financing cannot be convertible debt and must not require personal guarantees for repayment.

Losses in excess of a member's at-risk basis cannot be deducted in the year generated, but can be carried forward until sufficient at-risk basis is available.

Tax Accounting Methods

Sec. 448 bars the use of the cash method of accounting for tax purposes by C corporations, partnerships with C corporation partners and tax shelters. For this purpose, a "tax shelter" is defined by Secs. 448(d) (3) and 461 (i) (3) as the following:

* Any enterprise other than a C corporation, if interest in such enterprise have been offered for sale in an offering required to be registered with any Federal or state agency regulating the offering of securities for sale.

* Any partnership or other entity (other than a C corporation) if more than 35% of the losses of such entity during the tax year are allocable to persons who are limited partners and who do not actively participate in the management of the enterprise.

* Any enterprise the principal purpose of which is the avoidance or evasion of Federal income tax.

Recent letter rulings defining a "tax shelter" are of particular interest to professional service general partnerships contemplating converting to LLC status, because tax shelters cannot use the cash method and a change to the accrual method, if required, would accelerate the recognition of taxable income. Sec, 448 permits qualified personal service corporations(10) and partnerships to use the cash method, but not LLCs. If the members of an LLC were categorized as limited partners, they would be allocated 100% of the entity's losses, and the LLC would thus be considered a tax shelter unable to use the cash method. Favorable positions taken by the IRS in letter rulings (discussed below) indicate that LLCs converting from general partnerships that meet certain requirements will be able to retain the cash method.

Unlike in a limited partnership, LLC members can participate at various levels and yet appoint one or more managers to operate the LLC. The applicability of the cash method must therefore be carefully scrutinized on a case-by-case basis. In two recent rulings, the IRS considered whether LLC members were actively participating in management based on the entities' operating agreements.(11) In these rulings, the votes of all of the LLC's members were required to elect or remove managers, to admit or dismiss members, to amend the operating agreement, to dissolve the LLCs and to approve members' compensation. In each case, the members were found to actively participate in the LLC's management and were not limited entrepreneurs under Sec. 464(e) (2).

In another ruling,(12) the IRS approved the use of the cash method for a law firm, without basing its determination on each member's active participation in firm management. Although the law firm had members who were not responsible for firm management activities, the IRS concluded that because the firm had been in its current business for over 100 years and had consistently reported taxable income rather than losses, it was not a syndicate(13) and so could use the cash method.

LLCs, like S corporations and partnerships, may use the cash method (regardless of their level of gross receipts) if they do not (1) have as members C corporations (other than personal service corporations defined in Sec. 448(d) (2)) and (2) allocate more than 35% of their losses to persons not active in the management of the LLC (as determined under its operating agreement).(14) LLCs wishing to use the cash method should ensure that they comply with these requirements.

Partnership Considerations

Tax Matters Partner

Under Sec. 6231(a) (7), a "tax matters partner" (TMP) must be a general partner. The unified audit and litigation procedures apply to partnerships with more than 10 partners; partnerships may designate their own TMPs responsible for representing the entity before the IRS. If no TMP is designated, Sec. 6231(a) (7) deems the TMP to be the general partner with the largest profits interest at the close of the tax year involved. LLCs do not have general partners; Temp. Regs. Sec. 301.6231(a) (7)-1T thus provides welcome advice in determining which LLC members can serve as TMP. Under the regulation, only member-managers of an LLC qualify as a general partner for purposes of determining the TMP. This rule incorporates and modifies the provisions of Rev. Proc. 88-16(15) concerning the selection of a TMP when no designation is made by the LLC and the "largest-profits interest" rule does not apply. For entities without limited partners (e.g., general partnerships or LLCs with only member-managers), the IRS may select any member (i.e., general or limited partner) to be the TMP.

Tax Year

Under Sec. 706(b) (1) (B) (i), the LLC's tax year is based on the tax year of the majority of its members; the LLC must adopt the tax year of its members who have an aggregate interest of more than 50% in the entity's capital and profits. If there is no such year, Sec. 706(b) (1) (B) (ii) provides that the LLC adopts the tax year of all LLC members having an interest of 5% or more in its capital or profits. If neither of these approaches yields a tax year, under Temp. Regs. Sec. 1.706-1T(a) (2), the LLC's tax year is the tax year resulting in the least amount of aggregate income being deferred to the members.

In the case of a general or limited partnership converting to an LLC, the IRS has ruled that, on conversion, the tax year does not close as long as a termination under Sec. 708 has not occurred.(16)

Sec. 754 Election

Under Secs. 734 and 743, if a distribution is made in liquidation of a member's interest or a member's economic interest is transferred due to death or a sale or exchange, an election can be made under Sec. 754 to adjust the basis of the LLC's property. The membership interest represents the member's entire economic, management and control rights in the LLC; the economic interest represents the member's right to receive LLC allocations of profits, losses and distributions. This election may be advisable for those LLCs with property valued significantly more than original cost, the value of which is not expected to depreciate in future years.

Partnership Exclusion Election

Regs. Sec. 1.761-2 provides that partnerships meeting certain requirements can elect to be excluded from the Code's partnership provisions. Under Sec. 761(a) (1) and (2) and Regs. Sec. 1.761-2(a) (3) (i), partnerships used either for investment purposes, or for the joint production, extraction or use of property may elect to be excluded from subchapter K, if the partners own the partnership property as co-owners. Property held by an LLC is not owned by the members as co-owners, and thus, the election may not be available. However, if the LLC makes the election out and provides in its operating agreement that (1) it is the member's intent that the LLC be treated as a co-ownership, rather than as a partnership, for tax purposes and (2) expenses are to be allocated to the members that fund them, even if the IRS determines that the Sec. 761(a) election is invalid, the allocation provided by the partnership agreement would correspond to the results as if the LLC were treated as a co-ownership.

If the titling problem above does not apply, members in an LLC that holds investments and elects out of subchapter K must reserve the right to take or dispose of their interests in any property held by the LLC. Members of an LLC formed for the joint production, extraction or use of property must possess the right to take in kind or dispose of their shares of any property produced, extracted or used. In both cases, to retain flexibility for LLC members to make decisions pertaining to their interests in LLC property, the LLC should not be managed by managers. LLCs making such an election will not be required to file a partnership return, and each member will report his taxable income from the LLC separately on his income tax return.

Single-Member LLCs

The tax classification of LLCs owned by a single member is currently uncertain. Many state statutes prohibit single-member LLCs, but others permit it (e.g., New York, Virginia, Texas and Delaware).(17) It is unlikely that single-member LLCs will be treated as partnerships, because subchapter K clearly pertains to entities owned by more than one owner.(18) Although there have been no rulings, it appears that a single-owner LLC will be classified either as a sole proprietorship or as an association taxable as a corporation. Under Regs. Sec. 301.7701-2, a one-member LLC will be treated as an association if it has at least three of the following: limited liability, continuity of life, centralization of management and free transferability of interests. Although there is some argument that the other two corporate characteristics (associates and an objective to carry on a business and divide the gains therefrom) should be considered in distinguishing between a sole proprietorship and a corporation, at least two cases have rejected this result,(19) holding that single-owner, unincorporated entities should be tested under the four factors used to distinguish partnerships from corporations.

A one-member LLC will not be classified as a partnership, because the IRS has indicated that an organization with a single member can be deemed to have associates in determining whether it is an association, but a single-member organization cannot be a partnership.(20)

Under the IRS's "check-the-box" entity classification proposal,(21) any domestic unincorporated business organization would be classified as a partnership for Federal tax purposes, unless the members elect corporate tax treatment. This proposal does not extend to one-member LLCs, however, because it only pertains to organizations with at least two associates. Numerous problems could exist if partnership treatment were permitted for single-owner LLCs; for example, large corporations could selectively structure their consolidated returns.

Other Operational Issues

Post-Conversion Reporting Requirements

Rev. Rul. 95-37(22) confirmed a series of letter rulings that determined that the tax consequences of a partnership's conversion to an LLC were identical to those of a general partnership's conversion to a limited partnership.(23) Under the ruling, the tax year of the converting partnership does not close with respect to any partner (provided that a termination does not occur under Sec. 708), and the LLC continues to use the former partnership's Federal taxpayer identification number. This holding applies regardless of how the conversion takes place under state law (e.g., via merger).

Organizational Expenses

Under Sec. 709(b) (1), a partnership may elect to deduct its organizational expenses ratably over a period of not less than 60 months, beginning with the month in which the partnership begins business. Organizational expenses are defined in Sec. 709(b) (2) as expenditures that are:

1. Incident to the creation of the partnership.

2. Chargeable to a capital account.

3. Of a character which, if expended incident to the creation of a partnership having a limited life, would be amortizable over such life.

A newly formed LLC would clearly be able to deduct organizational expenses under Sec. 709; whether a converting LLC would receive the same treatment is uncertain.

Under Rev. Rul. 95-37, a partnership converting into an LLC will not terminate for tax purposes. Because the business and tax status of the partnership continues, the organizational expenses are not "incident to the creation of a partnership" under Sec. 709(b) (2) (A). If the expenses were considered to be ordinary and necessary in carrying on a trade or business, they would be deductible under Sec. 162. The expenses could be analogous to costs incurred in a corporate reorganization, which the Supreme Court held must be capitalized because they create significant long-term benefits.(24) Unlike corporations, however, LLCs have a limited life; perhaps the organizational expenses incurred in the conversion could be amortized over the LLC's life.

S Corporation Repeal 

As part of a package proposed to close corporate loopholes, the Clinton administration has recommended that large C corporations (i.g., those with more than $5 million in annual sales) that elect S status be treated as though they liquidated and reincorporated at the time of conversion. Such corporations would incur significant tax on assets with large built-in gains, if sufficient net operating loss carryovers were not available to offset them.

Currently, S corporations only recognize the built-on gain at the corporate level if assets are sold within 10 years after conversion.(25) Although this provision would be effective for S elections made after Dec. 7, 1995, Treasury has announced that it will recommend that it apply only to S elections effective for tax years beginning after Jan. 1, 1997.(26)

If this proposal is enacted, business owners with significant annual sales would be well advised to consider an LLC rather than a C corporation. Frequently, C corporations convert to S status, after they no longer have ineligible shareholders or become able to meet the restrictive S rules. The Clinton proposal would impose a significant front-end charge on C corporations with extensive built-in gains when converting to S status, and would ensure double taxation. This is in contrast to single-level taxation of LLCs, with generally no additional tax imposed on liquidation or conversion into a different form of entity.

State Tax Considerations

As was discussed, all but two states have adopted LLC statutes, and a Uniform Limited Liability Company Act (Act) was approved by the Uniform Law Commissioners in August 1994. Because most states have not yet adopted the Act, LLC statutes vary significantly among states. Companies engaging in interstate commerce face laws that are not uniform, and operations in a state that does not recognize LLCs could expose the business and its members to unlimited liability. Additionally, LLCs conducting business in a state not having an LLC statute could cause the members to be treated as general partners. Of the two states that do not recognize LLCs, Vermont follows the Federal tax treatment of foreign LLCs, and Hawaii treats them as partnerships.(27)

Not all states treat LLCs as partnerships (e.g., Florida and Texas tax LLCs as corporations). Pennsylvania taxes LLCs as corporations except for "restricted professional companies" (i.e., traditional learned professions). Numerous other states impose entity-level withholding responsibilities on LLCs--for instance, Georgia and Maryland impose a withholding tax on nonresident members' distributive shares of LLC income.(28)

Because LLCs are a relatively new form of entity, little state case law exists. In addition, those doing business with LLCs may require some time to become comfortable with this type of entity. A business that has multistate operations should carefully consider both tax and non-tax implications before electing to be treated as an LLC.

Conclusion

Although guidance is available for certain areas of LLC taxation, such as the determination of SE earnings, an LLC's ability to use a former partnership's cash method of accounting after conversion, and the criteria for choosing a TMP, numerous areas remain unresolved--for example, LLC members cannot offset PALs against nonpassive income without meeting a restrictive material participation test applicable to limited partners. Additional guidance is needed to clarify whether LLC members can use the more liberal seven tests of material participation available to S shareholders and general partners, and if so, the level of management authority that must be demonstrated by the members. Clarification is also needed on the tax treatment of single-member LLCs, and the deductibility of organizational expenses resulting from the conversion of a partnership into a LLC. Finally, businesses with multistate operations must carefully consider all state tax issues resulting from the LLC election. Despite this uncertainty, however, the LLC has the unparalleled advantage of being taxed as a partnership while providing limited liability to members, which explains its popularity as a business form.

(1) S. 758, 104th Cong., 1st Sess. (1995).

(2) See the discussion in Cochran, Blazek and Elliott, "The Costs of Converting a Partnership to an LLC," 26 The Tax Adviser 455 (Aug. 1995) (hereinafter, "Cochran").

(3) See generally, Elliott and Spudis, "Taxation of Limited Liability Companies and Their Members," presented to the New Mexico Bar Association (Aug. 1993).

(4) Wyo. Stat. [sections][sections] 17-15-116 to 17-15-143 (Michie Supp. 1994).

(5) Flo. Stat. [sections][sections] 608.401 to 608.514 (West 1995).

(6) Rev. Rul. 88-76, 1988-2 CB 360 (holding that a Wyoming LLC is a partnership for Federal tax purposes).

(7) EE-45-94 (12/28/94); see Cochran, note 2.

(8) Rev. Proc. 89-12, 1989-1 CB 798, supplemented by Rev. Proc. 92-33, 1992-1 CB 782.

(9) I.e., closely held C corporations meeting the stock ownership rules of Sec. 542(a).

(10) Sec. 448(d) (2) defines "qualified personal service corporation" as a corporation substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting, and which meets certain other requirements.

(11) IRS Letter Rulings 9321047 (2/25/93) and 9328005 (12/21/92).

(12) IRS Letter Ruling 9415005 (1/10/94).

(13) As defined in Temp. Regs. Sec. 1.448-1T(b) (3), a syndicate is a partnership or other entity (other than a C corporation) if more than 35% of the losses of such entity during the tax year (for years after 1986) are allocated to limited partners or limited entrepreneurs.

(14) See Temp. Regs. Sec. 1.448-1T(b) (1).

(15) Rev. Proc. 88-16, 1988-1 CB 691.

(16) Rev. Rul. 95-37, 1995-2 CB 130.

(17) See Carlin and Hedlund, "Advantageous Uses of LLCs for Real Estate Investments: Tax Considerations," Tax Mngmt. Memo. (10/30/95).

(18) See Regs. Sec. 1.736-1(a) (6); generally, subchapter K foresees the existence of one-partner partnerships only on the death or retirement of one partner in a two-partner partnership.

(19) John B. Hynes, Jr., 74 TC 1266 (1980); Larry D. Barnette, TC Memo 1992-371.

(20) GCM 39395 (8/5/85).

(21) See Notice 95-14, 1995-1 CB 297; Prop. Regs. Sec. 301.7701-3(a).

(22) Rev. Rul. 95-37, note 16.

(23) See Rev. Rul. 84-52, 1984-1 CB 157.

(24) See INDOPCO, Inc., 112 Sup. Ct. 1039 (1992) (69 AFTR2d 92-694, 92-1 USTC [paragraph] 50,113).

(25) See Orbach and Lassar, "Are the Sec. 1374 Regulations a BIG Improvement?," 27 The Tax Adviser 157 (Mar. 1996).

(26) See News Notes, "Sec. 1374 Repeal Relief," 27 The Tax Adviser 197 (Apr. 1996).

(27) See CCH State Tax Guide, 2d ed., [paragraph] 10,099.

(28) See Ely, "The LLC Scoreboard,' 69 Tax Notes 1661 (12/25/95).