Now You See it, Now You Don’t: The Comings and Goings of Disregarded Entities

While state law recognizes an LLC as a distinct type of entity, an LLC is not a distinct entity for federal tax purposes. An LLC that has two or more owners is treated as either a corporation or a partnership, while an LLC with a single owner will be disregarded for federal income tax purposes unless it elects to be treated as a corporation. In addition to single-member LLCs, the Code and Regulations recognize a second type of disregarded entity – the qualified subchapter S subsidiary (commonly called a QSub). The first part of this Article examines the tax consequences of (1) the formation and dissolution of single member LLCs, (2) check-the-box elections and revocations for a single member LLC, (3) the addition of a second member to an LLC, which converts a disregarded entity into a partnership, (4) the reduction of the number of members of an LLC from two or more to one, which converts the LLC from a partnership into a disregarded entity, (5) the election by a LLC to be taxed as a corporation – including “check and sell” and “check and merge” transactions – and the revocation of an election by an LLC to be taxed as a corporation, (6) the merger of a single member LLC into another LLC or a partnership, and (7) the merger of an LLC into a corporation. The second part of the Article examines the treatment of QSub elections, revocations, and terminations, in various contexts, including merger and acquisition transactions

2018 Erwin N. Griswold Lecture Before the American College of Tax Counsel: Tax Policy Elegy

For over four decades there have been unrelenting calls to make the tax code “fair, simple, and efficient.” But despite nine major tax acts between 1969 and 2003, along with many less extensive tax acts, the refrain for a “fair, simple, and efficient” tax code has continued to be heard. This continuing plea is not surprising, because over the decades the tax system has evolved to ask the highest income earners to pay less in taxes, become ever more complex, and eschewed “efficiency” in favor of the allowance of an ever-increasing number of tax preferences. Tax act after tax act failed to produce a fair, simple, and efficient tax code. The recently enacted Tax Cuts and Jobs Act is simply another failure to enact tax reform that provides a fair, simple, and efficient tax code. The call for a “fair, simple, and efficient” tax code has become a mere trope. True “tax reform” entails revising the tax code better to meet normative tax policy criteria. “Fairness” needs to be determined with respect to the extent to which the tax code provides both horizontal and vertical equity. The tax burden on similarly situated taxpayers should be equal. If a dollar is a dollar, then two taxpayers (or households) with equal incomes, however derived, should pay equal income taxes. Vertical equity means that taxpayers with greater income than others should pay appropriately greater taxes. This criterion has been interpreted to call for imposing graduated progressive rates, including very high marginal rates on extraordinarily high incomes, based on the ability to pay principle, reflecting the diminishing marginal utility of money. These equitable criteria call for repeal of preferential rates for capital gains. Determining ability to pay requires re-examination of the role of itemized deductions and the standard deduction. The standard deduction should be abolished. Deductions for unreimbursed employee business expenses, producing investment income, casualty losses, medical expenses, and state and local taxes should be allowed without any significant limitation. In reality, the tax system cannot be “simple.” All that we can ask is that the tax system is not unnecessarily unduly complex. That means minimizing special rules that are not necessary accurately to determine economic income or ability to pay consistent with both horizontal and vertical equity principles. “Efficiency” requires structuring the tax system to minimize interference with economic decision-making. To the greatest extent possible, the tax law should be neutral, taxing every investment made by a particular taxpayer identically and taxing all industries identically. In this regard, the Internal Revenue Code is an abject failure. It is replete with special provisions — tax expenditures — favoring various investments by various industries to one extent or another. It is long past time to pay more attention to the wisdom advanced over fifty years ago by Stanley Surrey in his analysis of the systemic problems created by introducing spending provisions through tax expenditure preferences in the tax code. An efficient tax system requires that all businesses, however organized, should be taxed at the entity level under a system that applies the same bases rules and rates to all businesses. The only distinction should be with respect to the treatment of distributions from publicly traded business entities and distributions from privately held businesses. Distributions from publicly traded business entities should continue to be taxed as dividends. Distributions from privately held businesses should be taxed to the owners by applying the imputation-credit model for corporate tax integration

Understanding Consolidated Returns

Section 1501 allows all of the members of an affiliated group of corporations to elect to file a consolidated return. A consolidated return permits the includible members of an affiliated group of corporations to combine their incomes into a single return. The detailed rules for filing consolidated returns are found in regulations promulgated pursuant to a broad delegation of authority in section 1502 of the Internal Revenue Code. In general, the regulations reflect a “single entity” approach that attempts to treat the several members of a consolidated group in the same manner as divisions of a single corporation. This article explains the most important general principles governing consolidated returns and is intended to provide an overview of the consolidated return regulations for lawyers who are generally unfamiliar with the detailed rules. Among other topics, the article explains (1) the rules governing eligibility to file a consolidated return, (2) the computation of consolidated taxable income, including relevant limitations on the use of net operating losses, (3) intercompany transactions and distributions, (4) stock basis adjustments, and (5) earnings and profits calculations. It explains both the rules in the consolidated return regulations and the differences from the rules that otherwise would govern had the corporations not elected to file a consolidated return

Understanding Consolidated Returns

Section 1501 allows all of the members of an affiliated group of corporations to elect to file a consolidated return. A consolidated return permits the includible members of an affiliated group of corporations to combine their incomes into a single return. The detailed rules for filing consolidated returns are found in regulations promulgated pursuant to a broad delegation of authority in section 1502 of the Internal Revenue Code. In general, the regulations reflect a “single entity” approach that attempts to treat the several members of a consolidated group in the same manner as divisions of a single corporation. This article explains the most important general principles governing consolidated returns and is intended to provide an overview of the consolidated return regulations for lawyers who are generally unfamiliar with the detailed rules. Among other topics, the article explains (1) the rules governing eligibility to file a consolidated return, (2) the computation of consolidated taxable income, including relevant limitations on the use of net operating losses, (3) intercompany transactions and distributions, (4) stock basis adjustments, and (5) earnings and profits calculations. It explains both the rules in the consolidated return regulations and the differences from the rules that otherwise would govern had the corporations not elected to file a consolidated return