New York Estate Planning-Property Held By Single-Member LLC Treated As Directly Owned

New York Estate Planning-Property Held By Single-Member LLC

Treated As Directly Owned

 

      An opinion from the Advisory Opinion Unit of the Office of Counsel, New York State Department of Taxation and Finance dated May 29, 2015, addressed the treatment of property held through a single-member LLC for New York State estate tax purposes. It would ultimately determine that property held in a single-member LLC would be treated as directly owned by the single-member.

      This opinion was issued in the context of an individual who planned to contribute his condominium, located in New York, to an LLC, and to then move to another jurisdiction. Although not expressly recited in the opinion, it is presumed that the question involved whether, upon the death of the single-member, the condominium itself or the interest in the LLC would be treated as in the decedent’s estate.

      While a condominium is treated as real property and subject to the New York State estate tax, where the real property is held by a corporation, partnership or trust, the decedent’s estate is treated as holding an intangible interest in the business organization.  Further, New York law prohibits the imposition of an estate tax on the intangible property of a person not resident in New York, even if that intangible property is located in New York.

      All that said, in reliance upon the “Check the Box” regulations providing, inter alia, that absent election to treat a single-member LLC as a corporation, it will be “disregarded, its activities [] treated in the same manner as a sole proprietorship, branch, or division of the owner.” 26 C.F.R. § 301.7701-2(a), the opinion concludes that:

Under the circumstances presented by the Petitioner, interest in the SMLLC owned by Petitioner would not be treated for estate tax purposes as an intangible asset. Instead, the condominium held by the SMLLC would be treated as real property held by the Petitioner for New York State estate tax purposes.

       This determination is troubling in a number of respects. First, the treatment of a SMLLC as a “disregarded entity” under the Check the Box regulations relates to income tax classification. It was never intended to address estate planning questions.

      Second, this opinion conflicts with the numerous statutes and decisions which have held, inter alia, that notwithstanding disregarded entity tax classification, a SMLLC has a real existence, and the sole member and the LLC are not to be treated as one.  This is a topic I covered in Regarding the Disregarded Entity, 14 J. Passthrough Entities 39 (March/April 2011).  HERE IS A LINK to that article.

      Third, notably absent from the discussion was any reference to New York LLC Act. Specifically, it provides:

A membership interest in the limited liability company is personal property. A member has no interest in specific property of the liability company.

It is, at best, difficult to reconcile a statement that the member will be treated as the owner of the SMLLC’s property when the New York LLC Act provides to the contrary.

Foreclosure of Missouri LLC Charging Order: Failure to Affirmatively Authorize Treated as No Authorization

Foreclosure of Missouri LLC Charging Order:  Failure to Affirmatively
Authorize Treated as No Authorization

      A recent decision from the Missouri Court of Appeals interpreted the Missouri LLC Act and its charging order provision, concluding that as it did not affirmatively provide for foreclosure, foreclosure is not possible.  DiSalvo Properties, LLC v. BluffView Commercial, LLC, No. ED 101977, 2015 WL 3795402 (Mo. App. June 16, 2015).

      DiSalvo was awarded a default judgment against BluffView.  Seeking to collect thereon, DiSalvo sought and was awarded charging orders against Bluff View’s interests in two other LLCs, Perrydise Properties, LLC and WR Management, LLC. When DiSalvo sought as well a foreclosure sale on those interests he was stymied, the trial court holding that a sheriff’s sale of LLC interests is not available under the charging order provision of the Missouri LLC Act.  It was that determination that would be appealed and ultimately affirmed.

      The Court of Appeals compared the provisions of the Missouri LLC Act’s charging order provision, it not addressing the foreclosure of the lien, with that under the Missouri partnership and limited partnership acts, where foreclosure is addressed and provided for.  The charging order provision of the Missouri partnership act provides for foreclosure of the charging order lien.  While the charging order provision of the Missouri limited partnership act is silent as to foreclosure, the limited partnership act is “linked” to the general partnership act to the effect that if the rule is not set forth in the limited partnership act proper, refer to the general partnership act.  By this mechanism the foreclosure of a charging order against a limited partnership interest is provided for.  In reliance upon that differential, namely that the LLC Act is silent as to foreclosure and does not link to a foreclosure statute, it was held that there is no foreclosure of an LLC charging order.

      As the language in the partnership/limited partnership acts as to foreclosure was in place at the time Missouri adopted its LLC Act:

[W]e presume the 1993 General Assembly legislated with knowledge of those existing laws as explained in Section II.B.1.b., those provisions of the Uniform Partnership Law and Uniform Limited Partnership Law expressly and implicitly authorize a foreclosure and court-ordered sale of charged partnership interests in a general partnership and limited partnership. The legislature could have enacted similar language expressly or implicitly authorizing a foreclosure and court-ordered sale of charged membership interests in an LLC but failed to do so. Given that the legislature was fully aware of the provisions of sections 358.280.2 and 358.060.2 of the Uniform Partnership Law and section 359.671 of the Uniform Limited Partnership Law when enacting the Missouri LLC Act, then under the rule of expressio unius est exclusio alterius, we find the legislature must have intentionally omitted foreclosures and court-ordered sales as a remedy with respect to charged membership interests in an LLC. (citation omitted). 2015 WL 3759402, *4.

 

            The Plaintiff’s argument that an equitable lien is generally subject to foreclosure was rejected on the basis that the specific statutory language controls.

 

            This decision is noteworthy in its determination that the absence of an affirmative grant of a capacity is equivalent to denial of that capacity.  Also, and as this I could be entirely off base, I have understood expressio unius est exclusio alterius to be a rule of construction within a statute but not between statutes.

 

            Professor Carter Bishop, a recognized authority, has critiqued this decision as follows:

 

IMHO, a poorly reasoned opinion by a court more familiar with litigation than business law.

 

A quick scan of my charging order statutes table reveals that nearly all states originally borrowed the limited partnership charging order statute and implanted it in the new LLC Act. Why? The limited partnership was at least an entity with a partial liability shield. At that time, LLPs did not exist so the limited partnership model (foreclosure not directly contemplated) was a more attractive model than the general partnership model (foreclosure permitted). The charging order was not the driving force behind the LLC movement and was more an afterthought.

 

Of course I could be wrong, but I doubt many business entity lawyers had in mind the obscure limited partnership-general partnership backward linkage for cases not covered. In fact, it is perfectly reasonable to argue that the backward LP-to-GP linkage only authorizes foreclosure on the GP interest in a limited partnership but not on the LP interest because GP law does not mention or contemplate a limited partnership in any form. But the law has evolved otherwise and, as the Court properly states, foreclosure is permitted against a general or limited partner interest in a limited partnership.

 

It is naive to suggest that in 1993 the Missouri legislature was aware of this specific LP-GP charging order linkage (Step 1). It is worse to then conclude that by adopting the LP charging order language (silent on foreclosure) the legislature “intended” to preclude foreclosure (Step 2).

 

Why isn’t it preferable to conclude that the legislature never contemplated the subtle LP-GP charging order linkage? If so, by adopting the LP language, the legislature may have “intended” an LLC interest be treated the same as an LP interest - foreclosure permitted. At the very least, this history can be used to create a latent statutory ambiguity to allow the courts to place the burden of proof on the party seeking the charging order that interpretation is more reasonable.

 

Of course, this confusion merits a legislative fix. Indeed, in states that adopt a version of the updated uniform limited partnership act, the old GP linkage is destroyed, the new LP act is completely self-contained, and foreclosure is authorized.

 

In the meantime, if I was forced to decide this issue, the preferred statutory interpretation would be that by adopting the LP language, the legislature intended that an LLC interest should be treated the same as an LP interest - foreclosure permitted.

 

 

SEC Issues Guidance on Same-Sex Marriage

SEC Issues Guidance on Same-Sex Marriage

      Certain aspects of the securities laws require disclosure as to a spouse.  For example, Section 16 reporting includes the spouse of the person responsible to report.  Last Friday the SEC issued Release No. 33-9856 interpreting how the terms “spouse” and “marriage” will be interpreted.  Essentially, a same-sex couple will be treated as married if lawfully married under state law irrespective of whether their state of domicile recognizes same sex marriage.

More on Magna Carta

More on Magna Carta

 

       An article in the New York Times, while more eloquent than my posting last Monday, likewise challenges the importance of the 1215 Magna Carta.

 

 

HERE IS A LINK TO THAT ARTICLE

 

 

More on Recent Amendments to the Delaware Corporate Laws - Forum Selection

More on Recent Amendments to the Delaware Corporate Laws -

Forum Selection

      The Delaware General Assembly, by means of Senate Bill 75, has enacted a number of revisions and additions to the Delaware General Corporation Law. As previously noted (HERE IS A LINK TO THAT POSTING), Senate Bill 75 has precluded stock corporations, either in their certificate of incorporation or bylaws, from imposing requirements upon shareholders and other stakeholders to pay all defense cost in the event a derivative or similar action is not successful. That was not, however, the sole import of Senate Bill 75.

      Another provision added to the DGCL addresses forum selection provisions in either the certificate of incorporation or the bylaws. Under the new provisions, it is clear that either the certificate or the bylaws may provide that (a) the Delaware courts are the exclusive jurisdiction for consideration of internal corporate claims or, in the alternative (b) the courts of a foreign jurisdiction or a permissible venue for the resolution of disputes over internal affairs provided that the Delaware courts as well remain an available venue. At the same time, and this is made express in the official comment released with the statute, neither the certificate nor the bylaws may purport to identify the courts of a jurisdiction outside of Delaware as the exclusive venue for the resolution of internal corporate claims: the statute “invalidates such a provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.”

      The referenced definition of “internal corporate claims” of section 115 is to “claims, including claims in the right of the corporation, (i) that are based upon a violation of the duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

      It should be noted that, while such provisions may not be set forth in the certificate of incorporation or the bylaws, they may still be set forth in a shareholder agreement that has been “signed by the stockholder against whom the provision is to be enforced.”

      The 2015 Kentucky General Assembly, through sections of 6 and 7 of House Bill 440 (2015 Ky. Acts, ch. 34), have enabled a corporation to identify the “appropriate court,” that being the circuit court of the county in which the corporation has its principal office address or, if the principal office address is not in Kentucky, its registered office, as that in which derivative actions or actions to compel the production of books and records, may or must be brought. However, the Kentucky Act requires that the venue election be in the articles of incorporation; a venue provision in the bylaws has not been statutorily sanctioned.  Further, in that the statute has defined where such a provision may be adopted, namely in the articles of incorporation, by implication the adoption elsewhere is in effective.

Delaware Legislature Rejects Fee Shifting

Delaware Legislature Rejects Fee Shifting

      In ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), in the context of a nonprofit corporation, the Delaware Supreme Court affirmed the validity of a provision added to the corporation’s bylaws providing, inter alia, that if a member of the corporation should bring a derivative action and not substantially prevail, they must pay all of the defense costs incurred in connection with the action. In effect, similar bylaw provisions (alternatively, these requirements could be set forth in the certificate of incorporation) have the effect of insulating the directors and officers from challenges for breach of fiduciary duty. The Delaware General Assembly has passed, and there is every expectation that the governor will sign, amendments to the Delaware General Corporation Law providing, essentially, that fee shifting provisions in either the certificate or the bylaws will not be effective.

      Specifically, Senate Bill 75, with respect to stock corporations (the contrary rule as set forth in ATP Tour for nonstock/nonprofit corporations is not modified), adds a new subsection (f) to section 102 to provide:

The certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the Corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

In a similar vein, there is added to section 109 of the DGCL:

The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the Corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

      The referenced definition of “internal corporate claims” of section 115 is to “claims, including claims in the right of the corporation, (i) that are based upon a violation of the duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

      This is an important development in the law as it preserves the ability of shareholders and, on the appropriate facts, other stakeholders such as creditors to bring actions challenging the discharge of fiduciary obligations by corporate directors and officers. That said, it is unfortunate that Delaware has not extended this amendment to nonstock corporations. Essentially, the adoption of fee shifting bylaws by charities organized in Delaware remains, at this time, permissible.

      It bears noting that fee shifting in stockholder agreements remains permissible.  Investors need to carefully review stockholder and similar agreements to assess what fee shifting provision they contain.

      Senate Bill 75 enacts a number of other amendments to the Delaware General Corporation Law; those changes will be reviewed in future postings.

Jumping the Magna Carta Gun

Jumping the Magna Carta Gun

      This year there are being held a series of events commemorating the 800th anniversary of the Magna Carta, the “Great Charter” imposed on “Bad” King John in 1215.  Those events will include a display of the Magna Carta at the Kentucky State Fair, a presentation supported by both the Kentucky Bar Association and the Louisville Bar Association.

      Specifically, and it is all over the news, June 15, 1215, 800 years ago today, is celebrated for the signing of Magna Carta by King John and his leading nobles, all at Runnymede.  From there the foundation of Magna Carta is dated. In espousing the Magna Carta as a foundational document in the development of the rule of law, these celebrations are jumping the gun. 

      The only problem is that the Magna Carta of June, 1215 was a dead letter.  John repudiated the charter, and that repudiation was affirmed by Pope Innocent III.

      John's after-the-fact rejection of Magna Carta precipitated the First Barons War, a contest in which a group of disaffected nobles actually aligned themselves with the King of France. Had history turned out only slightly differently, the Angevin house of England could have been replaced by the French royal house, thereby uniting England and France under a single crown.  That, of course, was the ultimate aim of the English in the Hundred Years War in the 14^th and 15^th centuries, but that is a different story.  King John would die in October, 1216, the Crown being inherited by his nine year old son Henry III.  As part of the effort to bring the First Barons War to a conclusion, William Marshal, the prototypical knight of the period and the Regent of Henry III, caused there to be issued a shorter version of Magna Carta. This effort was not entirely successful, but the shorter version was ultimately incorporated into the settlement the brought about the resolution of the First Barons War.

      Henry III would again issue Magna Carta during his reign as a trade-off for new taxes, and his son Edward I would as well issue Magna Carta in his own name.  Subsequent monarchs would do the same through the 14th century.

      That said, none of the issuances of Magna Carta, irrespective of a specific content, had the same theatrical flair as the June 15, 1215 signing at Runnymede.  For that reason, it remains the event to which everybody refers.

      But it did not bring Magna Carta into law. 

      Today is without question the date of issuance, in 1520, of the bull Exsurge Domine by Pope Leo X.  Addressed to formerly obscure theology professor Martin Luther, it threatened excommunication if Luther did not recant certain heretical views. He did not do so, and the threatened excommunication was carried out in January 1520.  Whereas the 1215 Magna Carta never had legal effect, Exsurge Domine did and does.