Author Archives: Michael J. Wilson

The S Corporation Inversion – How to Convert an S Corporation into a Tax Partnership Tax-Free

Tax inversions have been in the news for several years now, but almost always in the context of a public US company reincorporating in a foreign country to achieve lower tax rates on non-US source income. However, there is another type of inversion, the S corporation inversion, that does not involve any foreign countries but can be an elegant solution to a problem faced my many small and medium-sized businesses operated as S corporations.

Many businesses start as S corporations for good tax reasons, but later in their lifecycle want to convert to a tax partnership (such as an LLC taxed as a partnership) for a variety of business and tax reasons. For example, perhaps a private equity fund or foreign investor (which are both impermissible S corporation shareholders) want to invest in the business and become owners. Another example is where an S corporation wants to grant an equity interest to a key employee in exchange for their past and future services. Oftentimes, the best approach in this case is to grant the employee a “profits interest” in the business, but S corporations cannot grant such interests, while tax partnerships can. Simply converting or merging the S corporation into an LLC taxed as a partnership is not satisfactory, because that transaction would trigger the taxable liquidation of the S corporation.

One method to convert to a tax partnership tax-free, without undergoing an inversion, is the “LLC drop-down,” which entails the S corporation forming a wholly-owned LLC, that is initially a disregarded entity for tax purposes, and transferring all of the S corporation’s assets and business to the new LLC. Once this is accomplished, the new investors can invest in the business by investing into the new LLC, which will become a tax partnership. However, this restructuring is deceptively simple, because migrating the S corporation’s business to the new LLC can create many issues, including (1) migrating employees, payroll, and benefit plans to the new LLC; (2) opening new operating and payroll bank accounts for the new LLC; (3) consulting with insurance agents to obtain coverage for the new LLC; (4) assigning customer, lease, vendor, and other key agreements to the new LLC, which oftentimes requires the counterparty’s consent; (5) transferring or obtaining new licenses and permits for the new LLC to operate the business; and (6) obtaining lender consent.

These headaches can oftentimes be avoided by utilizing an S corporation inversion. The S corporation inversion is accomplished by having the shareholders of the S corporation (“Old S”) transfer their stock to a newly formed S corporation (“New S”) in exchange for all the stock of New S. Old S immediately makes an election to be a qualified subchapter S subsidiary, and so Old S will be disregarded for tax purposes. New S then forms a wholly-owned LLC, which is initially disregarded for tax purposes, and then merges Old S into the new LLC, with new LLC as the survivor of the merger. The merger is without tax consequences, because it’s a merger of two entities, Old S and LLC, that are disregarded for tax purposes. Furthermore, by operation of the Florida merger statute, all of the assets, liabilities, contracts, and legal relationships of Old S transfer to LLC and in most circumstances no third party consents are required. Now the old business is in a new LLC that can take on new investors in a tax partnership format and without many of the headaches of migrating a business to a new legal entity. For guidance on this structure, see Treasury Regulation Section 1.1361-5(b)(c), Example 2.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Ally Law London Firm Wins Article 50 Brexit Challenge

Williams Parker has international reach as the Florida member of Ally law – one of the world’s leading law firm networks. Our companion firm in London, Edwin Coe, represented the winning claimant, Dier Dos Santos, in the high-profile litigation in the U.K. challenging Article 50 and the Brexit vote. The High Court of Justice ruled that based on a 300-year-old law, the U.K. government does not have the constitutional capacity to trigger U.K.’s withdrawal from the European Union without a Parliamentary vote. More information on the ruling and its consequences can be found here.

Williams Parker regularly works with Ally Law attorneys to make sure our clients receive the legal support they need wherever in the world they might operate or have investments. Ally Law includes over 1,300 lawyers in 41 countries. More information on Ally Law can be found on our website.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Join Us: Doing Business in China Executive Briefing

R&P China BannerWe invite you to join us for an engaging, informative presentation on doing business in China. Williams Parker is pleased to host Maarten Roos and Robin Tabbers, lead partners of R&P China Lawyers (Shanghai) and authors of articles recently published in Requisite V – The International Edition. Our guests will provide practical guidance on manufacturing and sourcing in China, strategies for managing a Chinese subsidiary, and best practices for selling to the Chinese market. The presentation will take place Monday, September 19, from 5:30 to 7 p.m. at the firm’s office, located at 200 S. Orange Ave. in downtown Sarasota.

Williams Parker and R&P China Lawyers work together as part of the Ally Law network (formerly the International Alliance of Law Firms) to provide solutions to companies doing business internationally. R&P China Lawyers is a boutique PRC law firm that supports international business in China. Its attorneys combine in-depth legal expertise and broad experience of the Chinese business environment with a keen understanding of client needs.

Space is limited. If interested in attending, please email MarketingDesk@williamsparker.com.

BREXIT – Time to Analyze Your EU Contracts?

Many US companies have entered into licensing agreements, distributorship agreements, or other commercial agreements that set out what they or another party may or may not do in the “European Union.” Historically, countries joined the European Union but they did not depart. Of course, with BREXIT, the constituent countries of the European Union will change when the United Kingdom departs.  Consequently, now is a good time for parties to these types of agreements to review them and give some thought as to how they might be construed with the changing composition of the European Union and whether a contract amendment would be appropriate. Furthermore, in light of the closeness of the Scottish Independence Referendum in 2014 and other independence movements within the United Kingdom, it would also be wise to review contracts that set out what a party may or may not do in the “United Kingdom” or “Great Britain.”

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Final Regulations for Cancellation of Debt Income Involving Partnerships with Disregarded Entities and Grantor Trusts as Partners

Treasury recently finalized regulations clarifying the application of the bankruptcy and insolvency exceptions to cancellation of debt income involving a debtor partnership with one or more partners that are disregarded for income tax purposes. Section 108(a)(1)(A) and (B) exclude cancellation of debt from income if the cancellation or discharge occurred in a bankruptcy case or to the extent the taxpayer is insolvent. Where the debtor is a tax partnership, these exceptions are applied at the partner level instead of at the partnership level. Where a partner is a disregarded entity or grantor trust, the final regulations clarify that the bankruptcy and insolvency exceptions are applied by looking through the disregarded entity or grantor trust to the ultimate owner for income tax purposes. Consequently, the insolvency analysis is applied to the ultimate owner of the disregarded entity or grantor trust, and not to the disregarded entity or grantor trust itself. Similarly, in order for the bankruptcy exception to apply, the ultimate owner of the disregarded entity or grantor trust must be subject to a bankruptcy court’s jurisdiction.

The final regulations can be found here: : https://www.federalregister.gov/articles/2016/06/10/2016-13779/guidance-under-section-108a-concerning-the-exclusion-of-section-61a12-discharge-of-indebtedness

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Canada to treat Florida and Delaware LLLPs and LLPs as Corporations for Tax Purposes

The Canada Revenue Agency (“CRA”) announced at the May 26 meeting of the International Fiscal Association in Montreal that limited liability limited partnerships and limited liability partnerships organized under the laws of Florida or Delaware will be taxable as corporations for Canadian income tax purposes.  The CRA has treated US limited liability companies as corporations for many years, but previously treated US LLLPs and LLPs as pass-through entities. The announcement did not specify whether similar entities organized in other US states would be treated the same, but the justification provided by the CRA would appear to apply to such other entities.

The CRA’s announcement raises several issues for US LLLPs and LLPs that have Canadian owners, including such entities that own US real estate. One issue is that income from these entities will now be subject to double income tax. The US will treat these entities as pass-through entities and so only the owners will be subject to US income tax, but Canada will now treat these entities as corporations. Consequently, Canadian dividend tax will apply to distributions received by the Canadian owner, and a Canadian tax credit is not available for the US tax.  Previously for such LLLPs and LLPs, but not for LLCs, the Canadian owner could credit the US tax they paid against their Canadian tax. Issues can also arise for US LLLPs or LLPs that do not have Canadian owners, but have business operations or investments in Canada.

The CRA did announce transitional relief so that US LLLPs and LLPs can be treated as pass-through entities for Canadian tax purposes retroactively if certain conditions are satisfied. One of the key conditions is that the LLLP or LLP must convert before 2018 to an entity that is recognized by the CRA as a pass-through entity, such as a general partnership or a limited partnership.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Proposed Regulations Expand Reporting Obligations for Foreign-Owned Disregarded Entities

In the wake of the Panama Papers leak, Treasury promulgated proposed regulations that require a US disregarded entity that is wholly-owned by a foreign owner to comply with the reporting, record maintenance, and associated compliance requirements that currently apply to US corporations that are owned 25% or more by a foreign owner under Code section 6038A, including the obligation to file Form 5472. The regulations also expand the types of transactions that must be reported. For example, contributions and distributions between the disregarded entity and its foreign owner would be subject to reporting even though these transactions would otherwise be ignored for tax purposes because of the involvement of the disregarded entity.

A link to the proposed regulations is here: https://www.gpo.gov/fdsys/pkg/FR-2016-05-10/pdf/2016-10852.pdf

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

New Regulations End Dual Partner/Employee Planning Technique

Temporary and proposed regulations issued May 3, 2016, reaffirm Treasury’s position that an individual cannot be both an employee and a partner of the same tax partnership, and end the ability of tax planners to use a disregarded entity in conjunction with a tax partnership to change an individual’s self-employment tax treatment. Previously, tax planners would use the rule that disregarded entities are treated as corporations for employment tax purposes to setup a structure whereby a tax partnership owned a disregarded entity with the partners treated as employees of the disregarded entity and not the tax partnership.  The primarily motivation for such structures was to permit the partners to be employees and enable Form W-2 withholding instead of having the partners pay self-employment tax and make estimated tax payments.  The new regulations provide that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of individuals who are partners in a partnership that owns a disregarded entity.  A link to the new regulations is here: https://www.gpo.gov/fdsys/pkg/FR-2016-05-04/pdf/2016-10383.pdf

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Ruling Clarifies Rules Regarding Equestrian Supplies and Sales Tax

The Florida Department of Revenue recently issued a Technical Assistance Advisement (“TAA”) clarifying the applicability of sales tax to certain equestrian supplies. The TAA explains that the sale of veterinary drugs, substances, or preparations that are required by federal or state law to be dispensed only by prescription are exempt from sales tax under the general prescription medicine exemption. Non-prescription substances or preparations are taxable. Feed for livestock, which includes all animals of the equine class (including racehorses), is also exempt from sales tax. Exempt feed includes equine joint supplements. Sales of equine insect and fly repellant are exempt as sales of pesticides used directly on livestock. Finally, sales of insect or fly masks and fly sheets are taxable.

A link to the ruling is here: https://revenuelaw.state.fl.us/LawLibraryDocuments/2015/09/TAA-120175_15A-011%20redacted%20_%20summay%20RLL.pdf Michael J. Wilson mwilson@williamsparker.com 941-536-2043

Going Global: What Are the International Tax Issues for a Small or Mid-Size Company

From a legal perspective, global expansion can have many forms, structures, and functions, including creating contractual relationships with distributors or licensees; establishing international legal entities for sales, manufacturing, or other business functions; or entering into an international joint venture. Regardless of the form or size of the contemplated global business expansion, there are a host of complex tax issues that have to be wrestled with in addition to the plethora of business and regulatory issues. Mike Wilson recently authored an article on this topic, which can be found here: http://www.williamsparker.com/docs/default-source/PDFs/international-tax-small-business_mjw

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043