The Louisiana limited liability company law after "check-the-box"

Louisiana Law Review

Volumn 57, Issue 3, 1997, Pages 715-823

  Kalinka, Susan ^a  

^a LOUISIANA STATE UNIVERSITY   (United States)

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EID: 21744444542     PISSN: 00246859     EISSN: None     Source Type: Journal    
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References (396)

1. Much has been written about LLCs. The two leading commentaries on LLCs are Carter G. Bishop & Daniel S. Kleinberger, Limited Liability Companies Tax and Business Law (1994 and Supp.);
2. Larry E. Ribstein & Robert R. Keatinge, Ribstein and Keatinge on Limited Liability Companies (1995).
3. For a treatise on Louisiana LLCs, see Susan Kalinka, Louisiana Civil Law Treatise, Volume 9 - Louisiana Limited Liability Companies and Partnerships: A Guide to Business and Tax Planning (1997).
4. Former Treas. Reg. § 301.7701-2 (as amended in 1993). For a discussion of the former tax classification regulations, see infra notes 38-244 and accompanying text.
5. La. R.S. 12:1301-1369 (1992).
6. Rev. Rul. 94-5, 1994-1 C.B. 312.
7. Id. See also Priv. Ltr. Rul. 96-22-007 (May 31, 1996) (Louisiana LLC classified as a partnership for federal income tax purposes); Priv. Ltr. Rul. 96-06-006 (Nov. 9, 1995) (same); Priv. Ltr. Rul. 94-09-016 (Nov. 30, 1993) (same); Priv. Ltr. Rul. 94-09-014 (Nov. 29, 1993) (same); Priv. Ltr. Rul 94-04-021 (Nov. 1, 1993) (same).
8. Treas. Reg. §§ 301.7701-1 through 301.7701-3 (1996).
9. 216 F.2d 418 (9th Cir. 1954).
10. Former I.R.C. § 165 (1952).
11. Every state has enacted legislation permitting at least some groups to form professional corporations. For a list of the current statutes, see 4A Zolman Cavitch, Business Organizations § 82.01 (1991).
12. In 1965 the Treasury Department amended the Kintner regulations to provide that professional corporations would be taxed as partnerships. Treas. Reg. § 301.7701-2(h) (1965). Courts, however, invalidated these amendments. See, e.g., Kurzner v. United States, 413 F.2d 97, 111 (5th Cir. 1969); O'Neill v. United States, 410 F.2d 888, 895 (6th Cir. 1969); United States v. Empey, 406 F.2d 157, 170 (10th Cir. 1969); Smith v. United States, 301 F. Supp. 1016, 1022 (S.D. Fla. 1969); Holder v. United States, 289 F. Supp. 160, 165 (N.D. Ga. 1968).
13. Self-Employed Individuals Tax Retirement Act of 1962, Pub. L. No. 87-792, 76 Stat. 809 (1963).
14. Larson v. Commissioner, 66 T.C. 159 (1976); Zuckman v. United States, 524 F.2d 729 (Cl. Ct 1975).
15. Prop. Treas. Reg. § 301.7701-2, 42 Fed. Reg. 1041 (1977).
16. 42 Fed. Reg. 1489 (1977).
17. Prop. Treas. Reg. §§ 301.7701-2(a)(2) to (4), 45 Fed. Reg. 75,709 (1980).
18. Prop. Treas. Reg. § 301.7701-2(g), 45 Fed. Reg. 75,710 (1980).
19. See, e.g., I.R. 82-41 (April 1, 1982).
20. I.R. 82-145 (Dec. 16, 1982).
21. Rev. Proc. 83-15, 1983-1 C.B. 676, superseded by Rev. Proc. 83-22, 1983-1 C.B. 680 and Rev. Proc. 85-22, 1985-1 C.B. 550, superseded by Rev. Proc. 86-3, 1986-1 C.B. 416, superseded by Rev. Rul. 87-3, 1987-1 C.B. 147, superseded by Rev. Proc. 88-3, 1988-1 C.B. 579, modified by Rev. Proc. 88-44, 1988-2 C.B. 634.
22. Rev. Proc. 88-44, 1988-2 C.B. 634.
23. 1988-2 C.B. 360, 361.
24. See, e.g., Rev. Rul. 95-9, 1995-3 I.R.B. 17 (South Dakota LLC); Rev. Rul. 94-79, 1994-2 C.B. 409 (Connecticut LLC); Rev. Rul. 94-51, 1994-2 C.B. 407 (New Jersey LLC); Rev. Rul. 94-30, 1994-1 C.B. 316 (Kansas LLC); Rev. Rul. 94-6, 1994-1 C.B. 314 (Alabama LLC); Rev. Rul. 94-5, 1994-1 C.B. 312 (Louisiana LLC); Rev. Rul. 93-93, 1993-2 C.B. 321 (Arizona LLC); Rev. Rul. 93-92, 1993-2 C.B. 318 (Oklahoma LLC); Rev. Rul. 93-91, 1993-2 C.B. 316 (Utah LLC); Rev. Rul. 93-81, 1993-2 C.B. 314 (Rhode Island LLC); Rev. Rul. 93-53, 1993-2 C.B. 312 (Florida LLC); Rev. Rul. 93-50, 1993-2 C.B. 310 (West Virginia LLC classified as a partnership); Rev. Rul. 93-49, 1993-2 C.B. 308 (Illinois LLC): Rev. Rul. 93-38, 1993-1 C.B. 233 (Delaware LLC); Rev. Rul. 93-30, 1993-1 C.B. 231 (Nevada LLC classified as a partnership); Rev. Rul. 93-6, 1993-1 C.B. 229 (Colorado LLC classified as a partnership); Rev. Rul. 93-5, 1993-1 C.B. 227 (Virginia LLC classified as a partnership).
25. I.R.C. § 465(c) (1994).
26. For a discussion of the at risk rules, see 1 Boris I. Binker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 25.10 (2d ed. 1989 and Supp.)
27. Tax Reform Act of 1986, Pub. L. No. 99-514 § 501 (a), 100 Stat. 2233 (1986). The current provision is I.R.C. § 469.
28. For a discussion of the passive activity loss rules, see Bittker & Lokken, supra note 24, at ¶ 28 and Supp.
29. I.R.C. §§ 55-59 (1994).
30. I.R.C. § 7704(a) (1994). An exception applies to a publicly traded partnership with large amounts of passive-type income. I.R.C. § 7704(c). Publicly traded partnerships that were in existence on December 17, 1987, are exempted from classification under I.R.C. § 7704(a) until taxable years beginning after 1987. Revenue Act of 1987, Pub. L. No. 100-203, § 10211(c), 101 Stat. 1330 (1987).
31. William S. McKee et al., Federal Taxation of Partnerships and Partners ¶ 3.06[1] (2d ed. 1990).
32. 1995-1 C.B. 501.
33. 1995-1 C.B. 297.
34. Prop. Treas. Reg. §§ 301.7701-1 through 301.7701-3, 61 Fed. Reg. 21, 989 (1996).
35. T.D. 8697, 61 Fed. Reg. 66,584 (1996).
36. Treas. Reg. §§ 310.7701-1(f), -(2e), -3(f)(1) (1996).
37. Treas. Reg. § 301.7701-3(b)(3)(i) (1996).
38. Preamble to T.D. 8697, 61 Fed. Reg. at 66,585.
39. I.R.C. § 331(a) (1994) (amounts received by a shareholder in liquidation of a corporation are treated as received in exchange for the shareholder's stock), § 336(a) (1994) (in general, gain or loss must be recognized by a liquidating corporation on the distribution of its assets).
40. Former Treas. Reg. § 301.7701-2(a) (as amended in 1993).
41. Former Treas. Reg. § 301.7701-2(b) (as amended in 1993).
42. Former Treas. Reg. § 301.7701-2(a)(3) (as amended in 1993).
43. Larson v. Commissioner, 66 T.C. 159, 172 (1976), acq., Rev. Rul. 79-106, 1979-1 C.B. 448.
44. UPA §§ 29, 31(1)(d), (4), (5) (1914); RULPA §§ 402(3), (6)(i), (4), 801(4) (1985).
45. RUPA § 801(2) (1994).
46. RUPA § 801(1) (1994).
47. La. Civ. Code art. 2829.
48. Id.
49. La. Civ. Code art. 2826 (3rd paragraph).
50. UPA § 38(1) (1914); RULPA § 801(4) (1985); La. Civ. Code art. 2826. For the ability of partners to continue a partnership formed under the Uniform Limited Partnership Act, see 2 Alan R. Bromberg & Larry E. Ribstein, Bromberg and Ribstein on Partnership § 7.11(e) (1989).
51. Former Treas. Reg. § 301.7701-2(b)(1) (as amended in 1993).
52. Former Treas. Reg. § 301.7701-2 (b)(2) (as amended in 1993).
53. La. R.S. 12:1334(3) (1994).
54. 1994-1 C.B. 312.
55. Id.
56. La. R.S. 12:1334(3) (1994).
57. La. R.S. 12:1336, 12:1337 (1994).
58. La. R.S. 12:1334(3) (1994) provides: Except as provided in the articles of organization or a written operating agreement, a limited liability company is dissolved and its affairs shall be wound up upon the first to occur of the following: . . . . (3) The death, interdiction, withdrawal, expulsion, bankruptcy, or dissolution of a member or the occurrence of any other event which terminates the continued membership of a member in the limited liability company unless, within ninety days after such event, the limited liability company is continued by the unanimous consent of the remaining members or as otherwise provided in the articles of organization or a written operating agreement and, if membership is reduced to one, the admission of one or more members. (emphasis added).
59. See, e.g.. Rev. Rul. 93-38, 1993-1 C.B. 233 (Situation 2).
60. See, e.g., Rev. Rul. 94-30, 1994-1 C.B. 316 (approval of a majority in interest of the remaining members was necessary to continue the LLC upon the termination of a member's interest; LLC lacked continuity of life); Rev. Rul. 93-92, 1993-2 C.B. 318 (same); Rev. Rul. 93-91, 1993-2 C.B. 316 (same); Priv. Ltr. Rul. 95-38-036 (June 28, 1995) (same); Priv. Ltr. Rul. 95-29-015 (July 21, 1995) (same); Priv. Ltr. Rul. 95-25-058 (March 28, 1995) (same); Priv. Ltr. Rul. 94-21-025 (Feb. 24, 1994) (approval of three-fourths of the remaining members was necessary to continue the LLC on the withdrawal of a member); Priv. Ltr. Rul 94-15-005 (Jan. 10, 1994) (majority of the total votes of the remaining members); Priv. Ltr. Rul. 94-12-030 (Dec 22, 1993) (majority in interest); Priv. Ltr. Rul. 94-07-030 (Nov. 24, 1993) (same); Priv. Ltr. Rul. 93-50-013 (Sept 15, 1993) (same); Priv. Ltr. Rul. 93-35-032 (June 4, 1993) (majority of the total votes remaining); Priv. Ltr. Rul. 93-33-032 (May 24, 1993) (approval of two-thirds of the remaining members necessary to continue the LLC); Priv. Ltr. Rul. 93-25-039 (March 26, 1993) (same); Priv. Ltr. Rul. 93-21-047 (Feb. 25, 1993) (majority in interest); Priv. Ltr. Rul. 93-08-027 (Nov. 27, 1992) (consent of a majority of the LLC's managers who were also members and a majority in number and in interest of the remaining members); Priv. Ltr. Rul. 92-26-035 (March 26, 1992) (unanimous consent of the LLC's managers who also were members and a majority of the remaining members).
61. Former Treas. Reg. § 301.7701-2(b)(1) (as amended in 1993). See also Rev. Proc. 92-35, 1992-1 C.B. 790 ("If under local law and the partnership agreement the bankruptcy or removal of a general partner of a limited partnership causes a dissolution of the partnership unless the remaining general partners or at least a majority in interest of all remaining partners agree to continue the partnership, the Service will not take the position that the limited partnership has the corporate characteristic of continuity of life"). Before the Kintner regulations were amended, they provided that a limited partnership would lack continuity of life if it dissolved upon the retirement, death, or insanity of a general partner unless either the remaining general partners or all of the remaining partners agreed to continue the partnership. Former Treas. Reg. § 301.7701-2(b)(1) (1983). Under the previous regulation, the Service had rules that a Florida LLC had continuity of life where its articles of organization provided that the LLC would dissolve upon the termination of a member's interest unless the remaining members agreed to continue the LLC by a majority vote of the members. Priv. Ltr. Rul. 90-10-027 (Dec. 7, 1989). Subsequent rulings have been more liberal. See rulings cited supra note 58.
62. 1994-1 C.B. 312. See also Rev. Proc. 95-10 § 5.01(2), 1995-1 C.B. 501.
63. Rev. Proc. 95-10 § 5.01(3), 1995-1 C.B. 501; Rev. Proc. 94-46, 1994-2 C.B. 688.
64. See, e.g., Priv. Ltr. Rul. 94-09-016 (Nov. 30, 1993); Priv. Ltr. Rul. 94-09-014 (Nov. 29, 1993); Priv. Ltr. Rul. 94-04-021 (Nov. 1, 1993); Priv. Ltr. Rul. 93-06-008 (Nov. 10, 1992); Priv. Ltr. Rul. 92-10-019 (Dec. 6, 1991).
65. Priv. Ltr. Rul. 92-10-019 (Dec. 6, 1991).
66. Rev. Proc. 95-10 § 5.01(1), (2), 1995-1 C.B. 501.
67. Rev. Proc. 95-10 § 5.01(1), 1995-1 C.B. 501.
68. Rev. Proc. 95-10 §4.02-4.05, 1995-1 C.B. 501.
69. Rev. Proc. 95-10 §4-02, 1995-1 C.B. 501. Required allocations under I.R.C. § 704(b) or § 704(c) causing less than one percent of the LLC's income, gain, loss, deduction, or credit to be allocable to the member-managers will not cause a violation to the minimum ownership interest requirement Any other temporary allocation that has the same result will cause a violation of the minimum ownership interest requirement unless the LLC clearly establishes in its ruling request that the member-managers have a material interest in net profits and losses over the LLC's anticipated life. For this purpose a profits interest generally will not be considered material unless it substantially exceeds one percent and will be in effect for a substantial period of time during which the LLC reasonably expects to generate profits. An example of a material profits interest provided by Rev. Proc. 95-10 is a 20% interest in profits that begins four years after the LLC's formation and continues for the life of the LLC where the LLC is expected to generate profits for a substantial period of time beyond the initial four-year period.
70. Rev. Proc. 95-10 §4.03, 1995-1 C.B. 501.
71. Id. The member-managers must maintain this lesser ownership interest at all times during the existence of the LLC except for temporary allocations or nonconformance as required under I.R.C. § 704(b) or § 704(c) or as permitted by the Service. See supra note 37.
72. Id.
73. Rev. Proc. 95-10 §4.04, 1995-1 C.B. 501.
74. Id. In some cases, the requirement will be satisfied even if the member-managers make no contributions to the LLC.
75. Id.
76. Treas. Reg. § 1.704-1(b)(2)(iv) (as amended in 1993).
77. Rev. Proc. 95-10 § 4.05, 1995-1 C.B. 501. The term "guaranteed payment" is defined in I.R.C. § 707(c). In determining whether a member-manager's contributed services are performed in a capacity as a member, the Service will closely scrutinize services that do not relate to the day-to-day operations of the LLC's primary business activity, such as services related to the organization and syndication of the LLC, accounting, financial planning, general business planning, and services in the nature of investment management Id.
78. Rev. Proc. 95-10 § 4.05, 1995-1 C.B. 501.
79. Rev. Proc. 95-10 § 5.01(4), 1995-1 C.B. 501.
80. Id.
81. La. R.S. 12:1318(A) (1994).
82. La. R.S. 12:1323 (1994).
83. La. R.S. 12:1318(A), 12:1323 (1994). A provision in an LLC's articles of organization is sufficient to alter the one-person, one-vote majority rule with the respect to the members' voting rights. La. R.S. 12:1318(A) (1994).
84. See La. R.S. 12:1325(C) (Supp. 1997) (a member who withdraws from an LLC is entitled to receive the fair market value of the member's interest as of the date of the member's withdrawal), La. R.S. 12:1337(A)(2) (1994) (upon liquidation of an LLC, members receive a return of their capital contributions after superior claims are satisfied).
85. See, e.g., Larry E. Ribstein and Robert R. Keatinge, Ribstein and Keatinge on Limited Liability Companies § 16.14 (1992); Susan Pace Hammil, The Limited Liability Company. A Possible Choice for Doing Business?, 41 Fla. L. Rev. 721 (1989).
86. Former Treas Reg. § 301.7701-2(b)(3) (as amended in 1993).
87. See authorities cited supra note 83.
88. Ribstein and Keatinge, supra note 83, at § 16.14 n.192.
89. See La. R.S. 12:81(A) (1994) (requiring a Louisiana corporation to have a board of directors). The Revised Model Business Corporation Act, however, requires a board of directors only for publicly traded corporations. Revised Model Business Corp. Act §§ 7.32(a)(1), (d), 8.01 (1991).
90. Former Treas. Reg. § 301.7701-2(c)(1) (as amended in 1993).
91. Former Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
92. La. Civ. Code art. 2814; UPA § 9 (1914); Former Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
93. La. R.S. 12:1311 (1994).
94. La. R.S. 12:1312(A) (1994).
95. La. R.S. 12:1317(A) (1994).
96. See, e.g., Rev. Rul. 93-38, 1993-1 C.B. 233 (Situation 1); Priv. Ltr. Rul. 96-22-007 (Feb. 21, 1996); Priv. Ltr. Rul. 95-38-022 (June 23, 1995); Priv. Ltr. Rul. 93-35-032 (June 4, 1993); Priv. Ltr. Rul. 93-21-070 (March 3, 1993); Priv. Ltr. Rul. 93-20-045 (Feb. 24, 1993); Priv. Ltr. Rul. 93-20-019 (Feb. 18, 1993); Priv. Ltr. Rul. 90-10-027 (Dec. 7, 1989).
97. 1995-1 C.B. 501.
98. Rev. Proc. 95-10 § 5.03(1), 1995-1 C.B. 501.
99. See Former Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
100. La. Civ. Code art. 2814; UPA § 9(1) (1914); RUPA § 301(1) (1994); Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
101. La. R.S. 12:1317(A) (1994).
102. See, e.g., Priv. Ltr. Rul. 93-21-070 (March 3, 1993); Priv. Ltr. Rul. 93-20-045 (Feb. 24, 1993); Priv. Ltr. Rul. 93-20-019 (Feb. 18, 1993). See also Priv. Ltr. Rul. 96-02-018 (Oct. 12, 1995) (member-managed LLC lacked centralized management, notwithstanding the existence of a governing committee).
103. I.R.C. § 6110(j)(3) (1994); Rev. Proc. 96-1 § 11.02, 1996-1 I.R.B. 8.
104. For such a suggestion, see Kenneth L. Harris and Francis J. Wirtz, Corporate Governance, Limited Liability Companies and the IRS's View of Centralized Management, Taxes, Apr. 1993, at 225, 230.
105. La. R.S. 12:1317(A) (1994).
106. Id.
107. La. R.S. 12:1311, 1312(A) (1994).
108. La. R.S. 12:1317(A), (B) (1994).
109. 1994-1 C.B. 312.
110. See, e.g., Rev. Rul. 95-9, 1995-1 C.B. 222; Rev. Rul. 94-79, 1994-2 C.B. 409; Rev. Rul. 94-51, 1994-2 C.B. 407; Rev. Rul. 94-30, 1994-1 C.B. 316; Rev. Rul. 94-6, 1994-1 C.B. 314; Rev. Rul. 94-5, 1994-1 C.B. 312; Rev. Rul. 93-93, 1993-2 C.B. 321; Rev. Rul. 93-92, 1993-2 C.B. 318; Rev. Rul. 93-91, 1993-2 C.B. 316; Rev. Rul. 88-76, 1988-2 C.B. 360. In Re venue Ruling 93-6, 1993-1 C.B. 229, the Service ruled that a Colorado LLC whose management was vested in managers, all of whom were members, had centralized management, even though all of the members were managers. At the time that Revenue Ruling 93-6 was issued, the Colorado LLC Act provided that management of an LLC always was vested in managers. Colo. Rev. Stat. § 70-80-607(1) (amended 1994). Thus, there was no other way that the parties could have provided for the management structure of the LLC. In Revenue Ruling 93-6, the Service explained that a Colorado LLC always had the corporate characteristic of centralized management because members of a Colorado LLC never could manage the LLC in their capacity as members. 1993-1 C.B. at 231. Thus, the member-managers of the LLC were like shareholders in a corporation who also serve on the corporation's board of directors. Such shareholders manage the corporation, not in their capacity as shareholders, but in their capacity as directors.
111. 1995-1 C.B. 501.
112. Former Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
113. RULPA § 303 (1985); ULPA § 7 (1916).
114. Former Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
115. Rev. Proc. 89-12 § 4.06, 1989-1 C.B. 798, 801.
116. Former Treas. Reg. § 301.7701-2(c)(4) (as amended in 1993).
117. Id.
118. Rev. Proc. 95-10 § 5.03(2), 1995-1 C.B. 501, 504.
119. Id.
120. Id.
121. Id.
122. La. R.S. 12:1313(2) (1994).
123. La. R.S. 12:1313 (1994) (first clause).
124. La. R.S. 12:1305(C)(1), 1317(B) (1994). Notwithstanding such a provision, a member could exceed his or her authority by self-certifying the member's authority to act on behalf of the LLC. La. R.S. 12:1317(C) (1994). The ability of a member to exceed his or her authority by self-certification, however, can be prevented if the LLC's articles of organization designate a certifying officer. La. R.S. 12:1305(C)(5), 1317(C) (1994).
125. Former Treas. Reg. § 301.7701-2(c)(1) (as amended in 1993).
126. La. R.S. 12:93(B) (1994); Revised Model Business Corp. Act § 6.22(b) (1985).
127. La. Civ. Code art. 2817; UPA § 15 (1914); RULPA § 403(b) (1985). While a partner in a Louisiana partnership is liable only for the partner's virile share of partnership obligations, the partner is potentially liable for a percentage of an unlimited amount.
128. Former Treas. Reg. § 301.7701-2(d)(1) (as amended in 1993).
129. Id.
130. La. R.S. 12:1320(B) (1994).
131. La. R.S. 12:1320(D) (1994). See also La. R.S. 12:1314 (1994) (a member in a member-managed LLC may be liable for breach of a fiduciary duty to the LLC or its members unless the LLC's articles of organization or written operating agreement provide for elimination of liability for such a breach or for indemnification); 12:1315(B) (1994) (a member in a member-managed LLC is always liable for the amount of any financial benefit improperly received from the LLC and for any intentional violation of criminal law).
132. La. R.S. 12:1322 (1994).
133. La. R.S. 12:1328 (1994).
134. See Kalinka, supra note 1, at § 1.32.
135. See id. § 1.31.
136. 1994-1 C.B. 312.
137. See. e.g., Rev. Rul. 95-9, 1995-1 C.B. 222; Rev. Rul. 94-79, 1994-2 C.B. 409; Rev. Rul. 94-51, 1994-2 C.B. 407; Rev. Rul. 94-30, 1994-1 C.B. 316; Rev. Rul. 94-6, 1994-1 C.B. 314; Rev. Rul. 93-93, 1993-2 C.B. 321; Rev. Rul. 93-92, 1993-2 C.B. 318; Rev. Rul. 93-91, 1993-2 C.B. 316; Rev. Rul. 93-81, 1993-2 C.B. 314; Rev. Rul. 93-53, 1993-2 C.B. 312; Rev. Rul. 93-50, 1993-2 C.B. 310; Rev. Rul. 93-49, 1993-2 C.B. 308; Rev. Rul. 93-38, 1993-1 C.B. 233 (Delaware LLC, Situations 1 and 2); Rev. Rul. 93-30, 1993-1 C.B. 231 (Nevada LLC); Rev. Rul. 93-6, 1993-1 C.B. 229 (Colorado LLC); Rev. Rul. 93-5, 1993-1 C.B. 227 (Virginia LLC); Rev. Rul. 88-76, 1988-2 C.B. 360 (Wyoming LLC); Priv. Ltr. Rul. 90-10-027 (Dec. 7, 1989) (LLC formed pursuant to the statute of an unidentified state).
138. See e.g., Rev. Rul. 94-30, 1994-1 C.B. 316 (Kansas professional LLC); Rev. Rul. 93-93, 1993-2 C.B. 321 (Arizona professional LLC); Rev. Rul. 93-91, 1993-2 C.B. 316 (Utah professional LLC).
139. See, e.g., Rev. Rul. 93-93, 1993-2 C.B. 321 (Arizona professional LLC).
140. 1995-1 C.B. 501.
141. Rev. Proc. 95-10 § 5.04, 1995-1 C.B. 501, 504.
142. Id. The ten percent net worth requirement must be met at the time of the ruling request and must be expected to continue throughout the life of the LLC. Id.
143. Id. In determining the net worth of the assuming members), the principles contained in Rev. Proc. 92-88 § 4.03, 1992-2 C.B. 496, are to be applied. Under principles contained in § 4.03 of Rev. Proc. 92-88, in determining the net worth of a member, the member's interest in the LLC is not included and the value of property included in determining the net worth of one assuming member may not be taken into account in determining the net worth of any other assuming member. For example, where a parent corporation and a wholly owned subsidiary are assuming members, the value of the stock held by the parent in the subsidiary is not counted in determining the parent's net worth.
144. Rev. Proc. 95-10 §§ 4.02, 4.03, 1995-1 C.B. 501, 503. To satisfy the minimum ownership interest standard, the assuming member or members generally must own, in the aggregate, at least a one percent interest in each material item of the LLC's income, gain, loss, deduction, or credit during the LLC's entire existence. Id. § 4.02. If an allocation required by § 704(b) or § 704(c) causes the assuming members' interests temporarily to fall below the one percent standard, it generally will not be considered to be a violation of the minimum ownership interest requirement Id. Any other temporary allocation causing less than one percent of any material item of the LLC's income, gain, loss, deduction, or credit to be allocable to the assuming member(s) will be considered a violation of the requirement unless the LLC clearly establishes in the ruling request that the assuming members have a material interest in net profits and losses over the LLC's anticipated life. Id. For this purpose, a profits interest generally will not be considered material unless it substantially exceeds one percent and will be in effect for a substantial period of time during which the LLC reasonably expects to generate profits. Id. The assuming members need not meet the one percent standard if the LLC has total contributions exceeding $50 million. Id. § 4.03. In that case, the assuming members in the aggregate must maintain an interest at all times during the existence of the LLC in each material item of the greater of: (1) one percent divided by the ratio of total contributions to $50 million or (2) .2%. Id. For example, if total contributions are $200 million, the interest in each material item must be at least .25%, that is, one percent divided by 200/50. Temporary allocations required by § 704(b) or § 704(c) that reduce the assuming members' aggregate interest below the required amount will not cause a violation of the minimum ownership interest requirement Id. If other temporary allocations reduce the assuming members' interest below the required amount, the LLC must clearly establish that the assuming members have a material interest in net profits and losses over the LLC's anticipated life. Id.
145. Rev. Proc. 95-10 §§ 4.04, 4.05, 1995-1 C.B. 501, 503. If a taxpayer requests a ruling that an LLC lacks limited liability, the assuming members, in the aggregate, generally must maintain throughout the entire existence of the LLC, a minimum capital account balance equal to the lesser of one percent of total positive capital account balances or $500,000. Id. § 4.04. Whenever a non-assuming member makes a capital contribution, the assuming members must be obligated under the express terms of the LLC's operating agreement, to contribute immediately to the LLC capital contributions equal to 1.01% of the non-assuming members' capital contributions or a lesser amount (including zero) that causes the sum of the assuming members' capital account balances to equal the lesser of one percent of total capital account balances for the LLC or $500,000. Id. If no member has a positive capital account balance, then the assuming members need not have a positive capital account balance to satisfy the minimum capital account balance requirement Id. For this purpose, capital accounts and the value of contributions are determined under the rules of Treas. Reg. § 1.704-1(b)(2)(iv) (1996). The minimum capital account balance requirement does not apply if at least one assuming member has contributed or will contribute substantial services in the capacity as a member, other than services for which guaranteed payments under I.R.C. § 707(c) are made. Rev. Proc. 95-10 § 4.05, 1995-1 C.B. 501, 503. In that case, the LLC's operating agreement must provide that, upon dissolution and termination of the LLC, the assuming members will contribute capital to the LLC in an amount equal to the lesser of: (1) the aggregate deficit balance, if any, in their capital accounts, or (2) an amount equal to 1.01% of the total contributions of the non-assuming members less the aggregate capital previously contributed to the LLC by the assuming members. Id.
146. Rev. Proc. 95-10 § 5.04, 1995-1 C.B. 501, 503.
147. La. R.S. 12:1320(B) (1994).
148. La. R.S. 12:1320(C) (1994).
149. Former Treas. Reg. § 301.7701-2(e)(1) (as amended in 1993).
150. Id.
151. La. R.S. 12:1330(A) (1994).
152. Id.
153. La. R.S. 12:1330(A), 12:1332(A) (1994).
154. 1994-1 C.B. 312.
155. See, e.g., Rev. Rul. 95-9, 1995-1 C.B. 222; Rev. Rul. 94-51, 1994-2 C.B. 407; Rev. Rul. 94-30, 1994-1 C.B. 316; Rev. Rul. 94-6, 1994-1 C.B. 314; Rev. Rul. 93-93, 1993-2 C.B. 321; Rev. Rul. 93-81, 1993-2 C.B. 314; Rev. Rul. 93-53, 1993-2 C.B. 312; Rev. Rul. 93-50, 1993-2 C.B. 310; Rev. Rul. 93-49, 1993-2 C.B. 308; Rev. Rul 93-38 (Situation 1), 1993-1 C.B. 233; Rev. Rul 93-30, 1993-1 C.B. 231; Rev. Rul. 93-6, 1993-1 C.B. 229; Rev. Rul. 93-5, 1993-1 C.B. 227; Rev. Rul. 88-76, 1988-2 C.B. 360; Priv. Ltr. Rul. 93-08-039 (Dec. 2, 1992); Priv. Ltr. Rul. 92-42-025 (July 22, 1992); Priv. Ltr. Rul. 92-27-033 (Apr. 8, 1992); Priv. Ltr. Rul. 92-16-004 (Jan. 14, 1992); Priv. Ltr. Rul. 92-10-039 (Dec. 11, 1991); Priv. Ltr. Rul. 91-47-017 (Aug. 12, 1991); Priv. Ltr. Rul. 91-19-029 (Feb. 7, 1991); Priv. Ltr. Rul. 90-52-039 (Oct. 2, 1990); Priv. Ltr. Rul. 90-30-013 (Apr. 25, 1990); Priv. Ltr. Rul. 90-29-019 (Apr. 19, 1990); Priv. Ltr. Rul. 90-10-027 (Dec. 7, 1989); Priv. Ltr. Rul. 89-37-010 (June 16, 1989).
156. La. Civ. Code art. 2807. See also La. Civ. Code art. 2812 (a partner may share his interest in the partnership with a third person without the consent of his partners, but he cannot make him a member of the partnership).
157. La. Civ. Code art. 2814. A partner is not a mandatary of the partnership with respect to the alienation, lease, or encumbrance of immovables. Id.
158. La. Civ. Code art. 2817.
159. La. R.S. 12:1317(A) (1994).
160. Id.
161. La. R.S. 12:1318(B) (1994).
162. La. R.S. 12:1330(A), 1332(A) (1994).
163. Rev. Rul. 93-38, 1993-1 C.B. 233 (Situation 2).
164. Former Treas. Reg. § 301.7701-2(e)(1) (as amended in 1993).
165. See, e.g., Rev. Rul. 93-92, 1993-2 C.B. 318; Rev. Rul. 93-91, 1993-2 C.B. 316. See also Priv. Ltr. Rul. 93-50-013 (Sept 15, 1993); Priv. Ltr. Rul. 92-19-022 (Feb. 6, 1992).
166. (Jan. 31, 1992).
167. (Dec. 6, 1991).
168. See, e.g., Former Treas. Reg. § 301.7701-3(b)(2) Example (1) (as amended in 1993).
169. 1995-1 C.B. 501.
170. Rev. Proc. 95-10 § 5.02(1), 1995-1 C.B. 501.
171. Rev. Proc. 95-10 § 5.02(3), 1995-1 C.B. 501. See also Rev. Proc. 94-46, 1994-2 C.B. 688.
172. Rev. Proc. 95-10 § 4.02, 1995-1 C.B. 501. The express terms of the LLC's operating agreement must provide that the member-managers have at least an aggregate one percent interest in each material item. Id. Allocations required under I.R.C. § 704(b) or § 704(c) that temporarily reduce the member-managers' aggregate interest in the LLC's items of income, gain, loss, deduction, or credit below the one percent threshold generally will not be considered to violate the minimum ownership interest requirement Rev. Proc. 95-10 § 4.02, 1995-1 C.B. 501. Any other temporary allocation causing less than one percent of any material item of the LLC's income, gain, loss, deduction, or credit to be allocated to member-managers will be considered a violation of the minimum ownership interest requirement unless the LLC clearly establishes that the member-managers have a material interest in net profits and losses over the LLC's anticipated life. Id. For this purpose, a profits interest generally will not be considered material unless it substantially exceeds one percent and will be in effect for a substantial period of time during which the LLC reasonably expects to generate profits. Id. For example, a twenty percent interest in profits that begins four years after the LLC's formation and continues for the life of the LLC generally will be considered material if the LLC is expected to generate profits for a substantial period of time beyond the initial four-year period. Id.
173. Rev. Proc. 95-10 § 4.03, 1995-1 C.B. 501, 503.
174. Id. The LLC's operating agreement must expressly incorporate at least the computed percentage. Id.
175. Rev. Proc. 95-10 § 4.04, 1995-1 C.B. 501. Whenever a non-managing member makes a capital contribution, the member-managers must be obligated, pursuant to the express terms of the operating agreement, to contribute immediately to the LLC capital equal to 1.01% of the non-managing members' capital contributions or a lesser amount (including zero) that causes the sum of the member-managers' capital account balances to equal the lesser of one percent of total capital account balances for the LLC or $500,000. Id. If no member has a positive capital account balance, the member-managers need not have a positive capital account balance to satisfy the minimum capital account balance requirement. Id. For this purpose, capital accounts and the value of contributions are determined under the rules of Treas. Reg. § 1.704-1(b)(2)(iv) (1996). Rev. Proc. 95-10 § 4.04, 1995-1 C.B. 501.
176. Rev. Proc. 95-10 § 4.05, 1995-1 C.B. 501. The Service will closely scrutinize services that do not relate to day-to-day operations in the LLC's primary business activity to determine if they are in fact substantial services. Id. Suspect services include: services related to the organization and syndication of the LLC, accounting, financial planning, general business planning, and services in the nature of investment management Id. In making the determination, the Service will consider the nature of the LLC and its activities. Id.
177. Id.
178. Rev. Proc. 95-10 § 5.02(2), 1995-1 C.B. 501.
179. Rev. Proc. 95-10 § 5.02(3), 1995-1 C.B. 501.
180. Rev. Proc. 95-10 § 5.02(4), 1995-1 C.B. 501.
181. Id.
182. Former Treas. Reg. § 301.7701-2(e)(1) (as amended in 1993).
183. 1992-1 C.B. 782.
184. Rev. Proc. 95-10 § 5.02(1), (2), 1995-1 C.B. 501. See, e.g., Priv. Ltr. Rul. 93-06-008 (Nov. 10, 1992), in which the Service held that an LLC lacked free transferability of interests where one of the members, who owned less than eighty percent of all interests in the LLC's capital, income, gain, loss, deduction and credit, could freely transfer the member's interest.
185. Former Treas. Reg. § 301.7701-2(e)(1) (as amended in 1993).
186. La. R.S. 12:1334; 12:1336 (1994).
187. La. R.S. 12:1337 (1994).
188. 1993-1 C.B. 225.
189. See e.g., Priv. Ltr. Rul. 94-09-016 (Nov. 30, 1993); Priv. Ltr. Rul. 94-09-014 (Nov. 29, 1993); Priv. Ltr. Rul. 94-04-021 (Nov. 1, 1993).
190. See, e.g., La. Civ. Code art 1520; Female Orphan Society v. Young Men's Christian Ass'n, 119 La. 278, 44 So. 15 (1907). But see Priv. Ltr. Rul. 96-06-006 (Feb. 9, 1996) (Louisiana LLC owned by Y and Y's wholly-owned corporation lacked free transferability of interests where the LLC's operating agreement provided that no member could transfer, sell, give, donate, assign, alienate, or otherwise dispose of any of his interest in the LLC and no member could transfer all or any part of his interest by way of security).
191. Former Treas. Reg. § 301.7701-2(e)(2) (as amended in 1993).
192. See Former Treas. Reg. § 301.7701-2(a)(3) (as amended in 1993) (an unincorporated organization shall not be classified as a corporation unless the organization has more corporate characteristics than noncorporate characteristics). See also Larson v. Commissioner, 66 T.C. 159, 185-86 (1976) (each corporate characteristic bears equal weight, except for the modified form of free transferability of interests).
193. See, e.g., Minn. Stat. § 322B.313(2) (1996); N.D. Cent Code § 10-32-32(2) (1995).
194. (March 23, 1994).
195. Former Treas. Reg. § 301.7701-2(e)(1) (as amended in 1993).
196. La. R.S. 12:1318(A) (1994).
197. La. R.S. 12:1333 (1994).
198. (Oct. 26, 1995).
199. La. R.S. 12:1367(B) (1994).
200. See supra text accompanying note 196.
201. I.R.C. § 6110(j)(3) (1994); Rev. Proc. 96-1 § 11.02, 1996-1 I.R.B. 8.
202. Former Treas. Reg. § 301.7701-2(a)(1) (as amended in 1993).
203. 66 T.C. 159 (1976).
204. Id. at 184.
205. 524 F.2d 729, 744 (Ct. Cl. 1975).
206. 1979-1 C.B. 448.
207. Id.
208. See La. R.S. 12:1301(A)(10) (1994) (defining the terms "limited liability company" and "domestic limited liability company" to mean an unincorporated association having two or more members); La. R.S. 12:1304 (1994) (requiring two or more persons to form an LLC).
209. La. R.S. 12:1334(3) (1994).
210. See, e.g., Del. Code Ann. tit. 6, § 18-101(6) (1996); N.Y. Limited Liability Company Law § 102(m) (McKinney 1996) (defining the term "limited liability company" as an unincorporated organization of one or more persons having limited liability); Or. Rev. Stat. § 63.001(13) (1995); Tex. Rev. Civ. Stat. Ann. art. 1528n, art. 6.01(A)(4) (West 1995) (requiring as a default rule that a Texas LLC dissolves upon the termination of a member's interest unless there is at least one remaining member and the LLC is continued by the consent of the remaining members); ULLCA § 202(a) (1995) (one or more persons may organize an LLC consisting of one or more members). Some states, while not specifically authorizing the formation of single-member LLCs, do not prohibit persons from operating a single-member LLC. See statutes cited in Marshall B. Paul & Stuart Levine, One-Member LLCs Pose Often-Overlooked State Law Issues, 1 J. Limited Liability Companies 162, 166 Table 6 (1995).
211. See La. R.S. 12:1342 (1994) (permitting a foreign LLC to obtain a certificate of authority to transact business in Louisiana even if the laws of the jurisdiction under which the foreign LLC was organized differ from the laws of Louisiana).
212. Rev. Proc. 95-10 § 4.01, 1995-1 C.B. 501.
213. See, e.g., J. William Callison, Limited Liability Companies § 12.12 (1994); Ribstein & Keatinge, supra note 83, § 16.19. But see Jerry S. Williford & Donald H. Standley, How Should Single-Member LLCs Be Classified For Federal Income Tax Purposes?, 2 J. Limited Liability Companies 27, 34-35 (Summer 1995) (suggesting that there is no reason that an LLC should not be treated as a partnership for federal income tax purposes).
214. See La. Civ. Code arts. 2801 (defining a partnership as a juridical person created by a contract between two or more persons), 2826 (providing that a general partnership terminates when its membership is reduced to one person), 2837 (defining a partnership in commendam as consisting of one or more general partners and one or more partners in commendam); UPA § 6(1) (1914) (a partnership is an association of two or more persons to carry on as co-owners a business for profit); RULPA § 101 (7) (1985) (a "limited partnership" means a partnership formed by two or more persons having one or more general partners and one or more limited partners).
215. I.R.C. §§ 761(a), 7701(a)(2) (1994).
216. Former Treas. Reg. § 301.7701-2(a)(2) (as amended in 1993).
217. I.R.C. § 708(b)(1)(A) (1994).
218. Treas. Reg. § 1.708-1(b)(1) (1960). Upon the death or retirement of a partner in a two-person partnership, the retired partner or a deceased partner's successor in interest is treated as a partner until the partnership interest of the retired or deceased partner is completely liquidated. Treas. Reg. § 1.736-1(a)(1)(ii) (as amended in 1965). Thus, a two-person partnership does not terminate for tax purposes upon the retirement or death of one of the partners until the partnership interest of the retired or deceased partner is completely liquidated or the interest is purchased by the remaining partner. See also Treas. Reg. § 1.708-1(b)(1)(i)(a) (1960) (upon the death of one of the partners in a two-member partnership, the partnership does not terminate if the estate or other successor in interest of the deceased, partner continues to share in the profits or losses of the partnership business). These rules should apply when one of the members of a two-member LLC dies or retires.
219. Francis J. Wirtz & Kenneth L. Harris, Tax Classification of the One-Member Limited Liability Company, 59 Tax Notes 1829 (June 28, 1993). See also Williford & Standley, supra note 211, at 33.
220. Treas. Reg. § 301.7701-3(a) (as amended in 1996).
221. Treas. Reg. § 301.7701-2(a) (as amended in 1996).
222. Treas. Reg. § 301.7701-3(b)(3)(i) (as amended in 1996).
223. Id.
224. Treas. Reg. § 301.7701-3(f)(2) (as amended in 1996). In addition, an entity's claimed classification may not be respected if: (1) the entity or any of its members did not recognize the federal tax consequences of any change in the entity's classification within the 60 months prior to January 1, 1997 or (2) either the entity or any member was notified in writing on or before May 8, 1996, that the classification of the entity was under examination. Id.
225. H.R. Rep. No. 213, 103d Cong., 1st Sess. 669 (Conf. Rep. 1993). See also Prop. Treas. Reg. § 1.6662-3(b)(3), 60 Fed. Reg. 45,661 (1995) (the reasonable basis standard is significantly higher than not frivolous or not patently improper; if a return position is reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii), the return position generally will satisfy the reasonable basis standard).
226. See La. R.S. 12:1301(A)(13) (1994) (defining the term "member" as a person with a membership interest in an LLC); La. R.S. 12:1301(A)(18) (1994) (defining the term "person" as a natural person, corporation, partnership, limited partnership, domestic or foreign LLC, joint venture, trust, estate or association).
227. 502 F. Supp. 838 (C.D. Cal. 1980), rev'd on other grounds, 685 F.2d 1099 (9th Cir. 1982).
228. 502 F. Supp. at 844.
229. Id. at 846.
230. Id.
231. Id.
232. Id. at 847.
233. 685 F.2d 1099 (9th Cir. 1982).
234. 685 F.2d at 1103-04.
235. See, e.g., Rev. Rul. 75-19, 1975-1 C.B. 382 (domestic business organizations formed by controlled corporations qualified for partnership taxation); Priv. Ltr. Rul. 94-09-016 (Nov. 30, 1993) (Louisiana LLC owned by a corporation and its wholly-owned subsidiary); Priv. Ltr. Rul. 94-09-014 (Nov. 29, 1993) (same); Priv. Ltr. Rul. 94-04-021 (Nov. 1, 1993) (same); Priv. Ltr. Rul. 93-20-045 (Feb. 24, 1993) (LLC formed by one person and a wholly-owned corporation classified as a partnership); Priv. Ltr. Rul. 93-20-019 (Feb. 18, 1993) (same); Priv. Ltr. Rul. 91-03-033 (Oct. 23, 1990) (foreign societe en nom collectif owned by a United States corporation and its wholly-owned subsidiary classified as a partnership); Priv. Ltr. Rul. 82-43-193 (July 29, 1982) (German general partnership owned by two GmbHs, each wholly-owned by a United States corporation qualified for partnership taxation); Priv. Ltr. Rul. 79-34-096 (May 24, 1979) (business organization formed by controlled corporations classified as a partnership).
236. 1977-1 C.B. 408, modified and superseded by Rev. Rul. 93-4, 1993-1 C.B. 225.
237. 1977-1 C.B. at 409.
238. Id.
239. Id.
240. 1993-1 C.B. 225.
241. Id. at 226.
242. Id.
243. Id.
244. La. R.S. 12:1334(3) (1994).
245. If the LLC also lacks centralized management, the consideration of whether it also lacks free transferability of interests is irrelevant because an LLC needs to lack only two of the four primary corporate characteristics to
246. See, e.g., Priv. Ltr. Rul. 94-09-016 (Nov. 30, 1993); Priv. Ltr. Rul. 94-09-014 (Nov. 29, 1993); Priv. Ltr. Rul. 94-04-021 (Nov. 1, 1993). See also Priv. Ltr. Rul. 96-06-006 (Feb. 9, 1996) (Louisiana LLC owned by Y and Y's wholly-owned corporation lacked free transferability of interests where LLC's operating agreement provided that no member could transfer, sell, give, donate, assign, alienate or otherwise dispose of any of his interest in the LLC or transfer any or all of his interest in the LLC by way of security).
247. T.D. 8697, 61 Fed. Reg. 66,584 (1996).
248. PS-43-95, 61 Fed. Reg. 21,989 (1996).
249. Preamble to Prop. Treas. Reg. §§ 301.7701-1 through 301.7701-3, 61 Fed. Reg. 21,989 (1996).
250. Id.
251. Treas. Reg. §§ 301.7701-1(b), -2(b), -3(a) (as amended in 1996).
252. Treas. Reg. § 301.7701-2(b)(7) (as amended in 1996). While a publicly traded entity may be classified as a partnership under the current classifications or may be eligible to make a check-the-box election under the proposed regulations, the taxation of such an entity is determined under I.R.C. § 7704. The Service and the Treasury Department do not have the authority to overrule a federal statute. A publicly traded entity, however, may be taxed as a partnership if ninety percent of the partnership's gross income consists of "qualifying income" for the taxable year and for all preceding taxable years beginning after December 31, 1987. I.R.C. § 7704(c) (1994). For this purpose, qualifying income generally consists of passive-type income, such as interest, dividends, real property rents, gain from the sale or other disposition of real property, capital assets, and income and gains from certain mineral activities. See I.R.C. § 7704(d) (1994). A grandfather rule provides that certain partnerships that were publicly traded on December 17, 1987, will not be classified as corporations until taxable years beginning after December 31, 1997, unless prior to that time, they engage in a substantially new line of business. H.R. Rep. No. 495, 100th Cong., 1st Sess. 950 (1987); IRS Notice 88-75 § 5, 1988-2 C.B. 386. While it is not entirely certain, a publicly traded partnership that converts to an LLC should be able to take advantage of the grandfather rule. Inasmuch as the grandfather rule is about to expire, it should have little relevance for LLCs unless the expiration date is extended.
253. Treas. Reg. § 301.7701-3(a) (as amended in 1996).
254. Treas. Reg. § 301.7701-1(a)(1) (as amended in 1996).
255. See La. R.S. 12:1301(A)(10) (1994) (defining the term "limited liability company" as an "entity" that is an unincorporated association having two or more members that is organized under the Louisiana LLC Law); La. R.S. 12:1329 (1994) (an interest in an LLC is property; a member of an LLC has no interest in the LLC's property); La. Civ. Code art. 2801 (defining the term "partnership" as a "juridical person, distinct from its owners").
256. Treas. Reg § 301.7701-1(a)(2) (as amended in 1996).
257. Id.
258. Id.
259. See Former Treas. Reg. § 1.761-1(a) (as amended in 1972). I.R.C. § 761(a) provides a definition of the term "partnership" that is similar to the definition of that term in I.R.C. § 7701(a)(2). Thus, it is appropriate for the § 7701 regulations to provide interpretative rules similar to those contained in the § 761 regulations.
260. 1975-2 C.B. 261.
261. I.R.C. § 703(b) (1994).
262. I.R.C. §§ 441, 444, 706 (1994).
263. See I.R.C. §§ 446, 448 (1994). In some cases, an LLC may not be permitted to use the cash method of accounting. For a discussion of whether an LLC may use the cash method of accounting, see Kalinka, supra note 1, § 6.3.
264. I.R.C. § 168 (1994).
265. I.R.C. § 1033 (1994).
266. I.R.C. § 706(a) (1994).
267. I.R.C. § 702(b) (1994).
268. Cf. Podell v. Commissioner, 55 T.C. 429 (1970) (finding of a partnership resulted in gain on the sale of property being treated as ordinary income to a non-dealer partner because the partnership was holding the real estate primarily for sale to customers in the ordinary course of a business). But see I.R.C. § 734 (1994) (gain or loss with respect to contributed property generally retains it character, at least for five years after the contribution). For a discussion of I.R.C. § 734, see Kalinka, supra note 1, § 5.21.
269. I.R.C. § 6031 (1994). Failure to file a partnership return could result in a penalty unless the participants can prove that the failure was due to reasonable cause. I.R.C. § 6698 (1994).
270. Treas. Reg. § 301.7701-3(a) (as amended in 1996).
271. Id.
272. Treas. Reg. § 301.7701-2(b)(1), (3), (4), (5), (6), (7) (as amended in 1996).
273. Treas. Reg. § 301.7701-2(b)(8)(i) (as amended in 1996). The regulations also provide exceptions to the automatic corporate classification of certain listed entities. See Treas. Reg. § 301.7701-2(b)(8)(ii) (as amended in 1996).
274. Treas. Reg. § 301.7701-2(d)(1) (as amended in 1996). For this purpose, the issue of whether the entity had a reasonable basis for its claimed classification as a partnership is determined under the principles of I.R.C. § 6662. Id. If a listed entity is formed after May 8, 1996, pursuant to a written binding contract in effect on May 8, 1996, and all times thereafter, in which the parties agreed to engage (directly or indirectly) in an active and substantial business operation in the jurisdiction in which the entity is formed, the grandfather rule also will apply to the entity. Treas. Reg. § 301.7701-2(d)(2) (as amended in 1996).
275. Treas. Reg. § 301.7701-3(d)(1) (as amended in 1996).
276. Treas. Reg. § 301.7701-2(d)(3)(i) (as amended in 1996). The grandfather status of a listed entity will not cease where termination of the partnership is caused by a sale or exchange of the interests in the entity to a related person (within the meaning of I.R.C. §§ 267(b) and 707(b)) and occurs twelve months after the date on which the entity was formed. Treas. Reg. § 301.7701-2(d)(3)(ii) (as amended in 1996).
277. Treas. Reg. § 301.7701-3(a) (as amended in 1996).
278. Id.
279. Treas. Reg. § 301.7701-2(a) (as amended in 1996).
280. See La. R.S. 12:1301(A)(10) (1994 & 1996 Supp.) (defining the term "limited liability company" as an unincorporated association having two or more members).
281. See La. R.S. 12:93(B) (1994 & 1996 Supp.) (a shareholder is not personally liable for any debt or liability of the corporation).
282. Preamble to T.D. 8697, 61 Fed. Reg. at 66,585.
283. Treas. Reg. § 301.7701-3(b)(1)(i) (as amended in 1996).
284. Treas. Reg. § 301.7701-3(b)(1)(ii) (as amended in 1996).
285. The default rules for classification of a foreign entity that is eligible to make a check-the-box election depend on whether any of the members of the foreign entity have limited liability. If one or more of the members of a foreign eligible entity does not have limited liability, the entity automatically will be classified as a partnership if it has two or more members and will be disregarded as a separate entity if it has only one member, unless the entity elects to be classified as an association. Treas. Reg. § 301.7701-3(b)(2)(i)(A), (C) (as amended in 1996). For this purpose, a member of a foreign eligible entity has limited liability if, pursuant to the law under which the entity is organized, the member has no personal liability for the debts of or claims against the entity by reason of being a member. Treas. Reg. § 301.7701-3(b)(2)(ii) (as amended in 1996). If the law under which the entity is organized allows the entity to specify in its organizational documents whether its members will have limited liability, the organizational documents also may be relevant in determining whether any member has limited liability. Id. A person has personal liability for purposes of the check-the-box regulations if the creditors of the entity may seek satisfaction for all or any portion of the debts of or claims against the entity from the member as such, even if the member makes an agreement under which another person assumes the member's liability or agrees to indemnify the member for such liability. Id. On the other hand, if all of the members of a foreign eligible entity have limited liability, the default rules provide for classification of the foreign entity as an association. Treas. Reg. § 301.7701-3(b)(2)(i)(B) (as amended in 1996).
286. Treas. Reg. §§ 301.7701-3(b)(3)(i) (as amended in 1996).
287. Id. For this purpose, a foreign eligible entity is considered to be an existing entity only if the entity's classification is relevant to any person for federal tax purposes at any time that includes the date immediately before the effective date of the check-the-box regulations. Treas. Reg. §301.7701-3(b)(3)(ii) (as amended in 1996).
288. Preamble to T.D. 8697, 61 Fed Reg. at 66,585.
289. I.R.C. §§ 331, 336(a) (1994).
290. Treas. Reg. § 301.7701-3(f)(2) (as amended in 1996).
291. The "reasonable basis" standard was added to I.R.C. § 6662 in 1993. According to the legislative history of § 6662, Congress "intend[ed] that 'reasonable basis' be a relatively high standard . . ., that is, significantly higher than 'not patently improper.' This standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim." H.R. Rep. No. 213, 103d Cong., 1st Sess. 669 (Conf. Rep. 1993). See also Prop. Treas. Reg. § 1.6662-3(b)(3), 60 Fed. Reg. 45,661 (1995) (same; if a return position is reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities and subsequent developments), the return position will generally satisfy the reasonable basis standard).
292. Treas. Reg. § 301.7701-3(c)(1)(A) (as amended in 1996). The form to be used in making a check-the-box election is Form 8832, which will designate the service center with which it must be filed. Id.
293. Id.
294. Id. An eligible entity required to file a federal tax or information return for the taxable year for which an election is made must attach a copy of its Form 8832 to the return for that year. Treas. Reg. § 301.7701-3(c)(1)(ii) (as amended in 1996). If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal tax or information return of any direct or indirect owner of the entity for the taxable year of the owner that includes the date on which the election is effective. Id. If an entity or any of its direct or indirect owners fails to attach the Form 8832 to its tax or information return as required, an otherwise valid election will not be invalidated, but the non-filing party may be subject to penalties if the federal tax or information returns are inconsistent with the entity's election. Id.
295. Treas. Reg. § 301.7701-3(c)(iii) (as amended in 1996). If an election specifies an effective date that is more than 75 days prior to the date on which the election is filed, the election will be effective 75 days prior to the date on which it is filed; an election that specifies a date that is more than 12 months after the date of filing will be effective 12 months after the date of the filing; an election that specifies an effective date before January 1, 1997 will be effective on January 1, 1997. Id.
296. Id.
297. Treas. Reg. § 301.7701-3(c)(2)(i) (as amended in 1996).
298. Treas. Reg. § 301.7701-3(c)(2)(ii) (as amended in 1996).
299. Preamble to T.D. 8697, 61 Fed. Reg. at 66,587.
300. See La. R.S. 12:1318 (1994 and Supp. 1996) (default rule providing that members vote on a one-person, one-vote, majority-rules basis).
301. Treas. Reg. § 301.7701-3(c)(1)(v)(A) (as amended in 1996).
302. Id.
303. Treas. Reg. § 301.7701-3(c)(v)(B) (as amended in 1996).
304. Id.
305. Treas. Reg. § 301.7701-3(c)(1)(iv) (as amended in 1996).
306. Id.
307. See La. R.S. 12:1367(C) (1994 and Supp. 1996) (neither the Louisiana LLC Law nor any amendment thereto is to be construed so as to impair the obligations of any contract or to affect any action or proceedings begun or right accrued before the LLC Law or any amendment thereto takes effect).
308. See La. R.S. 12:1301(A)(10) (1994 and Supp. 1996) (defining the term "limited liability company" as an unincorporated association having two or more members), 12:1304(A) (1994 and Supp. 1996) (requiring two or more persons to form an LLC), 12:1334(3) (1994 and Supp. 1996) (default rule requiring dissolution of an LLC on the occurrence of any event that terminates the continued membership of a member unless the LLC is continued by the unanimous consent of the remaining members, and if membership is reduced to one, the admission of one or more members).
309. One commentator, however, does not think that a single-member LLC is such a good idea. Professor Larry E. Ribstein is concerned that statutes that allow single-member LLCs "may invite such firms into a world of trouble and uncertainty." Larry E. Ribstein, The Loneliest Number: The Unincorporated Limited Liability Sole Proprietorship, J. of Asset Protection May/June 1996, at 46, 47. Professor Ribstein's concerns are based largely on the fact that the default rules of most LLC statutes, including rules relating to allocation of management power among members and managers, sharing of profits and distributions, fiduciary duties of members and managers, and dissolution and buy-out upon dissociation of a member, are designed for two or more owners. Id. This author does not share Professor Ribstein's fears. Corporate statutes, like LLC statutes, contain default provisions designed for corporations having two or more members. Nevertheless, there has been little difficulty in applying these statutes to single-owner corporations. Professor Ribstein is concerned, however, that many LLC statutes permit the default rules to be altered only by an LLC's operating agreement. Id. He reasons that an operating agreement requires an agreement between or among members, an impossibility if an LLC has only one member. Id. In contrast, a corporation's articles of incorporation or bylaws may alter the default rules of corporate statutes. La. R.S. 12:24(C), 28(B) (1994 and Supp. 1996); Rev. Model Business Corp. Act §§ 2.02(b)(2), (3), (4), (5), 2.06. It seems that Professor Ribstein has overlooked the possibility of altering the default provisions of an LLC statute in the LLC's articles of organization, which do not require an agreement among the members. Moreover, as Robert Keatinge has observed, there is no reason why the sole member of an LLC may not enter into an operating agreement with the LLC to alter the default rules of the LLC statute.
310. Robert R. Keatinge, The Single-Member LLC: Operating Agreement Questions and Other Issues, 3 J. of Limited Liability Companies 87, 88 (1996). Professor Ribstein suggests that a new statute should be enacted, designed for single-member limited liability entities. Ribstein, supra at 49. Such a statute is not necessary. The existing LLC statutes, if amended to authorize the formation of a single-member LLC, are adequate to meet the needs of such entities. Promulgation of new laws designed for single-member entities is inefficient because it will require courts, practitioners, and entrepreneurs to master the rules of the new law. Moreover, Professor Ribstein has suggested no solution to the problems that may arise if another member is admitted to a single-member entity that is governed by the special statute.
311. Before the proposed check-the-box regulations were issued, most commentators agreed that an LLC with fewer than two members would not be classified as a partnership. See supra note 211 and accompanying text. In fact, the Service has stated that it will not rule that an LLC with fewer than two members may be classified as a partnership. Rev. Proc. 95-10 § 4.01, 1995-1 C.B. 501.
312. I.R.C. § 1336(d)(1) (1994). Losses that are disallowed under this rule may be carried forward indefinitely until the basis of the shareholder's stock or the basis in any indebtedness of the corporation to the shareholder increases. I.R.C. § 1366(d)(2) (1994). The time value of money, however, makes a current deduction of such losses more valuable to a shareholder than the deferred deduction.
313. See, e.g., Harris v. United States, 902 F.2d 439 (5th Cir. 1990); Estate of Leavitt v. Commissioner, 875 F.2d 420 (4th Cir. 1989), aff'g 90 T.C. 206 (1988); Brown v. Commissioner, 706 F.2d 755 (6th Cir. 1963). But see Selfe v. United States, 778 F.2d 769 (11th Cir. 1985) (indicating that a subchapter S shareholder may include corporate debts in basis if the creditor looks primarily to the shareholder, rather than to the corporation, for repayment of the debt).
314. A sole proprietor includes a debt in the basis of property purchased with the borrowed funds and may claim depreciation deductions that are computed with respect to the full basis of the property even if the sole proprietor is not personally liable for repayment of the debt Crane v. Commissioner, 331 U.S. 1, 67 S. Ct. 1047 (1947); Commissioner v. Tufts, 461 U.S. 300, 103 S. Ct. 1826 (1983).
315. On a distribution of appreciated property to a shareholder, an S corporation must recognize gain. I.R.C. § 311(b) (1994). The gain recognized by the corporation flows through to the shareholder and increases the adjusted basis of the shareholder's stock. I.R.C. §§ 1366(a), 1367(a) (1994). The shareholder may be required to recognize additional gain if the fair market value of the distributed property exceeds the adjusted basis of the shareholder's stock, determined after the stock basis is increased to account for the shareholder's pro rata share of all of the corporations items of income and deduction, including the gain recognized by the corporation on the distribution of the property. I.R.C. § 1368(b), (c), (d) (1994).
316. See I.R.C. § 1001 (a) (1994) (gain or loss must be recognized on the sale or exchange of property unless otherwise provided). A sole proprietor may recognize gain in some cases, however, even if business property is not sold or exchanged, if the property withdrawn from business use was expensed under I.R.C. § 179 or if the property was listed property for which accelerated depreciation was claimed. See I.R.C. § 179(d)(10) (1994) (requiring recapture of deductions allowed under I.R.C. § 179(a) with respect to property that is not used primarily in a trade or business in a subsequent year), § 280F(b)(2) (1994) (requiring recapture of accelerated depreciation deductions with respect to listed property that is not used primarily in a trade or business in a subsequent year).
317. See I.R.C. §§ 1501-1504 (1994) (authorizing the filing of a consolidated return by an affiliated group of corporations).
318. For a discussion of some of the state-law problems that may arise in jurisdictions requiring an LLC to have at least two members and some planning suggestions, see Paul & Levine, supra note 208, at 162.
319. La. R.S. 12:1334(3) (1994 and Supp. 1996).
320. Id.
321. La. R.S. 12:1301(A)(10) (1994 and Supp. 1996).
322. La. R.S. 12:1337 (1994 and Supp. 1996).
323. There is at least one potential problem in forming a single-member LLC. One commentator has cautioned that a single-member LLC that conducts a multi-state business may face personal liability for the LLC's obligations arising in states that do not recognize single-member LLCs. William E. Sider, Check-the-Box Proposed Regulations Make LLCs Even More Appealing, 3 J. of Limited Liability Companies 51, 59 (1996). This concern, however, will diminish as more states, encouraged by the check-the-box regulations, amend their statutes to allow the formation of single-member LLCs.
324. The prohibition against single-member LLCs, however, is not a default rule. See La. R.S. 12:1301(A)(10), 1334(3) (1994 and Supp. 1996).
325. See ULLCA, Prefatory Note (1995).
326. For a discussion of the ability to create "super pass-through" LLCs after the effective date of the check-the-box regulations, see Sider, supra note 320, at 57-58.
327. La. R.S. 12:1334(3) (1994 and Supp. 1996).
328. See supra note 55 and accompanying text.
329. La. R.S. 12:1336 (1994 and Supp. 1996).
330. La. R.S. 12:1337 (1994 and Supp. 1996).
331. La. R.S. 12:1318(B)(1), 1334(2) (1994 and Supp. 1996).
332. La. R.S. 12:1335 (1994 and Supp. 1996).
333. La. R.S. 12:1336 (1994 and Supp. 1996).
334. La. R.S. 12:1337 (1994 and Supp. 1996).
335. La. R.S. 12:1337(A) (1994).
336. La. R.S. 12:1325(C) (1994 and Supp. 1997).
337. If the business faces a downturn, the parties may agree to discontinue the business before their entire investment is lost. The Louisiana LLC Law permits the members to dissolve an LLC by consent See La. R.S. 12:1318(B)(1), 1334(2) (1994).
338. La. R.S. 12:1333 (1994).
339. Id.
340. The Bankruptcy Code supersedes both state law and any provisions in an LLC's operating agreement See, e.g., In re Safren, 65 B.R. 566, 568 (Bankr. C.D. Cal. 1986); In re Rittenhouse Carpet, Inc., 56 B.R. 131, 133 (Bankr. E.D. Pa. 1985). Like the interest of a member of an LLC, a general partner's interest in a partnership terminates upon the bankruptcy of a partner. La. Civ. Code art. 2818; RUPA §601(6)(i) (1994); UPA §§ 31(5), 35(3)(b) (1914); RULPA § 402(4) (1985). The courts do not agree as to whether a trustee in bankruptcy may avoid termination of a general partner's interest in a partnership, notwithstanding state partnership law. Compare In re Phillips, 966 F.2d 926 (5th Cir. 1992) (partner who was a Chapter 11 debtor did not have authority to file Chapter 11 petition for the partnership; federal bankruptcy law did not supersede state law on this issue); In re Catron, 158 B.R. 624, 627 (Bankr. E.D. Va. 1992), aff'd, 25 F.3d 1038 (4th Cir. 1993) ("Fundamentally, a partnership is based upon the personal trust and confidence of the partners"; because of this relationship, "the agreement or contract governing the partnership is essentially a contract for personal services, which renders it nondelegable and nonassumable); In re Minton Group, Inc., 27 B.R. 385, 390 (Bankr. S.D. N.Y. 1983), aff'd, 46 B.R. 222 (S.D. N.Y. 1985) (Chapter 11 filing by a general partner of a limited partnership dissolves the partnership) and In re Harms, 10 B.R. 817 (Bankr. D. Colo. 1981) (bankruptcy of a general partner dissolves the partnership and terminates the debtor partner's interest in the partnership) with In re LeRoux, Nos. 94-11251-DPW, 94-11252-DPW 1995 WL 447800 (D. Mass. Oct. 20, 1994), aff'g 167 B.R. 318 (Bankr. D. Mass. 1994) (bankruptcy of general partners did not terminate their status as general partners notwithstanding state law and partnership agreement provisions to the contrary); In re Cardinal Industries, Inc., 116 B.R. 964 (Bankr. D. Ohio 1990) (trustee could assume partnership agreement notwithstanding partnership law and the contractual agreements to the contrary); In re Hawkins, 113 B.R. 315, 316 (Bankr. N.D. Tex. 1990) (personal bankruptcy of general partner did not automatically cause dissolution of the partnership, notwithstanding partnership agreement to the contrary); In re B C & K Cattle Co., 84 B.R. 69, 71 (Bankr. N.D. Tex. 1988) (general partner which had itself filed for Chapter 11 relief retained authority to file involuntary petition against the partnership, notwithstanding state law to the contrary); In re Safren, 65 B.R. 566 (Bankr. C.D. Cal. 1986) (bankruptcy of a general partner does not dissolve the partnership; estate of the debtor is substituted as a partner); In re Rittenhouse Carpet, Inc., 56 B.R. 131 (Bankr. E.D. Pa. 1985) (debtor partner may not be removed as a partner on the filing of a petition in bankruptcy, notwithstanding provisions of state law to the contrary); In re Fidelity Mortgage Co., 10 B.R. 781 (Bankr. E.D. Pa. 1981) (debtor partner may not be removed as a partner on the filing of a bankruptcy petition, notwithstanding provisions of the partnership agreement to the contrary). For a discussion of the issue of whether a trustee in bankruptcy can avoid termination of a partner's interest in a partnership, see John C. Ale, Substantive Law and Special Problems of General and Limited Partnerships, A.L.I.-A.B.A. Resource Materials, Partnerships: UPA, ULPA, Securities, Taxation, and Bankruptcy 120-21 (9th ed. 1990);
341. Lawrence D. Cherkis, The Effect On a Partnership of the Bankruptcy of a General Partner, 368 PLI/Real 23 (1991);
342. Lewis R. Kaster & Jeffrey K. Cymbler, The Impact of a General Partner's Bankruptcy Upon the Remaining Partners, 21 Real Prop. Prob. & Trust J. 539, 548-51 (1986);
343. Gerald K. Smith, Issues in Partnership and Partner Bankruptcy Cases and Reorganization of Partnership Debtors, A.L.I.-A.B.A. Course of Study 639, 651-90 (May 1996).
344. A similar issue exists with respect to whether a trustee in bankruptcy may avoid the termination of a member's interest in an LLC. As with respect to partnership law, the courts are split on the issue of whether bankruptcy terminates a member's interest in an LLC for purposes of the Bankruptcy Code. Compare In re DeLuca, 194 B.R. 797 (Bankr. E.D. Va. 1996) (debtor-member's interest in an LLC terminates upon the filing of a petition in bankruptcy; bankruptcy of the only two members of an LLC caused the LLC to dissolve) and In re DeLuca, 194 B.R. 65 (Bankr. E.D. Va. 1996) (LLC dissolved upon the bankruptcy of the member-managers; remaining members had a right to continue the business and elect new managers) with In re Daugherty, 188 B.R. 607 (Bankr. D. Neb. 1995) (provision of Nebraska LLC Act providing that an LLC terminates upon any member's filing for bankruptcy relief is not enforceable, as conflicting with the Bankruptcy Code). For a discussion of the issue of whether a bankruptcy court should enforce state law terminating the interest of a bankrupt member of an LLC, see, e.g., James J. Wheaton, Dumping Deadbeats: Enforcing Limited Liability Entity Agreements in Bankruptcy, 3 J. of Limited Liability Companies 60 (1996);
345. James M. Jorissen, Note, Member Bankruptcy Under the New Minnesota Limited Liability Company Act: An Executory Contract Analysis, 77 Minn. L. Rev. 953 (1993).
346. La. R.S. 12:1330(A), 1332(A)(1) (1994).
347. La. R.S. 12:1332(A)(1) (1994).
348. See La. R.S. 12:1318 (1994) (providing voting rights to members of an LLC).
349. See La. R.S. 12:1319(B) (1994) (providing the right to members to inspect an LLC's records).
350. La. R.S. 12:1330(A) (1994).
351. La. R.S. 12:1334(3) (1994).
352. La. R.S. 12:1324(A) (1994).
353. La. R.S. 12:1335 (1994).
354. Id.
355. Distributions from an LLC generally must be in cash. La. R.S. 12:1326 (1994).
356. La. R.S. 12:1317(A) (1994). A member of a member-managed LLC, however, is not a mandatary of the LLC for matters concerning the alienation, lease, or encumbrance of the LLC's immovables. Id.
357. See Robert W. Hillman, The Dissatisfied Participant in the Solvent Business Venture: A Consideration of the Relative Performance of Partnerships and Close Corporations, 67 Minn. L. Rev. 1, 83 (1982) (suggesting a similar remedy for a minority shareholder in a close corporation). As Professor Hillman observes, the remaining members could employ manipulative tactics, such as increasing expenses, including salaries, to avoid the installment payment obligation by relying on statutory limitations on distributions of funds to members. Id. To prevent such manipulation, Professor Hillman suggests that the withdrawing shareholder (or member, in the case of an LLC) should be entitled to an immediate decree of dissolution of the enterprise if there is a default in the installment payments. Id. ULLCA adopts a similar approach in permitting a member to obtain judicial dissolution of an LLC upen the failure of the LLC to purchase a dissociated member's interest ULLCA § 801(b)(5)(iv) (1995). It is not certain, however, whether ULLCA extends this right to a successor or legal representative of a dissociated member. See infra notes 353-354 and accompanying text.
358. ULLCA § 701(a) (1995).
359. ULLCA § 702(a)(2) (1995). ULLCA leaves the terms of the installment obligation to the discretion of the court, presumably because the need for installment payments and the length of time that should be allotted to such payments will vary from case to case. One commentator has observed that "[n]egotiated buy-out rights for minority shareholders in closely held corporations usually provide an installment repurchase redemption for a 15 year period. . . ." Dale A. Oesterle, Subcurrents in LLC Statutes: Limiting the Discretion of State Courts to Restructure the Internal Affairs of Small Business, 66 U. Colo. L. Rev. 881, 890 n.45 (1995). A 15-year payout period should be sufficiently long to protect the interests of the remaining members.
360. ULLCA § 601 (1995).
361. ULLCA § 701(d) (1995).
362. ULLCA § 702 cmt. (1995).
363. La. R.S. 12:1325(C) (Supp. 1997).
364. La. Civ. Code art. 2823.
365. 549 So. 2d 833 (La. 1989).
366. See Glenn G. Morris, Agency, Partnerships & Corporations, 51 La. L. Rev. 217, 224-29 (1990).
367. Id. at 224.
368. Id. at 225.
369. Id.
370. Professor Morris also observes that application of a minority discount in valuing the interest of a retiring partner becomes circular: to the extent that courts apply minority discounts in valuing the interests of departing partners, minority interests are worth less in the marketplace. If no judicial discount were applied, a potential purchaser of a minority interest would pay more for an interest for which the purchaser could receive an undiscounted amount in liquidation of the interest. Id. at 227-29. As Professor Morris observes, any purchaser of a partnership interest (or an LLC interest) will only have the rights to share in the financial rights attributable to the interest unless the purchaser is admitted a member of the partnership (or LLC). Id. at 225 n.32. However, to the extent that the restricted rights of a purchaser of an interest in a partnership or LLC would diminish the "market" price of the interest, an appropriate discount for nontransferability should be included only if market prices truly are to control. Id.
371. See, e.g., American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 7.22 cmt. (e) (1994) (criticizing the application of a minority discount in valuing the stock of a shareholder who dissents to a corporate merger); Steven C. Bahls, Resolving Shareholder Dissention: Selection of the Appropriate Equitable Remedy, 15 J. of Corp. L. 285, 302 (1990) (arguing that courts should not apply a minority discount in most cases involving shareholders who purchased the stock at its original issue and their heirs or estates because the discount will frustrate the reasonable expectations of the minority shareholders);
372. Charles W. Murdock, The Evolution of Effective Remedies for Minority Shareholders and Its Impact Upon Valuation of Minority Shares, 65 Notre Dame L. Rev. 425 (1990) (arguing that a minority discount is inaccurate because the equitable remedies developed by courts and legislatures imposing fiduciary duties on controlling shareholders and permitting minority shareholders to receive payment for their shares in the even of majority oppression have enhanced the value of minority shares).
373. American Law Institute, supra note 363, at § 7.22 cmt. (e); Bahls, supra note 363, at 302.
374. See, e.g., Rigel Corp. v. Cutchall, 311 N.W.2d 519 (Neb. 1994); MT Properties, Inc. v. CMC Real Estate Corp., 481 N.W.2d 383 (Minn. 1992); Charland v. Country View Golf Club, Inc., 588 A.2d 609 (R.I. 1991); Cavalier Oil Corp. v. Harnett, 564 A.2d 1137 (Del. 1989); In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997 (Me. 1989); Hunter v. Mitek Indus., 721 F. Supp. 1102 (E.D. Mo. 1989); In re Friedman v. Beway Realty Corp., 661 N.E.2d 972 (N.Y. App. 1995); Robblee v. Robblee, 841 P.2d 1289 (Wash. App. 1992); Walter S. Cheeseman Realty Co. v. Moore, 770 P.2d 1308 (Colo. Ct App. 1988), cert. denied, (Colo. 1989); Columbia Management C. v. Wyss, 765 P.2d 207 (Or. App. 1988); Brown v. Allied Corrugated Box Co., 154 Cal. Rptr. 170 (1979); Woodward v. Quigley, 133 N.W.2d 38, modified on other grounds, 136 N.W.2d 280 (Iowa 1965).
375. RUPA § 701(b) (1994). The amount to be paid to a dissociated partner is reduced by various offsets, including damages for wrongful dissociation and amounts owing (presently or in the future) by the dissociated partner. RUPA § 701(c) (1994).
376. RUPA § 701(b) cmt. 3 (1994). Liquidation value is not intended to mean distress sale value. Id. The official comment explains, however, that other discounts, such as for lack of marketability or the loss of a key partner, may be appropriate. Id. Presumably, the discount would apply where the assets of the business lack marketability, and not where the interest to be purchased lacks marketability. Professor Hillman argues that in an analogous situation, a minority shareholder who is entitled to a buy-out of his or her stock should receive no more than the amount that would be realized on liquidation of the company, assuming that a substantial portion of the going concern value of the corporation would be realized. Hillman, supra note 349, at 82 and n.256. On the other hand, as Professor Murdock has demonstrated, most corporate liquidations involve a purchase of the corporate business as a going concern, either by the other shareholders or a third party who will continue operating business, and therefore, a minority shareholder or owner should receive a pro rata share of the value of the corporation as a going concern. Murdock, supra note 363, at 441-43.
377. RUPA § 701(c) (1994).
378. ULLCA § 701(a) (1995).
379. ULLCA § 701(a), (f) (1995).
380. ULLCA § 702 cmt. (1995).
381. Shopf v. Marina Del Ray Partnership, 549 So. 2d 833 (La. 1989).
382. La. R.S. 12:1330(A), 1332(A)(1) (1994). See La. R.S. 12:1319(B) (1994) (right of a member to inspect an LLC's records).
383. Robert W. Hillman et al., General and Limited Liability Partnerships Under the Revised Uniform Partnership Act 181 (1996).
384. ULLCA § 701(b) (1995). See also RUPA § 701(g)(1)-(3).
385. ULLCA § 408(b)(1) (1995). The information must be supplied to the member's legal representative without demand. Id. The LLC also is required to furnish the member's legal representative "other information concerning the company's business or affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances." ULLCA § 408(b)(2) (1995). For example, a demand for information that would reveal trade secrets probably would be unreasonable under this provision.
386. See La. Civ. Code art. 2821 cmt. (a).
387. La. R.S. 12:1325(A) (Supp. 1997).
388. See La. R.S. 12:1318, 1334(2) (1994) (default rules permitting a majority vote of the members to dissolve an LLC).
389. La. R.S. 12:1305(C)(4) (1994).
390. Under the Uniform Partnership Act ("UPA"), a member may withdraw from a term partnership before the expiration of its term, but may be liable for wrongful dissolution of the partnership resulting from the premature withdrawal. UPA § 31(b), (2) (1914). Damages for wrongful dissolution can be avoided if the partner who seeks to withdraw can obtain an equitable decree of dissolution of the partnership. UPA §§ 31, 32(1) (1914). Under these provisions, a number of courts have been willing to infer that a partnership formed under the UPA was entered into for a term and that the term has lasted for a significant amount of time. See, e.g., Bates v. McTammany, 76 P.2d 513, 515 (Cal. 1938) (partnership formed for the purpose of operating a radio station, the operation of which depended upon its holding a federal license, was entered into for a term that lasted "for so long as the federal license therefor could be procured"). See also cases cited in Hillman, supra note 349, at 20-33 and nn.60, 77-79. Some of the early LLC statutes provided that an LLC's term expired after 30 years. See, e.g., Colo. Rev. Stat. Ann. § 7-80-204(1)(b) (Repealed); Fla. Stat. Ann. § 608.407(1)(b) (Repealed); Kan. Stat. Ann. § 17-7607(a)(2) (Repealed); Nev. Rev. Stat. § 86.161(1)(b); Tex. Rev. Civ. Stat. Ann. art. 1528(n). art. 3.02(A)(2) (Repealed); Wyo. Stat. § 17-15-107(a)(ii) (1996). The mandatory term limit apparently was designed to prevent an LLC from having the corporate characteristic of continuity of life for tax classification purposes. When it became clear that an LLC did not have to be entered into for a term in order to lack continuity of life, many states repealed these statutes. For a discussion of the lack of necessity of a term limit for an LLC for tax classification purposes, see Thomas E. Rutledge, It Just Doesn't Matter, or Why You Don't Need A Definite Date of Dissolution, 2 Ltd. Liab. Co. Rep. 94-407 (1994).
391. I.R.C. §§ 701, 702 (1994).
392. Cf. Bates v. McTammany, 76 P.2d 513, 515 (Cal. 1938) (partnership formed to operate a radio station was entered into for a term that lasted "for so long as the federal license therefor could be procured"). For a discussion of other cases in which courts have found lengthy terms implied in partnership agreements, see Hillman, supra note 349, at 20-24.
393. La. R.S. 12:1325(B) (Supp. 1997).
394. La. R.S. 12:1325(C) (Supp. 1997).
395. La. R.S. 12:1314(1) (1994).
396. Id.