June 2018 Update
Congress enacted the Tax Cuts and Jobs Act (Pub L 115–97, 131 Stat 2054), effective January 1, 2018. See §3.1. Among its provisions affecting partnerships, the Act makes the following changes:
Entitles shareholders or members of “pass-through” entities, depending on the nature of the business, to a deduction of the lesser of 20 percent of ordinary income less net capital gain or 20 percent of “qualified business income.” IRC §199A(a)–(b). See §§2.21A, 7.12, 13.2. A new chart graphically illustrating the details of the deduction has been added in §13.2A.
Reduces the federal corporate tax rate to a flat 21 percent. IRC §11(b). See §§2.22, 13.2.
Changes certain limitations on the use of the cash method of accounting provided in IRC §448(c)(1). See §§2.25, 3.56.
Repeals former provisions for a deemed “technical termination” of a business entity. IRC §708(b). See §§2.42, 3.41, 3.71, 6.71, 14.23–14.26, 17.2, 18.20.
In a slight tweak to “carried interest” provisions, permits investment fund managers to report their shares of investment income as long-term capital gain if the investment fund holds the asset for at least 3 years. IRC §1061. See §3.29.
Adds new IRC §864(c)(8), which provides that a nonresident alien individual’s or foreign corporation’s gain or loss from the sale, exchange, or other disposition of a partnership interest is effectively connected with the conduct of a trade or business in the United States to the extent that the person would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value; and new IRC §1446(f), which provides special rules for withholding on dispositions of foreign partnership interests. See §§6.20, 14.49.
Changes the rules regarding net operating losses such that new net operating loss deductions are limited to 80 percent of taxable income; the 2-year loss carrybacks and other specified loss carryback provisions are eliminated except for certain net operating loss carrybacks from farming operations; and there are now indefinite loss carry-forwards. IRC §172. See §13.4.
Suspends the personal exemptions under IRC §151 in exchange for increasing the standard deduction up to $12,000 for individual taxpayers and $24,000 for taxpayers filing joint returns, along with other modifications to wage withholding rules and to requirements on who must file tax returns. See §13.4.
Repeals the deduction for alimony payments under former IRC §215, while at the same time excluding alimony from income. See §13.5.
Permits a member of an LLC to deduct the member’s distributive share of LLC loss to the extent of the member’s adjusted basis in the membership interest. IRC §704(d). See §13.43.
Provides that if any gain on a disposition of a partnership interest is treated as effectively connected with the conduct of a trade or business in the United States, the transferee is required to deduct and withhold 10 percent of the amount realized on the disposition unless the transferor furnishes to the transferee an affidavit stating that the transferor is not a foreign person. IRC §1446(f). See §14.49.
Since the Tax Cuts and Jobs Act was enacted, the IRS has issued some limited guidance concerning various aspects of it, including the following:
Guidance related to IRC §1061 clarifying that S corporations will be subject to the new “carried interest” holding periods. IRS Notice 2018–18, 2018–2 Int Rev Bull 443. See §3.29.
A determination that withholding under new IRC §1446(f) should not be required with respect to a disposition of an interest in a publicly traded partnership until further guidance has been issued (Notice 2018–08, 2018–7 Int Rev Bull 352), as well as an announcement that the IRS intends to issue regulations on qualifying for exemptions from withholding or reductions in the amount of withholding under §1446(f), and suspending secondary partnership level withholding requirements (IRS Notice 2018–29, 2018–16 Int Rev Bull 495). See §§6.20, 14.49.
The Fourth Appellate District of the California Court of Appeal held that automatic disqualification of an attorney was required in a class action due to a concurrent conflict of interest implicating the duty of loyalty. Walker v Apple, Inc. (2016) 4 CA5th 1098. See §1.8.
The United States District Court for the Eastern District of California held that the case-by-case inquiry required in certain conflict-of-interest situations involves a two-step, burden-shifting process. National Grange of the Order of Patrons of Husbandry v California Guild (ED Cal, May 12, 2017, CIV. No. 2:16-201 WBS DB) 2017 US Dist Lexis 72994. See §1.10.
A new discussion of sole proprietors as a choice of business entity has been added in chap 2. See §2.8.
The IRS has issued TD 9787, 81 Fed Reg 69291 (Oct. 5, 2016), which contains final regulations under IRC §§704, 707, and 752. The final regulations under §707 provide guidance relating to disguised sales of property to or by a partnership, and the final regulations under §752 provide guidance relating to allocations of excess nonrecourse liabilities of a partnership to partners for disguised sale purposes. Treas Reg §1.752–3. See §§2.38, 3.31–3.42, 13.3A, 13.19–13.20, 13.54, 13.61, 14.29.
A mistaken designation of an individual signing an agreement as the “managing member” of an LLC did not invalidate the agreement for lack of authority, in the absence of actual knowledge by the other party that the individual had no authority to execute the document. Western Surety Co. v La Cumbre Office Partners, LLC (2017) 8 CA5th 125. See §2.62.
Corporations Code §15907.02(h) does not prevent a limited partner from contracting with a third party such that a partner agrees to give the third party any distributions, information, or documents he receives from the partnership. SP Inv. Fund LLC I v Cattell (2017) 18 CA5th 898. See §§2.71, 7.70, 16.48.
The IRS has issued temporary and proposed regulations regarding transfers of appreciated property by United States citizens to partnerships with foreign partners related to the transferor; the regulations override the rules under IRC §721 for nonrecognition of gain on the contribution of property to a partnership in exchange for an interest in the partnership unless the partnership adopts the remedial allocation method and satisfies certain other requirements. TD 9814, 2017–7 Int Rev Bull 878. See §§3.12, 3.21, 13.36.
The IRS issued temporary regulations that address transfers of appreciated property by United States persons to partnerships with foreign partners related to the transferor under IRC §721(c), and that override the rules providing for nonrecognition of gain on a contribution of property to a partnership in exchange for an interest in the partnership. TD 9814, 2017–7 Int Rev Bull 878. See §§3.21, 13.36.
The IRS also issued final and temporary regulations concerning how liabilities are allocated for purposes of IRC §707 and when certain obligations are recognized for purposes of determining whether a liability is a recourse partnership liability. TC 9788, 2016–2 Cum Bull 889. See §§3.31, 3.42, 13.19, 13.54, 13.61.
The California Franchise Tax Board has released a final summary of 2017 federal income tax changes. See §3.83.
The Bipartisan Budget Act of 2015 (BBA) (Pub L 114–74, 129 Stat 584), effective for tax years on or after January 1, 2018, changes the way the IRS will be conducting audits of partnerships and LLC tax returns and creates a new centralized partnership audit regime. It imposes taxes on the partnership rather than any partner, and eliminates the special election for large partnerships. It also substitutes the term “partnership representative” for the old “tax matters partner.” Operating agreements throughout the book have been revised accordingly, and form language has been added to accommodate these provisions of the BBA. IRC §§6440–6446. See §§3.79, 6.14A, 6.56A–6.56C, 8.40, 8.41A, 10.14A–10.14E, 13.3, 13.3A.
The IRS has issued several sets of proposed and final regulations to implement the new partnership audit rules of the BBA. 82 Fed Reg 27334 (June 14, 2017); REG–119337–17, 82 Fed Reg 56765 (Nov. 30, 2017); REG–120232–17, REG–120233–17, 82 Fed Reg 60144 (Dec. 19, 2017); TD 9829, 83 Fed Reg 24 (Jan. 2, 2018); REG–118067–17, 83 Fed Reg 4868 (Feb. 2, 2018). In addition, on March 23, 2018, Congress enacted a series of Technical Corrections Related to Partnership Audit Rules (Pub L 115–141, Division U, Title II, §§201–207, 132 Stat 348) within the Consolidated Appropriations Act, 2018 (Pub L 115–141, 132 Stat 348). See §§6.14A, 10.14E, 13.3A.
Effective July 1, 2017, the California State Board of Equalization (BOE) has been restructured. The BOE will continue to perform the duties assigned to it by the California Constitution, while all its other duties will be transferred to the new California Department of Tax and Fee Administration and the Office of Tax Appeals. Many forms formerly filed with the BOE and publications formerly published by it are being transferred to the Department of Tax and Fee Administration. See §7.48.
A California court held that Corp C §15907.02(h) does not prevent a limited partner from contracting with a third party such that a partner agrees to turn over to the third party any distributions, information, or documents he receives from the partnership, or to vote on partnership matters as instructed by the third party. SP Investment Fund LLC I v Cattell (2017) 18 CA5th 898. See §§7.70, 16.48.
The application fee and initial license fees for a partnership to apply for a license with the State Board of Accountancy have been increased to $270. The filing fee for a name change application remains $150. 16 Cal Code Regs §70(c), (d). See §9.25.
A new discussion of crowdfunding has been added in chap 11. See §11.28B.
The legislature has provided that for taxable years beginning on or after January 1, 2017, a partnership that is required to file a return with the Franchise Tax Board (FTB) under Rev & T C §18633 or §18633.5 may apply for an extension for up to 7 months. Rev & T C §18567(a)(2)(B). See §13.7.
The California Supreme Court held that a provision in a predispute arbitration agreement that waives the right to seek public injunctive relief is contrary to California public policy and unenforceable under California law. McGill v Citibank, N.A. (2017) 2 C5th 945. See §15.5A.
The following forms have been updated:
Instructions to Application to Adopt, Change, or Retain a Tax Year (IRS Form 1128). See §3.69.
Certificate of Limited Partnership (Secretary of State Form LP-1). See §7.77.
Resignation of Agent Upon Whom Process May Be Served (Secretary of State Form RA-100). See §12.25.
Limited Partnership Certificate of Cancellation (Secretary of State Form LP-4/7). See §17.37.