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By: Charles R. Levun and Michael J. Cohen
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Over the years, the Partner’s Perspective has commented on developments regarding the sale of personal “goodwill.” (See, e.g., Partner’s Perspectives at ¶9733, ¶9759 and ¶9770.) There are a variety of circumstances in which a taxpayer may seek to sell his personal goodwill. Perhaps the most common situation is where the taxpayer has operated his business in C corporation format for whatever reason and then has received on offer for the business.
Bross Trucking and the Sale of Personal Goodwill
Tax professionals representing closely held businesses face a variety of issues in the choice between the "simplicity" of an S corporation and the "flexibility" of a partnership when deciding between the two forms of doing business in a flow-through format. The choice between the two is not only relevant at the time of formation, but often impacts the entity during its life cycle in a manner that initially may not have been contemplated. Over the years, the Partner's Perspective has discussed many aspects of the entity choice decision. This month's Partner's Perspective will compare the two forms of doing business in the context of issuing an equity ownership interest to a key employee.
Compensatory Issuances of Ownership Interests: S Corporation vs. Partnership
It would appear that if Ashley received a priority allocation of 100 percent of the LLC's income to provide her with an 8 percent cumulative return on her preferred capital, instead of receiving a guaranteed payment on capital, this allocation should not be subject to the NII tax because (1) it is not interest and (2) it is not passive income by virtue of Ashley's material participation in the LLC's business. The fact that there may be a high probability that the return will be achieved (likely not the case under the facts in this example) should not cause the income to be characterized as interest income for NII tax purposes.
Guaranteed Payments and Self-Charged Interest Under the Newly Proposed NII Tax Regulations
This monthly column is entitled the “Partner’s Perspective,” which may make one wonder why this month’s column will be discussing a concept involving C corporations. However, in addition to considering when the use of a QSBC in lieu of a partnership may be appropriate, this month’s Partner’s Perspective also will illustrate how a partnership can be used to increase the amount of the potential QSBC exclusion.
Using Partnerships to Leverage “Zero-Tax” Code Sec. 1202 Stock
This scenario is not uncommon, at least insofar as a shareholder/employee paying full value for his ownership interest, providing for a punitive redemption price in the event his employment with the corporation is terminated before a certain period of time elapses, but failing to make a Code Sec. 83(b) election. It happens frequently in both the partnership and the corporate arenas. This month’s Partner’s Perspective will examine the Tax Court opinion and consider when what looks like a substantial risk of forfeiture triggering the application of Code Sec. 83 may not be treated as a substantial risk of forfeiture.
When Is a Substantial Risk of Forfeiture Not a Substantial Risk of Forfeiture?
Treasury has granted to taxpayers the ability to opt into the proposed Code Sec. 751(b) regulations now, before they are final, and this month’s Partner’s Perspective will examine why a tax professional should not wait until these particular proposed regulations are finalized to examine the concepts embodied in these regulations.
Whether or Not to Opt Into the Code Sec. 751(b) Proposed Regulations