IRS releases prop. regs. on series LLCs.

• Author: Nevius, Alistair M.
• Position: Limited liability companies

On September 13, the IRS released proposed regulations (REG-119921-09) on the tax treatment of series limited liability companies (LLCs) and foreign cell companies, proposing to treat the individual series or cells as separate entities for tax purposes.

Eight states and Puerto Rico have enacted series LLC statutes that allow an LLC to establish separate "series" within it. The series are not separate legal entities, but each series has associated with it specified members of the LLC, as well as specified assets, rights, obligations, and investment objectives or business purposes. Being associated with a series is thus comparable to direct ownership of the series. Under series LLC statutes, the debts, liabilities, and obligations of one series are generally enforceable only against the assets of that series and not against assets of other series or of the series LLC. (For more on this topic, see Walberg and Hanson, "Series LLCs in Business and Tax Planning," 41 The Tax Adviser 50 (January 2010).)

Some jurisdictions have established similar entities known variously as protected cell companies, segregated account companies, or segregated portfolio companies (cell companies). A cell company may establish multiple cells, each of which has its own name and is identified with a specific participant, but each cell is not treated under local law as a legal entity distinct from the cell company. The assets of each cell are statutorily protected from the creditors of any other cell and from the creditors of the cell company.

There has been little guidance on the federal tax treatment of series LLCs and similar entities, and in Notice 2008-19 the IRS asked for comments on series LLC issues in general and specifically on issues that arise when arrangements entered into by a cell constitute insurance for federal income tax purposes. The comments the IRS received generally recommended that series and cells should be treated as separate entities for federal tax purposes, and the IRS in its proposed regulations has generally agreed to treat them that way.

The proposed regulations provide that, for federal tax purposes, a domestic series will be treated as an entity formed under local law, whether or not local law treats the series as a separate legal entity. The tax treatment of the series will then be governed by the check-the-box regulations (Regs. Sees. 301.7701-1 through 301.7701-3).

The IRS considered automatically treating series as disregarded...