Series LLCs helped by proposed regulations IRS issued in September | Norton Rose Fulbright
SERIES LLCs were helped by proposed regulations the Internal Revenue Service issued in September.
At least eight US states and Puerto Rico have statutes that allow limited liability companies to create different pockets or cells of investments, each potentially with different owners, a different managing member and different assets. In at least three of the eight states, each series can have a separate right, in its own name, to sign contracts, hold title to assets and grant liens and security interests in the assets belonging to that series. The debts of a particular series may be enforceable only against the assets of that series.
The structure opens a number of possibilities. For example, wind companies that build out projects in 100- or 200-megawatt increments using a single interconnection agreement may have trouble getting consent from the utility to divide up the interconnection rights among separate project companies. If a series LLC were used, then the interconnection agreement could remain in the name of a single LLC.
One issue is how the IRS plans to treat the separate LLC subsidiaries. The agency proposed in September to treat each separate series as a separate entity for tax purposes. Therefore, some could be treated as separate partnerships at the same time that the parties might to choose to treat others as corporations.
How each series is classified for tax purposes may depend on whether the series LLCs are set up with the ownership rights in the parent LLC or in specified partners in the parent LLC. In the latter case, a series LLC would be treated as a partnership in its own right. In the former case, it would be treated as a “disregarded” entity that does not exist for tax purposes. Therefore, the parent LLC would be treated as owning its assets directly.
Curtis Wilson, an IRS associate chief counsel, suggested at an American Bar Association tax meeting in Toronto in late September that the IRS may be able to reach the assets of all the series to cover a tax liability of any one of the series, despite state statutory language limiting debt liability among series.
The IRS largely reserved on the tax treatment of foreign series. The agency wants to make sure that a foreign series arrangement cannot be used to separate foreign tax credits from the related income.
Wilson said that a series LLC may be used to split services as well as assets.
The new regulations will not take effect until reissued in temporary or final form. The agency asked for comments in the meantime.