Just got a call from an elderly lady about a fee to prepare her and her spouse's personal tax return. I when thru the questions and when I inquired about owning any rentals, she replied yes. She told me her, her husband and 2 relatives have the rental. I asked is the rentals titled in all 5 names, she replied yes. Then asked if a P'Ship was filed and she did not know leaning probably not. I asked her does an LLC sounded familiar and she replied yes. I asked how long they owned the rentals with the 2 relatives and she thought 10 yrs. I was fortunate to obtain an address of one of the rentals. I looked it up on county records and it was titled to an LLC. I looked up the LLC at the AZ Corp Commissions and found the LLC with 5 members for which 2 was her and her spouse. Since her relative is handling the rentals per say, its a possible a P'Ship has and continues to be filed but if not this is a P'Ship return is it not? If by any chance a P'Ship has not and continues NOT to be filed, I am feeling I need to walk away from this prospect.
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I agree with you, if they don't want to file a 1065 don't do it. A LLC requires form 1065 even for rentals. -
Can't they make a 761(a) election out of Subchapter K (partnership) treatment? And if so, wouldn't their history constitute a deemed election?Comment
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Subchapter K?
Originally posted by Gary2 View Post
Intent of Subchapter K
Section 1.701-2(a) describes the intent of subchapter K. Generally, subchapter K is intended to permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement without incurring an entity-level tax. Implicit in the intent of subchapter K are the following requirements:
(1) The partnership must be bona fide and each partnership transaction or series of related transactions (individually or collectively, the transaction) must be entered into for a substantial business purpose.
(2) The form of each partnership transaction must be respected under substance over form principles.
(3) The tax consequences under subchapter K to each partner of partnership operations and of transactions between the partner and the partnership must accurately reflect the partners' economic agreement and clearly reflect the partner's income (collectively, proper reflection of income).
For not actually being a Partnership (form 1065), it uses the word partner and partnership all over the place. I dont know if a Subchapter K issues K-1 to each taxpayer or partner but if not, then does each taxpayer report their income or loss generated by the accounting of the Subchapter K and report that income or loss on their Schedule E? Is there an actual form used for an Subchapter K and if so what is the #? This is looking to me that unrelated taxpayers can pool their money together to purchase rental properties and use their books to determine gain or loss for each taxpayer thus bypassing the expensive and timely form 1065.Comment
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I know some of you think a partnership is the same as a LLC that is taxed as a partnership but it is not. I cannot see a LLC getting out of the requirement of filing form 1065.Comment
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Might have to disagree with that
A single member LLC can be a sole proprietor and now with the joint venture tax law that happen a few year ago, a husband and wife can be an LLC (each a member for 2 member LLC) and each be a sole proprietor. This joint venture was discussed in EA class this last year and the instructor still was practicing under the previous law and filing P’Ship’s for husband and wife joint ventures.Originally posted by Gretel View PostComment
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This is kind of mixing apples and oranges. Joint venture is fine not filing a 1065, but each filing their own Schedule C's. However, everything changes as soon as you become a multi-member LLC.Originally posted by AZ-Tax View PostComment
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Reference
I thought I better find some backup for my opinion. See below from the IRM under "Caution". It might be different for a community property state. I did not look into this.
5.1.21.3.2 (02-19-2008)
Default Classification of Entities Not Filing an Election
A domestic multi-member LLC that has not filed an election is classified by default as a partnership for federal tax purposes.
Exception:
See IRM 5.1.21.3.3 for special provisions regarding an LLC wholly owned as community property by a husband and wife.
Caution:
An LLC that is owned and operated by spouses as co-owners is a valid entity under state law. Therefore, it may not be considered a "qualified joint venture" under the provisions of the Small Business Work and Opportunity Tax Act, which allow spouses to elect not to be treated as a partnershipComment
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Default Partnership
AZ, can you cite that new law? Think it only would apply in community property states.Comment
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LLC is NOT a Qualifying Joint Venture
This is specifically stated in the instructions to Schedule C. Only an "unincorporated" joint venture may file two Schedule C's, not a husband/wife LLC.Originally posted by AZ-Tax View PostComment
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I think you've read my note backwards. Subchapter K is the partnership treatment. The form for a Subchapter K organization is the 1065.Originally posted by AZ-Tax View Post
What 761(a) (and reg 1.761-2) does is to allow an organization that would be treated as a partnership by default, but meets certain criteria, to choose to not be treated as a partnership. The main categories of organizations that qualify are investment partnerships and operating agreement partnerships; a group of people owning a rental property could conceivably qualify under either. The main criteria are that they not be operating as a business, that they have independence for their shares, and that their income be fairly determined without having to look at it as a partnership.
It's possible that they have an operating agreement that would preclude this election, but seems unlikely. I haven't seen anything that would preclude an LLC from making this election just because it's an LLC, but I don't claim expertise on this. If there were a record of them making this election explicitly, that would at least give weight to that approach (to the extent that someone reached the conclusion that it was permitted). However, because of the deemed election rules, it's possible that they never bothered.Comment
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The question I have is what precludes an LLC from making an election under 1.761-2 (which would get them out of that requirement)?Originally posted by Gretel View PostComment
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joint venture vs. joint venture LLC
TTB 5-8Originally posted by okie1tax View Post
Community property laws.
A husband and wife that wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession can treat the business either as a sole proprietorship or a partnership. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Ok, I understand my clients are AZ residents but its the next one that has me confused. If the AZ resident taxpayer is member 1 and his or her spouse is member 2 (of a 2 member LLC) of an unincorporated business organized as an LLC, is this a P'Ship default.
Husband and wife LLC.
The IRS has taken the position on their website that a husband and wife unincorporated business organized as an LLC may not elect to file as a qualified joint venture.Comment
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My reasoning is the same that prevents a husband/wife joint venture organized as a LLC to get out of filing 1065. That's the best I can come up with.Originally posted by Gary2 View PostComment
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