Improving Legal Documents in Crowdfunding: New Tax Audit Language for Operation Agreements

By Mark Roderick CrowdFunding Beat  Sr. contributing editor and crowdfunding attorney with Flaster/Greenberg PC.

Last year I reported that Congress had changed the rules governing tax audits of limited liability companies and other entities that are treated as partnerships for tax purposes. The changes don’t become effective until tax years beginning on or after January 1, 2018, but because most LLCs created today will still be around in 2018, it’s a good idea to anticipate the changes in your Operating Agreements today.

Under the current rules, the IRS conducts audits of LLCs at the entity level through a “tax matters partner” (normally the Manager of the LLC), and collects taxes from the individual members. Under the new rules, the IRS will continue to conduct audits at the entity level, but will also collect taxes, interest, and penalties at the entity level. That puts the LLC in the position of paying the personal tax obligations of its members, a drain on cash flow every deal sponsor will want to avoid.

Naturally, there are exceptions to the new rules and exceptions to the exceptions. Trouble sleeping? I’ll send you a detailed summary.

Consult with your own tax advisors, of course, here’s some language for your Operating Agreements that gives the deal sponsor maximum flexibility:

Tax Matters.

  1. Appointment. The Manager shall serve as the “Tax Representative” of the Company for purposes of this section 1. The Tax Representative shall have the authority of both (i) a “tax matters partner” under Code section 6231 before it was amended by the Bipartisan Budget Act of 2015 (the “BBA”), and (ii) the “partnership representative” under Code section 6223(a) after it was amended.
  2. Tax Examinations and Audits. At the expense of the Company, the Tax Representative shall represent the Company in connection with all examinations of the Company’s affairs by the Internal Revenue Service and state taxing authorities (each, a “Taxing Authority”), including resulting administrative and judicial proceedings, and is authorized to engage accountants, attorneys, and other professionals in connection with such matters. No Member will act independently with respect to tax audits or tax litigation of the Company, unless previously authorized to do so in writing by the Tax Representative, which authorization may be withheld by the Tax Representative in his, her, or its sole and absolute discretion. The Tax Representative shall have sole discretion to determine whether the Company (either on its own behalf or on behalf of the Members) will contest or continue to contest any tax deficiencies assessed or proposed to be assessed by any Taxing Authority, recognizing that the decisions of the Tax Representative may be binding upon all of the Members.
  3. Tax Elections and Deficiencies. Except as otherwise provided in this Agreement, the Tax Representative, in his, her, or its sole discretion, shall have the right to make on behalf of the Company any and all elections under the Internal Revenue Code or provisions of State tax law. Without limiting the previous sentence, the Tax Representative, in his, her, or its sole discretion, shall have the right to make any and all elections and to take any actions that are available to be made or taken by the “partnership representative” or the Company under the BBA, including but not limited to an election under Code section 6226 as amended by the BBA, and the Members shall take such actions requested by the Tax Representative. To the extent that the Tax Representative does not make an election under Code section 6221(b) or Code section 6226 (each as amended by the BBA), the Company shall use commercially reasonable efforts to (i) make any modifications available under Code section 6225(c)(3), (4), and (5), as amended by the BBA, and (ii) if requested by a Member, provide to such Member information allowing such Member to file an amended federal income tax return, as described in Code section 6225(c)(2) as amended by the BBA, to the extent such amended return and payment of any related federal income taxes would reduce any taxes payable by the Company.
  4. Deficiencies. Any deficiency for taxes imposed on any Member (including penalties, additions to tax or interest imposed with respect to such taxes and any taxes imposed pursuant to Code section 6226 as amended by the BBA) will be paid by such Member and if required to be paid (and actually paid) by the Company, may  be recovered by the Company from such Member (i) by withholding from such Member any distributions otherwise due to such Member, or (ii) on demand. Similarly, if, by reason of changes in the interests of the Members in the Company, the Company, or any Member (or former Member) is required to pay any taxes (including penalties, additions to tax or interest imposed with respect to such taxes) that should properly be the obligation of another Member (or former Member), then the Member (or former Member) properly responsible for such taxes shall promptly reimburse the Company or Member who satisfied the audit obligation.
  5. Tax Returns. At the expense of the Company, the Tax Representative shall use commercially reasonable efforts to cause the preparation and timely filing (including extensions) of all tax returns required to be filed by the Company pursuant to the Code as well as all other required tax returns in each jurisdiction in which the Company is required to file returns. As soon as reasonably possible after the end of each taxable year of the Company, the Tax Representative will cause to be delivered to each person who was a Member at any time during such taxable year, IRS Schedule K-1 to Form 1065 and such other information with respect to the Company as may be necessary for the preparation of such person’s federal, state, and local income tax returns for such taxable year.
  6. Consistent Treatment of Tax Items. No Member shall treat any Company Tax Item inconsistently on such Member’s Federal, State, foreign or other income tax return with the treatment of such Company Tax Item on the Company’s tax return. For these purposes, the term “Company Tax Item” means any item of the Company of income, loss, deduction, credit, or otherwise reported (or not reported) on the Company’s tax returns.

Tags: , , , , , , , , , , , , , , , ,

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

Kirkland ReporterMillennial entrepreneurs gearing up to launch crowdfunding campaign for Ombraz SunglassesKirkland ReporterWhile the common mistake may seem fairly mundane to most, the broken hinges on Brehm's sunglasses — and how he would fix them — planted a seed for the Kirkla [...]

IGNHasbro Announces Toy Crowdfunding Platform With 4-Foot Jabba's Barge ModelIGNBy Shabana Arif Hasbro's HasLab crowdfunding platform is like Kickstarter for cool toys, and first up is Jabba's Sail Barge, weighing in at 14lbs. HasLab "hopes to bring dream products [...]

GizmodoHasbro Is Getting Into Crowdfunding With an Insane Star Wars ToyGizmodoToday, Hasbro unveiled Haslab, which promises to basically be the toymaker's answer to Kickstarter, for diehard fans of its toys. The new crowdsourcing program is kicking off with one hell of a project: [...]

Comics BeatCrowdfunding Watch: The Awesome Fantasy Adventure EditionComics BeatOn this particular President's Day I'd like nothing more than to step outside this current reality. Thankfully, fantasy adventure let's me do exactly that. I've located three fantasy com [...]

Cinema BlendHasbro Unveils Crowdfunding For Insane Star Wars ToysCinema BlendBeing one of the most powerful franchises ever created, Star Wars has provided fans with countless characters, worlds, and stories to fawn over across just about every conceivable medium, but any executive wi [...]

ESPN.co.ukBritish bobsleigh team hoping to repay faith of crowdfunding backersESPN.co.ukBritish bobsleigh team hoping to repay faith of crowdfunding backers. play. British bobsleigh team thankful for crowdfunding backers (3:03). ESPN's Tom Hamilton caught up with the GB women [...]

Prosecco producer launches crowdfunding campaign for Giacomo Casanova museumThe Drinks BusinessCasanova hopes that the museum will help to increase tourism to the region and lead to further job opportunities in the area. They are currently finalising the details of the project with as [...]

The IndependentFlorida shooting: Crowdfunding page set up for victims' families raises more than $750k in just one dayThe IndependentMourners stand during a candlelight vigil for the victims of Marjory Stoneman Douglas High School shooting in Parkland, Florida on 15 February 2018 [...]

Decentralized EnergyCrowdfunding appeal for Indian village cogenDecentralized EnergyA crowdfunding campaign is aiming to bring power to a remote Indian village through a containerized waste-to-energy solution. UK-based SEaB Energy's 'Flexibuster' cogeneration system (pi [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |