Tax Implications

Professor Fershee,
In class today you mentioned there are negative tax consequences in switching from a GP to a LLP (as well as switching between the others)-without going into too much detail, where/how are the tax ramifications felt? Who drives these relatively new partnerships, is it the IRS or does the IRS merely react to trends in business?
Thanks.

Professor's Response:
Actually, (at least in the jurisdictions I have seen) there are no tax consequences to converting from a general partnership to an LLP (with the caveat that there could be some limited circumstances or state anomalies). The major consequences are when a corporation converts to an entity under the partnership structure (e.g., LP, LLP, LLC). This can be deemed a liquidation and have major tax consequences.

As for the other part of your question, we'll talk about it in more detail today. The IRS does not drive entity formation or rules, but IRS decisions certainly impact entity choices. When a new entity type is created, the IRS determines how it will treat the new entity -- that impacts if and how people will use such options.

partnership?

I have noticed that some partnerships are called (example's only): Fershee L.L.P. (limited liability partnership) while others are called Fershee L.P. (limited partnership). Is there a difference between an L.L.P and an L.P. or do they mean the same thing?

thanks

Tom

Professor's Response:

Great question, and certainly appropriate for today's discussion. In fact, today's class (October 27, 2008) will cover this specific issue. The short answer is no, they are not the same. Stay tuned . . . .

question

#1 Do the default rules that we have discussed in class (need all partners to agree to change original agreement, majority of partners can decide day to day issues if agreement doesn't appoint someone or already address, etc..) apply to an L.L.P as well. All the cases we have analyzed appear to be something other than an L.L.P arrangement.

#2 If a partner wants out of a partnership that is profitable, how do the partners normally settle on the value of "good will". It seems like it could be a highly litigated area and I haven't read any cases that address this.

Thanks

Tom

PROFESSOR'S RESPONSE

#1 The default rules we are talking about are for general partnerships, not Limited Liability Partnerships (LLPs). LLPs can only be created by agreement and filing with the state. As such, they have different rules, although they are similar in many instances). We will discuss LLPs periodically (I may note some specific differences and similarities), but overall, this course is about partnerships generally. LLPs are more advanced than we have time for in this course. We will discuss some LLP-related issues when we get to our LLC section later in this course.

#2 We will discuss goodwill a little more in the near future. It is often point of contention, but note that valuation of almost anything is contested when partners get to the litigation stage. More on this soon.

UPA (1914) v. UPA (1997)

For our purposes in BA I, what is the significance of the original UPA created in 1914? Do lawyers and courts look to the earliest UPA primarily for comparative analysis as persuasive authority? Is that also the primary reason for our use of the UPA (1914)?

Professor's Response:

Good question. The 1914 version of the UPA was adopted by all states, in some form, except Louisiana. As such, it is the basis for most partnership law. The National Conference of Commissioners on Uniform State Laws (NCCUSL) notes that the law was revised in 1994 and 1997 (there was also a 1996 Uniform Act). As such, the NCCUSL now refers to the UPA by the year of the version being discussed. However, many people (including me from time to time) still call any post-1914 version the Revised UPA or "RUPA."

The 1997 version was adopted by approximately 34 states plus others jurisdictions (e.g., Washington, D.C., and Puerto Rico), according to the NCCUSL. Thus, depending on the state of the partnership, you could be working in a UPA state or a RUPA state. FYI -- North Dakota and Minnesota are UPA (1997) states.

More on Bailouts

In one sense, this issue is not directly part of our course, but it has relevance to just about everything we do. And, as we saw in today's cases, the mindset that can lead to risky lending is nothing new. As lawyers, consumers, and Americans, the current financial crisis matters, no matter what Congress does with regard to the bailout.

Here are a couple good articles (plus one of mine), with varying view points.

Commentary: Bankruptcy, not bailout, is the right answer
Source: www.cnn.com
Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

Commentary: The Paulson Plan Will Make Money For Taxpayers
Source: online.wsj.com
In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson's Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs. But these are small-time deals . . . .

Commentary: Bailouts Should Have Strings
Source: www.lansingstatejournal.com
Recent government-arranged bailouts for Bear Stearns and the lenders Freddie Mac and Fannie Mae have raised questions as to who's next? The debate has focused on Detroit, primarily on General Motors.

This one is just amusing:
Shouts & Murmurs: Too Big to Fail
Before you throw this letter into the proverbial round file, let’s be clear: this is the first time I have ever asked for a bailout from the Federal Reserve.