September 13, 2010
Treasury Issues Proposed Regulations on Series LLCs and Cell Companies Further Solidifying the Place of the Delaware Series LLC in the Captive Market
By Marla H. Norton & Trisha W. Hall
The Treasury Department issued Proposed Regulations on September 13, 2010, regarding the Federal tax classification of so-called “series limited liability companies” or “series LLCs,” “series statutory trusts,” and cell companies created under insurance laws (collectively “Series Organizations”).
A Series Organization is an entity which is authorized, by statute, to segregate pools of assets into separate series which are then isolated from the liabilities associated with the other series and possibly the Series organization itself. The State of Delaware was the first state to authorize Series Entities in its statutory trust and LLC laws. Delaware law provides that each series may have its own members, assets, rights, obligations, investment objectives, and business purposes. In addition, a Delaware Series LLC has the power to contract and to hold title to assets in the name of the series, and to grant a security interest. Of the eight other U.S. jurisdictions that have followed Delaware’s lead, a majority have denied entity status to the series (including Delaware), although a few, most notably Illinois and Iowa, have afforded separate entity status to the series. The Proposed Regulations treat each series as a separate taxable entity, notwithstanding their characterization under applicable state law as separate legal entities. In reaching its conclusion, the Treasury cited to a history of prior rulings in which entities recognized under state law are disregarded for tax purposes, and others in which contractual arrangements not creating a juridical entity may be considered a separate taxpayer for federal tax purposes.
The Proposed Regulations provide certainty for parties concerned about the effect of a failure to comply with the technicalities ensuring limitation of interseries liabilities, by expressly stating that no such failure will impact the tax classification of a series. In addition, the mere titling of assets in the name of the Series Organization instead of titling them in the name of an individual series will not disqualify a series from being a separate taxpayer. Rather, entity status will hinge on the extent to which the series bears the benefits and burdens of ownership.
Other factors supporting the separate taxation of series include the ability of a series to have members and managers distinct from those of the Series Organization or other series, with specified rights, duties and powers. Also significant is the ability to assign a discrete business purpose or investment objective to an individual series. While these attributes led the IRS to conclude that series should be treated as separate taxpayers, no distinction will be made between the various state statutes permitting the creation of series by Series Organizations, nor will the IRS disqualify from taxpayer treatment series that are structured with less than all of the “separate” attributes permitted by the applicable statute.
The Proposed Regulations further recognize that once a domestic series is classified as an entity for tax purposes, it is entitled to make tax elections separately from the Series Organization or any other series.
The Proposed Regulations specifically avoid characterization for tax purposes of a Series Organization that has no business purpose or assets separate from the individual series.
The Proposed Regulations apply to all domestic Series Organizations; the IRS specifically declined to establish separate rules for a series that conducts insurance business. While the Proposed Regulations do not address foreign series generally, they expressly do grant separate tax treatment to a foreign series that would be classified as an “insurance company” under a
The Treasury Department issued Proposed Regulations on September 13, 2010, regarding the Federal tax classification of so-called “series limited liability companies” or “series LLCs,” “series statutory trusts,” and cell companies created under insurance laws (collectively “Series Organizations”).
A Series Organization is an entity which is authorized, by statute, to segregate pools of assets into separate series which are then isolated from the liabilities associated with the other series and possibly the Series organization itself. The State of Delaware was the first state to authorize Series Entities in its statutory trust and LLC laws. Delaware law provides that each series may have its own members, assets, rights, obligations, investment objectives, and business purposes. In addition, a Delaware Series LLC has the power to contract and to hold title to assets in the name of the series, and to grant a security interest. Of the eight other U.S. jurisdictions that have followed Delaware’s lead, a majority have denied entity status to the series (including Delaware), although a few, most notably Illinois and Iowa, have afforded separate entity status to the series. The Proposed Regulations treat each series as a separate taxable entity, notwithstanding their characterization under applicable state law as separate legal entities. In reaching its conclusion, the Treasury cited to a history of prior rulings in which entities recognized under state law are disregarded for tax purposes, and others in which contractual arrangements not creating a juridical entity may be considered a separate taxpayer for federal tax purposes.
The Proposed Regulations provide certainty for parties concerned about the effect of a failure to comply with the technicalities ensuring limitation of interseries liabilities, by expressly stating that no such failure will impact the tax classification of a series. In addition, the mere titling of assets in the name of the Series Organization instead of titling them in the name of an individual series will not disqualify a series from being a separate taxpayer. Rather, entity status will hinge on the extent to which the series bears the benefits and burdens of ownership.
Other factors supporting the separate taxation of series include the ability of a series to have members and managers distinct from those of the Series Organization or other series, with specified rights, duties and powers. Also significant is the ability to assign a discrete business purpose or investment objective to an individual series. While these attributes led the IRS to conclude that series should be treated as separate taxpayers, no distinction will be made between the various state statutes permitting the creation of series by Series Organizations, nor will the IRS disqualify from taxpayer treatment series that are structured with less than all of the “separate” attributes permitted by the applicable statute.
The Proposed Regulations further recognize that once a domestic series is classified as an entity for tax purposes, it is entitled to make tax elections separately from the Series Organization or any other series.
The Proposed Regulations specifically avoid characterization for tax purposes of a Series Organization that has no business purpose or assets separate from the individual series.
The Proposed Regulations apply to all domestic Series Organizations; the IRS specifically declined to establish separate rules for a series that conducts insurance business. While the Proposed Regulations do not address foreign series generally, they expressly do grant separate tax treatment to a foreign series that would be classified as an “insurance company” under a