Estate Planning, Trusts & Estate Administration Section Webinar

Is a Single Member LLC a Property Interest or an Intangible?

Wednesday, May 15, 2024
12:00 p.m. to 1:00 p.m.

Presented by:
Leo J. Cushing, Esq., CPA, LL.M.
lcushing@cushingdolan.com

Prepared by:
Leo J. Cushing, Esq., CPA, LL.M.
lcushing@cushingdolan.com

Robert J. DuCharme, Law Clerk

rducharme@cushingdolan.com

Cushing & Dolan, P.C.

Attorneys at Law
400 Fifth Avenue, Suite 400
Waltham, MA 02451
Tel: 617-523-1555
Fax: 617-523-5653
www.cushingdolan.com
lcushing@cushingdolan.com

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I. NEW MASSACHUSETTS LEGISLATION, REVIEW TEXT

A. 2023 MASS. ACTS, CHAPTER 50, SECTIONS 36 - 37 PROVIDE AS FOLLOWS:

SECTION 36. Section 2A of chapter 65C of the General Laws, as

so appearing, is hereby amended by striking out subsection (a) and
inserting in place thereof the following subsection:-
(a) A tax is hereby imposed upon the transfer of the estate of
each person dying on or after January 1, 1997 who, at the time of
death, was a resident of the commonwealth. The amount of the tax
shall be equal to the credit for state death taxes that would have
been allowable to a decedent’s estate as computed under section
2011 of the Code, as in effect on December 31, 2000, hereinafter
referred to as the “credit”. If the federal gross estate of a person
includes real or tangible personal property located outside of the
commonwealth at the time of death, the tax shall be reduced by an
amount equal to the proportion of such allowable credit as the
value of such real or tangible personal property located outside of
the commonwealth bears to the value of the entire federal gross
estate wherever situated, as determined under section 2011 of the
Code, as in effect on December 31, 2000.
SECTION 37. Said section 2A of said chapter 65C, as so
appearing, is hereby further amended by adding the following 2
subsections:-
(f) For the estates of decedents dying on or after January 1,
2023, a credit shall be allowed against the tax imposed by
subsections (a) and (b) equal to the amount of such tax; provided,
however, that the credit shall not exceed $99,600.
(g) The estates of decedents dying on or after January 1, 2023
shall not be required to pay any tax under subsections (a) and (b) if
the value of the federal taxable estate is not more than $2,000,000.

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II. COMPUTATIONS - HOW TO COMPUTE THE MASSACHUSETTS
ESTATE TAX

A. FOR A $2,000,000 ESTATE

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B. FOR A $4,000,000 ESTATE

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III. MASSACHUSETTS LIMITED LIABILITY COMPANIES - BACKGROUND

Limited liability companies clearly are the entity of choice, particularly in cases where
holding real estate is involved.

Massachusetts first introduced limited liability companies on November 28, 1995 to be

effective as of January 1, 1996. St. 1995, c. 281, § 18. There were a number of problems with
the statute as originally enacted including the inability to have a single member LLC and so it
was amended on March 5, 2003, retroactive to January 1, 2003. St. 2003, c. 4, § 33. As a result
of the 2003 amendment, single member LLCs are now permissible in Massachusetts. G.L.
c. 156C, § 2

Since Massachusetts did not allow for single member LLCs until 2003, between 1996 and
2003, LLCs were formed with one or more additional members—usually with such members
having a very small percentage interest (as little as one-tenth of one percent in some cases). This
meant that the LLC was treated as a partnership for income tax purposes, unless it elected to be
treated as a C corporation. See Treas. Reg. § 301.7701-1, Treas. Reg § 301.7701-3(a)

Single member and multi-member LLCs are clearly superior to other entity choices,
particularly in the case of real estate holdings. For example, contributions of appreciated
property to limited liability companies are income tax free. I.R.C. § 721. More importantly,
distributions of appreciated property from an LLC to its owners is generally income tax free
(unless there is debt associated with it). I.R.C. § 731.

This is a particularly significant benefit, inasmuch as a distribution of appreciated

property from an S corporation will be a taxable event. The transfer of appreciated property to
the shareholder is considered a deemed sale and there will be a capital gain recognized to the
extent that the fair market value of the property distributed exceeds the basis of the property to
the entity. I.R.C. § 311(b).

IV. MASSACHUSETTS BUSINESS TRUSTS OR SO-CALLED “REALTY

TRUSTS”

Prior to Massachusetts’ authorization of LLCs in 1995, many real estate properties were
acquired in a Massachusetts business trust, also known as a trust with transferable shares. G.L.
c. 182, § 1

For federal income tax purposes, prior to so-called “check-the-box” regulations, the
Massachusetts business trust was taxed as a corporation. As a result, the Massachusetts business
trust would typically make an S election to be taxed as an S corporation for federal income tax
purposes, but the income would be taxed at the individual rates as a Massachusetts business trust
under state law

Under state income tax law, the income of a Massachusetts business trust was taxed at the
regular individual income tax rate of 5%, and there was no divided tax on distributions. In
essence, the income was taxed like an S corporation, even though Massachusetts did not
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recognize S corporations at the time. The big difference between the Massachusetts business
trust, which is taxed like an S corporation, and an LLC is that the distribution of appreciated
property from the Massachusetts business trust would be a taxable event, since it is taxed as a
corporation for federal income tax purposes. See I.R.C. § 311(b).

This severely limited the ability of a Massachusetts business trust (or an S corporation) to
dissolve tax effectively and placed a significant limitation on like-kind exchanges where one
owner would like to withdraw and pay the tax and the other who would like to defer the tax
under I.R.C. § 1031. Limited liability companies provide greater flexibility in that the
distribution of the LLC to members is generally income tax free.

One word of caution. Many properties owned by Massachusetts business trusts are
typically known as being owned by a “realty trust” and care needs to be undertaken to determine
whether the entity is a Massachusetts business trust or a so-called Massachusetts nominee trust.
The Massachusetts nominee trust is essentially an agency relationship so that a distribution of
property from a nominee trust (also known as a realty trust) to the beneficiaries would be income
tax free. On the other hand, an inadvertent distribution of property from a Massachusetts
business trust (also known as a realty trust) to the shareholders would be a taxable event. See
Apahouser Lock & Security Corp. v. Carvelli, 26 Mass. App. Ct. 385 (1998).

This is why so many properties which were acquired by a Massachusetts business trust
remains in such trusts at this time, even though the LLC would be a much more flexible entity of
choice. Conversion to an LLC is an expensive proposition.

V. LIMITED LIABILITY

By statute, each member of an LLC has limited liability. G.L. c. 156C, § 22. This is the
case whether it is a single member LLC or a multi-member LLC. G.L. c. 156C, § 2.

VI. INCOME TAX FILINGS

A single member LLC does not file a separate income tax return. Rather, all items of
income, expenses, deductions, and credit are reported to the owner on the individual income tax
return for both federal and state purposes. This often is misunderstood and has been thought to
undermine the asset protection benefit inasmuch as no separate income tax filing is required to
be filed. This, however, is not the case and there is no case that so holds. See Treas. Reg.
§ 301.7701-2(c)(2).

VII. MULTIPLE PROPERTIES

In cases in which there are multiple properties, it is common to form a parent LLC and
have each of the separate properties owned by a separate LLC. Each separate title-holding LLC
will be owned by the parent LLC. The separate LLCs which own separate properties are single
member LLCs that do not have a separate income tax filing obligation. Each LLC is required to
pay the $500 annual filing fee.

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 VIII. FILING OBLIGATION

All income will be reported on the parent LLC and, in such a case, if the parent LLC is a
single member LLC, all items of income, expense, deduction, and credit will be reported on the
individual’s owns personal income tax return. If the parent LLC is a multi-member LLC, it will
be considered a partnership and all items of income, expense, deduction, and credit attributable
to the subsidiaries will be reported on its tax return.

Multi-member LLCs are treated as partnerships. No income taxes are paid at the entity
level. All items of income, expense, deduction and credit will pass through to the members and
will be taxed in accordance with the partnership rules of Subchapter K of the Internal Revenue
Code.

IX. CONVERSION OF SINGLE MEMBER LLC TO MULTI-MEMBER LLC

Single member LLCs often will be converted to multi-member LLCs when a membership
interest is transferred by the single owner to another entity or person. In such a case, a
partnership is created. For income tax purposes, thereafter a partnership income tax return must
be filed whether or not income is realized. The failure to file a partnership income tax return
carries a penalty of $195 per month per member up to twelve months, regardless of income. See
I.R.C. § 6698.

X. GIFTING OF LLC MEMBERSHIP INTERESTS –

PIERRE V. COMMISSIONER, 133 T.C. 2 (2009)

LLCs are used extensively for estate planning. In a typical case, a senior family member
will form an LLC and contribute substantial real estate holdings to it. Thereafter, the senior
family member will transfer by gift LLC membership interests. These may be voting or
nonvoting and could represent a small or significant portion of the LLC using non-voting shares.
To the extent that the membership interest transferred is either a minority interest or non-
voting shares, the gift tax value of the interest will be discounted. This is because the interest is
nonvoting and nontransferable.

In Lappo v. Commissioner, T.C. Memo 2003-258, discounts of 24% for lack of

marketability and 15% for a minority interest were allowed in the case of an LLC holding
primarily real estate. In Peracchio v. Commissioner, T.C. Memo 2003-280, discounts of 25%
for lack of marketability and 6% for a minority interest were allowed in the case of an LLC
owning cash and marketable securities.

The computation would work as follows: Assume the LLC is formed with $10,000,000
worth of real estate.

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If 49% of the LLC membership interest is transferred, the gift tax value of the transfer would be
computed as follows:

Undiscounted Value: $10,000,000 x 49% = $4,900,000

Less Discount: ($4,900,000 x 35%) = ($1,715,000)
Gift Tax Value: $3,185,000

In the case of Pierre v. Commissioner, 133 T.C. 2 (2009), the IRS argued unsuccessfully
that the LLC should be disregarded and that the transfer of a membership interest was essentially
a distribution of the underlying asset to the transferor, a gift by the transfer or to the transferee
with a recontribution of that asset by the transferee and, as a result, no discount would be
allowed. This was rejected by the Tax Court.

XI. CHANGING DOMICILE

Limited liability companies also are useful to minimize Massachusetts estate taxes in
connection with a change in domicile. Massachusetts residents are subject to an estate tax that
can be as high as 16%. For this reason, many Massachusetts residents consider changing their
domicile to Florida, New Hampshire, or some other state that does not have a state death tax.

Aside from the need to comply with the various regulations in terms of changing voting
registration, driver’s license, physicians, and the like, it also is important to deal with
Massachusetts real estate that the taxpayer may own. The reason for this is that nonresidents are
subject to the Massachusetts estate tax based upon a formula.

The computation involves first computing the amount of the state death tax that otherwise
would be due if the Florida resident was a Massachusetts resident and then multiplying that
amount by a fraction, the numerator of which is Massachusetts real estate and other tangible
personal property located in Massachusetts with the denominator being the decedent’s adjusted
gross estate. G.L. c. 65C, § 4(b).

If we assume that a single taxpayer dies with an estate of $4,000,000, which would be
nontaxable to a Florida resident, and we assume that 50% of the property is Massachusetts real
estate, the Commonwealth of Massachusetts would be entitled to $90,400, computed as follows:

Total tax due assuming decedent was $2,000,000

a Massachusetts resident: $180,800 x $4,000,000 = $90,400

If the Massachusetts property was transferred to an LLC in connection with a change in

domicile and even if the LLC is owned by the Florida resident, the numerator would be zero
since the LLC is an intangible and not real estate. See Estate of Nielson v. Commissioner,
Docket No. F232365; (Appellate Tax Bd. Feb. 15, 2001) (stating that partnership interest is not
taxable, but interest in realty trust taxable for Massachusetts estate tax purposes).

This planning opportunity has been addressed by a number of states including New York,
Maine and Rhode Island. Massachusetts has chosen not to address this issue. By way of history,
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the Commonwealth of Massachusetts had adopted regulation 830 Code Mass. Regs § 65C.2.1
that addressed the “Massachusetts Gross Estate” but did not address whether or not real estate
owned by an entity would be considered real estate or an intangible to determine the
Massachusetts Estate Tax for a nonresident. Subsequently, the exact date being unknown,
Massachusetts issued a proposed regulation addressing this specific issue which was designed to
amend the existing regulation by adding a new subsection that dealt specifically with the
question as to how real estate owned by an entity would be treated in the case of a nonresident.
The proposal was never adopted and the original regulation 830 C.M.R. 65C.2.1 was officially
repealed in November of 2014 with the following explanation:

“830 C.M.R. 65C.2.1; the regulation explains the properly included in the Massachusetts
Gross Estate for the computation of the Massachusetts estate tax that was applicable to estates of
descendants dying on or after January 1, 1986, and before January 1, 1997. The regulation is
being repealed because it is obsolete.”

The proposed regulation was never adopted. Remember, the term “Massachusetts Gross
Estate” is not used in General Laws c. 65C 2A.

“Which is the statute the estate was subject to because the descendant died on or after
January 1, 1997. Instead of referring to Massachusetts gross estate, Section 2A provides
for an estate tax equal to the State Tax Credit that would have been allowable to a
decedents estate as computed under Code Section 2011 as in effect on December 31,
200.” Shaffer v. Commissioner 485 Mass 198, 206, 207 (2020).

It should be noted that the proposed regulation provided that real estate owned by an
entity such as a partnership or a corporation (Single members LLCs were apparently not in
existence as of the time of the proposal) would be considered owned by the descendant unless
the partnership carried on a trade or business for the purpose of profit or gain.,

The proposed regulation was clearly inconsistent with the Massachusetts LLC Statutes
Is a single member LLC personal property and therefore not subject to the Massachusetts estate
tax or is it “ignored” for estate tax purposes?

M.G.L. c.156C, § 6(a) provides:

“Except as otherwise expressly provided by law, a limited liability company may carry
on any lawful business, trade, profession, purpose or activity.”

There is no requirement under state law in the LLC statute to be “for profit.”

However, M.G.L. 156C § 12(a) provides that in order to form a limited liability
company, one or more authorized persons must execute a certificate of organization. The
certificate of organization shall be filed in the office of the state secretary and set forth:

the general character of the limited liability company’s business. M.G.L. 156C § 12(a)(7)

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 Planning Note

This statute requires a limited liability company to set forth some business nature in the
certificate of organization. Using “any lawful business purpose” will result in the
Corporations Division rejecting the filing. However, there is no requirement that the
business purpose must be for profit and statements such as “managing real estate” may be
enough to satisfaction the statute.

M.G.L. 156C, § 38 provides:

“The limited liability company interest is personal property. A member has no interest in
specific limited liability property.”

New York:

In an advisory opinion, the New York State Department of Taxation and Finance issued the
following Advisory opinion and concluded that real estate owned by a single member LLC will
not be considered an intangible unless it elects to be taxed as a corporation:

The Department of Taxation and Finance received a Petition for Advisory Opinion
from “Petitioner”. Petitioner asks whether a membership insert in a single-
member LLC (SMLLC), which is disregarded for income tax purposes, is
“intangible property” for New York State estate tax purposes.

We conclude that a membership interest in a SMLLC owning New York real

property, which is disregarded for income tax purposes, is not treated as
“intangible property” for purposes of New York State estate tax purposes.
However, where a SMLLC makes an election to be treated as a corporation
pursuant to Treasury Regulations § 301.7701-3(c), rather than being treated as a
disregarded entity, such ownership interest would be considered intangible
property for New York State estate tax purposes.

Facts
Petitioner, an individual residing in New York State, is considering forming a
SMLLC under Delaware law for the sole purpose of contributing his
condominium, located in New York State, to the LLC and then moving to another
state. He intends to remain as the sole owner of that LLC for the remainder of his
life and to reside outside of New York State until his death. The Petitioner’s
question presumes that the proposed SMLLC would be disregarded for income tax
purposes. As such, this proposed SMLLC would not be treated as a corporation
under Treasury Regulations § 301.7701-3(c).

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Analysis
An estate tax is imposed on the transfer by the estate of a non-resident decedent of
real property and tangible personal property where such property is physically
located in New York State. N.Y. Tax Law § 960 (a). Condominiums constitute real
property and as such are generally subject to New York State estate tax. Real
Property Law § 339-g. However, where real property, including condominiums, is
held by a corporation, partnership or trust, interest in such entity has been held to
constitute intangible property. See Estate of Havemeyer 17 N.Y.2d 216, (1966)
and In the Matter of Finkelstein, 40 Misc.2d 910, (Surr. Ct. Rockland County
1963). Similarly, Tax Law § 951-a(c) defines "tangible personal property" to
exclude the following items: bank deposits, mortgages, debts receivables, shares of
stock, bonds, notes, credits, evidences of an interest in property, evidences of debt,
or legal claim generally and as such, those items are deemed intangible property.

The New York State Constitution prohibits the imposition of an estate tax on a
nonresident's intangible property, even if such property is located in New York
State. (N.Y. Const. Art. 16). Moneys, credits, securities and other intangible
personal property within the state, that are not used in carrying on any business
within the state by the owner, are considered to be located at the domicile of the
owner for purposes of taxation. N.Y. Const. Art. 16 § 3. NY Tax Law § 960
likewise indicates that a NY taxable estate does not include the value of any
intangible personal property otherwise includible in the deceased individual’s NY
gross estate.

Pursuant to 26 CFR §§ 301.7701-2, an entity that has a single owner is recognized

as an entity or can be disregarded. “A business entity with only one owner is
classified as a corporation or is disregarded; if the entity is disregarded, its
activities are treated in the same manner as a sole proprietorship, branch, or
division of the owner.” 26 C.F.R. § 301.7701-2(a). As such, pursuant to 26 C.F.R.
§ 301.7701-3(a), an entity with a single owner, such as a SMLLC, is disregarded
as an entity separate from its owner unless it elects to be classified as an
association and so a qualifying SMLLC can elect to be classified as an association
and thus treated as a corporation by making an entity classification election with
the IRS. 26 C.F.R. § 301.7701-3(c)(1)(i).

Where no election is filed, the default classification of the SMLLC is that the
entity is disregarded and is not deemed to be an entity separate from its owner. 26
C.F.R. § 301.7701- 3(b)(ii); 6611, Ltd. v. C.I.R., 2013, 2013 WL 560866 . “An
entity whose classification is determined under the default classification retains
that classification (regardless of any changes in the members' liability that occurs
at any time during the time that the entity's classification is relevant)… until the
entity makes an election to change that classification”. 26 C.F.R. § 301.7701-3(a).

Based on the above analysis, where a SMLLC is disregarded for Federal income
tax purposes, it is treated as owned by the individual owner and the activities of the
SMLLC are treated as activities of the owner. Therefore, under the circumstances
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 described by the Petitioner, interest in the SMLLC owned by Petitioner would not
be treated for estate tax purposes as an intangible asset. Instead, the condominium
held by the SMLLC would be treated as real property held by the Petitioner for
New York State estate tax purposes.

DATED: May 29, 2015 /S/

DEBORAH R. LIEBMAN
Deputy Counsel

NOTE: An Advisory Opinion is issued at the request of a person or entity. It is

limited to the facts set forth therein and is binding on the Department only with
respect to the person or entity to whom it is issued and only if the person or entity
fully and accurately describes all relevant facts. An Advisory Opinion is based on
the law, regulations, and Department policies in effect as of the date the Opinion is
issued or for the specific time period at issue in the Opinion. The information
provided in this document does not cover every situation and is not intended to
replace the law or change its meaning.

Rhode Island:

In a Ruling Request (who would have requested this), Number 2015-01, Rhode Island
has ruled that in response to a request for a ruling regarding the inclusion of a limited
liability interest in a decedent’s Rhode Island gross estate, provides as follows:

“Rhode Island General Laws 7-16-34 provides that, while a membership interest in a
limited liability company is personal property, a member has no interest in specific
liability company property. Accordingly, for Rhode Island estate tax purposes, a less than
100% member interest in an LLC is considered intangible personal property. Pursuant to
Rhode Island General Laws 44-22-1.1(e), the intangible personal property of a
nonresident is not subject to the Rhode Island estate tax. As a result, a less than 100%
interest in an LLC containing Rhode Island real estate owned by a nonresident would not
be subject to the Rhode Island estate tax.

In contrast, an LLC with only one member is treated as an entity disregarded as separate
from its owner unless it affirmatively elects to be taxed as a corporation for federal tax
purposes. If no election is made to treat a single member LLC as if it were a corporation,
the LLC would be disregarded for Rhode Island estate tax purposes and the value of the
real property will be included in the nonresident’s Rhode Island gross estate under Rhode
Island General Laws 44-22-1.1(e).”

Observations:

Rhode Island General Laws 7-16-3 provides that:

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 “Every limited liability organized under this Chapter has the purpose of engaging in any
lawful business…”

Rhode Island General Laws 7-16-34 provides that:

“A membership interest is personal property. A member has no interest in specific limited

liability company property.”

Maine:

Chapter 603 entitled Maine Estate Tax After 2012, Section 7, provides:

"E. Real or tangible property owned by a passthrough entity in the estate of a

nonresident. Real or tangible personal property owned by a pass-through entity, the
entity must be disregarded and the property must be treated as personally owned by the
decedent where the entity does not actively carry on a business for the purpose of profit
and gain; the ownership of the property in the entity was not for a valid business purpose;
or the property was acquired by other than a bona fide sale for full and adequate
consideration and the decedent retained a power with respect to or interest in the property
that would bring the real or tangible personal property located in Maine within the
decedent’s adjusted federal gross estate. The Assessor will determine whether the transfer
was for a valid business purpose by looking at the economic realities of the transfer. Tax
avoidance is not considered a valid business purpose."

Title 31 of the Maine Statutes provides that:

"1. Distinct entity. A limited liability company is an entity distinct from its members.

2. Any lawful purpose. A limited liability company may have any lawful purpose,
regardless of whether for profit."

XII. AVOIDING STAMP TAXES

General Laws c. 64D, § 1, imposes as stamp/excise tax on the sale of real estate; the
amount is $4.56 per $1,000 of sale price and is payable by the seller. Massachusetts has not
taken the position that a single member LLC is a property interest, at least for purposes of
imposing the $4.56 per $1,000 stamp tax. In theory, then, this would permit a taxpayer to
transfer their property to a single member LLC and then sell the membership interest to avoid
paying the $4.56 per $1,000. See DOR Directive 95-5 (a sale of benefits interest in a
Massachusetts nominee trust is subject to the stamp tax).

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 XIII. CAVEAT FOR NEW HAMPSHIRE REAL ESTATE AND LLCS

New Hampshire, unlike Massachusetts, imposes a transfer tax on the transfer of real
estate to an LLC equal to 1.5% of the value of the real estate. For the unwary, this could be a
very substantial problem. Consider the case of a shopping center worth $10,000,000 which was
owned by individuals who now wish to transfer it to an LLC. The cost would be $150,000.

XIV. LIKE-KIND EXCHANGES AND SINGLE MEMBER LLCS

Single member LLCs are used in connection with like-kind exchanges, particularly where
there is a so-called reverse exchange. A reverse exchange is a transaction in which the
replacement property is acquired prior to the sale of the so-called relinquished property. This
often is the case in connection with manufacturing companies that simply cannot shut down the
plant and so they acquire the replacement property before selling their existing manufacturing
facility.

In order to comply with the like-kind exchange rules, this property will be acquired by an
intermediary. If, for example, First American Exchange would be utilized, First American
Exchange would form a single member LLC and acquire the so-called replacement property
typically with funds borrowed from the property owner.

Once the build-out is undertaken or at least until the existing property can be sold, the
replacement property is owed by the exchanger. At such time as the manufacturing facility is
sold, the proceeds will be transmitted to the exchanger and the seller of the plant will purchase
the single member LLC interest from the exchanger.

In general, membership interests and stock interests are not eligible for like-kind
exchange but a single member LLC, being a disregarded entity, is in fact considered property
and therefore the acquisition of the single member LLC membership interest by the seller would
qualify for like-kind exchange treatment. PLR 200118023.

XV. SINGLE MEMBER LLC AND ASSET PROTECTION

One important asset protection benefit to an LLC is the statutorily limited remedy of a
creditor to a so-called charging order. See G.L. c. 156C, § 40. Generally, this means that unlike
an interest in another type of entity, the interest cannot be taken to satisfy a judgment creditor.
This benefit, however, does not exist in the case of a single member LLC.

In the case of In re Albright, 291 B.R. 538, (Bankr. Colo. 2003), the Court ruled that the
assets of a single member LLC could be used to satisfy the creditors of Ashley Albright. The
court denied that the charging order remedy is designed to protect the debtor’s partners and not
the debtor in the case of a single member LLC, since such there are no such members to protect.

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