All Forum Posts by: John Hyre

@Chris T. segregate. If you use Quick Books, create two classes. One for NNN and one for T/B rentals. Let CPA know about categorization so return can take the deduction for the correct properties.

May or may not want to shuffle which entities hold what....may inclination is "if ain't broken, don't fix it" and leave entities "as is".....Between QB and return, can distinguish what is a T/B and what is not.

@Gita Faust - probably not. There's no direct, definitive guidance. But based on activity levels required by case law to have a T/B and some IRS pronouncements on the issue of NNN in related but not identical contexts (for purposes of determining if an international taxpayer has sufficient connections to the US to have what is known as "effectively connected income"), I'd say odds are high that NNN leases will not be viewed as a TB for purposes of the 199A deduction.

@Justin Windham  and @Dmitriy Fomichenko.  Thanks for the thoughtful answers.  One of the reasons I love SD 401k's - a small error such as inadvertently providing a "service" doesn't blow up the entire account.  PT's are penalized, but nearly as heavily as is the case in an IRA.

@James Martin, that is way better than what most entrepreneurs, especially small to medium REI, manage to do.

Still - if I were trying to pierce, I'd argue that you commingled money - you just did a really good job if tracking it. Would that suffice for me to pierce? Maybe, maybe not. Surrounding facts do matter, and they tend to add up. I personally think failure to have a bank account for an LLC is a strong factor in favor of piercing. Perhaps your otherwise organized approach would suffice to overcome the issue.

@Justin Windham, I'd be curious to see whence that rationale comes.....I have heard it oft said that managing a rental "without swinging a hammer" is OK, but I've never seen the reasoning. 

My reasoning for telling clients to not manage a rental, especially in SDIRA's and other accounts that are killed by Prohibited Transactions is as follows:

4975(c)(1)(C) makes providing a "service" a PT. We have no idea what a "service" is, there is no definition at present. Given the consequence of being wrong (i.e. - managing a rental ends up being viewed as a "service" means we have a PT and a busted IRA) , I advise clients not to do anything that "could be a service". I think managing a rental without swinging the infamous hammer "could" be a service. I also do not think that the exceptions under 4975(d)(2) or 4975(d)(10) apply to managing a rental.

Is my reasoning flawed?

@Soh Tanaka:  A practical approach.

@James Martin read the Forbes article in re requirements to "do it right". If an REI is not going to bother with a bank account, he probably isn't going to bother with proper books, minutes, etc. I've seen it a million times - all the expenses are run through one LLC instead of each one that owns a property - and it's a mess with due to/due from accounts, lousy tracking, etc. Just had an IRS audit with someone who took that approach - they got crushed.

Remember the human element of the law - it is not just what is on the books. Your job is to persuade a living breathing life form that your LLC is "real" and a separate legal person from you. Who can it be a separate financial person if it lacks a bank account? How seriously will a judge take an LLC that one could not be bothered to run real transactions through? Best way to destroy and LLC - commingle its money with your personal money or that of other LLC's. How is not commingling to run all your LLC's money through a "management company" or the like?

Better to have one LLC that is properly maintained and run than a dozen that are done half-assed and will fall apart with the slightest scrutiny. If you are not willing, for example, to have a bank account for each LLC, you probably have too many LLC's and will not properly maintain them. I have seen it thousands of times with entrepreneurs over the last 20+ years.

Most REI LLC's could be pierced in ten minutes by a competent litigator.

OK, who let the Russian back in?

1)  See the language I posted from the case.  It was broad - under FF&C, no state can force its law on another state.  This narrow case followed those broad principles.  Which is pretty normal with case law.

2) I am not questioning legality of Series LLC or trusts. For you to assert I am doing so is to twist what I have said. That is not an honest approach and I do not appreciate it. It is a sign of severe weakness when you address what you wish I had said instead of addressing what I in fact did say. To repeat it yet one more time: I am saying that having a TX series LLC in AZ does not mean that TX law applies in AZ 99.99% of cases - and those few cases where TX would apply are extremely unlikely to matter to small to medium REI. You have never addressed that point. Ditto need to register TX series in AZ. Ditto true costs of Series, per Adkisson.

3)  Who said anything about AP lawyers being restricted to a few places?

4)  You seem to be an expert on personal anger the way Charles Manson was an expert on murder.  You have consistently engaged in personal/ad homenim attacks.  As Rob K said, I hope you do not do that in real life.  People like me will take full advantage of it.  Don't want hard pushback from the likes of me?  Don't engage in personal attacks.  Easy.  Or at least simple.

"the funny thing is most this has nothing to do with what the original poster asked."

Actually, I stayed on topic. TX (or other foreign) series LLC in AZ. I think it's a bad idea for REI (especially small to medium) and explained why in no small detail.

"The other thing is we will at least agree on one thing their is no perfect set up, especoslly if you are purley donestic, but you can get close if you link domestic with foreign. Then any rogue court or judge it would not matter and increase your leverage and negotiation strength."

I agree in principle, easy to do, very broad statements.  It's always a question of very specific & personal details, costs, and benefits, as well as subjective clients who have different views of risk and different levels of ability to properly execute.  And size matters - a lot.  More to protect, more incentive & ability to do so.

And now Brian wants to talk about his (surely Magical and Trademarked) Cook Islands product. How about we stick to use of foreign series LLC's in AZ, the original topic?

So, as I mentioned, Jay Adkisson is an authority in the area of Series LLC's. He writes some good articles on the topic. Easier to digest than case law, especially with Brian wanting you only to read one word in the case.

Here's a link to a good & readable article in re Series LLC's: https://www.forbes.com/sites/jayadkisson/2018/06/1...

Here are a few interesting quotes (bolding & underlining are mine):  

"For these reasons, the Series LLC is not an entity for general consumption, for the do-it-youselfer or even the average LLC planner who is inexperienced with Series LLCs. From time to time during the drafting process, there was talk of restricting the use of Series LLC only to those regulated industries which already have some experience with these entities and can be expected to use experienced counsel in forming them, those entities being primarily the hedge fund and insurance sectors. Releasing the Series LLC to the general public was feared to be, in the words of noted LLC expert Tom Rutledge, like "giving an Uzi to a three-year old". In the end, however, it was decided that if users were willing to take the risks then the Series LLC should be available to them.

So you wanna pay hedge fund or insurance style fees to experienced counsel?  Sure - as long as the benefit of the Series is sufficient to cover those costs.  So I'd ask yourself:  How much is benefit?  Wait, wait, I know!  You can have Texas law apply in Arizona!  NOT.

"If for whatever reason records do not exist or are not well-kept as to an asset, then the asset is deemed to be "non-associated" and is thus available to the creditors of any tranche or the parent organization, i.e., it is up for grabs for whichever creditor of any series or the parent organization gets to the asset first. Suffice it to say that for this reason Series LLCs are not for those who are not particularly good at keeping the books, and it is somewhat anticipated (based on, if nothing else, common sense) that a Series LLC will have its own professional accounting staff to make sure that the books are well kept."

Good Lord, if that does not describe REI, I don't know what does. You REI gonna maintain all that? Really?

"The obvious key to a successful Series LLC is a comprehensive and detailed Operating Agreement and ancillary documents that are carefully tailored to the specifics of the deal. Although a barebones or weak Operating Agreement might not cause too many problems with an ordinary LLC, that would be tantamount to suicide with a Series LLC. An off-the-shelf or do-it-yourself Operating Agreement for a Series LLC, or an Operating Agreement for an ordinary LLC with only slight modifications, will be little more than legal suicide should a significant issue arise."

Once again, most small REI are terrible with operating agreements and similar admin details. Gonna pay for the custom job to "save money via a Series LLC"? Gonna keep professional books, hire experienced lawyers, and draft and understand complex operating agreements like the big boys - all in the name of saving some money on LLC set up & annual fees?  Really?

But wait!  For only a small fee, I know someone who can do all this nice & cheap - no really!