[BUYING AND SELLING REAL ESTATE IN THE UNITED STATES - MASSACHUSETTS]
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V. THE “CHECK -THE- BOX” REGULATIONS A. Treas. Reg. §1.7701-1 et seq . provides that domestic business corporations are always classified as corporations for Federal income tax purposes; GPs, LPs, LLCs, LLPs and business trusts are automatically classified as partnerships (with pass- through treatment) unless they “check -the- box” on Form 8832 electing to be taxed as corporations. B. C corporations are subject to a “double tax,” once on the corporate level, and again on dividends or distributions to shareholders. S corporations are taxed only at the shareholder level, with a few exceptions. Partnerships “pass - through” income or loss to the partners. Single- owner LLCs and business trusts are “disregarded entities.” VI. DISTINGUISHING FEATURES A. Nominee Trust 1. Fiduciary relationship between “trustee” and beneficiaries listed on an unrecorded schedule. 2. Trustee has no power to deal with the trust property except as specifically directed by beneficiaries – legally an “agent” for beneficiaries. 3. Third parties are entitled to rely on certificates signed by trustees of record. 4. Beneficiaries may terminate or amend trust at any time. 5. On termination, the trust property is conveyed to beneficiaries. 6. Advantages 1. Beneficiaries are undisclosed (privacy). 2. Trust property can be effectively conveyed by assignment of
beneficial interests. Useful for intra- family gifts. 3. No income taxation on trust level; “pass - through” to beneficiaries. 7. Disadvantages 1. No limited liability for beneficiaries. 2. Sole trustee and sole beneficiary may not be identical – merger will result. 3. Poor draftsmanship can result in trust being treated as a “true trust,” which may result in the trust being subject to tax on capital gains and undistributed income and inability to pass through losses. 4. Ancillary probate for deceased non- Massachusetts beneficiaries (who are deemed to own Massachusetts real estate). 5. Potential for fraud by beneficiaries. 6. Creation of a partnership if two or more beneficiaries. 7. Deeds excise tax on transfer of beneficial interest (DD 95-2). B. General Partnership/Joint Venture 1. GP is an agreement (oral or written) among two or more people to engage in business. 2. A joint venture is a GP which is limited to a specific project or business. 3. Governed by Massachusetts Uniform Partnership Act, G.L. c. 108A. 4. In absence of written agreement, a numerical majority of partners control decision-making. 5. Limited transferability of interests.
ILN Real Estate Group – Buying and Selling Real Estate Series
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