Do Llcs Have by-Laws or Operating Agreements

Document Sample
Do Llcs Have by-Laws or Operating Agreements Powered By Docstoc
					           CHOICE OF ENTITY FOR REAL ESTATE OWNERS

      LIMITED LIABILITY COMPANY VS. S CORPORATION
                   VS. C CORPORATION

                  A Comparison Of These Business Entities

                        Dean A. Rocheleau, J.D., CPA
                          Plante & Moran, PLLC
                            Southfield, Michigan
                                 248-223-3225
                       Dean.Rocheleau@PlanteMoran.com

I.    OVERVIEW

      A.     This outline compares the similarities and differences between the three
             major business entities currently selected by our clients to obtain limited
             liability protection. Two of the entities provide pass-through taxation
             treatment but with some significant differences. These are the Limited
             Liability Company ("LLC") and the S Corporation (“S Corp”). The third
             alternative, the C Corporation (“C Corp”), is subject to tax on its earnings
             at the entity level.

      B.     This outline compares the attributes of multiple-owner Michigan LLCs, S
             Corps and C Corps. The outline primarily addresses issues to be
             considered when forming a new business entity for a particular client
             need, not necessarily when deciding whether to convert an existing
             business entity to an LLC, S Corp or C Corp.

      C.     A checkmark (“ ”) is used to indicate where the LLCs, the S Corps or the
             C Corps provide an advantage with respect to a certain attribute.

      D.     Note that all “section” references are to the Internal Revenue Code of
             1986, as amended through September 30, 2005.

II.   GENERAL ISSUES

      A.     Limited liability protection for owners

             1.     LLCs – One of the principal purposes for forming LLCs is to
                    protect the members’ personal assets from the creditors of the
                    LLC; absent any personal guarantees made by the members, the
           creditors of LLCs may only satisfy their claims from the assets of
           the LLC.

     2.    S Corps – One of the principal purposes for forming S Corps is to
           protect the shareholders’ personal assets from the creditors of the S
           Corp; absent any personal guarantees made by the shareholders,
           the creditors of S Corp may only satisfy their claims from the
           assets of the S Corp. However, S Corps have more case law
           testing the limits of the liability protection provided to its owners
           than do LLCs which are relatively new.

     3.    C Corps – Same attributes as S Corps.

B.   Participation of owners in daily management activities

     1.    LLCs – All LLC members may participate in the daily
           management activities and may contractually bind the LLC (unlike
           limited partners in a limited partnership) unless these management
           rights and obligations are delegated to managers in the Articles of
           Organization.

     2.    S Corps – Shareholders who are also employees may participate in
           the daily management activities and may contractually bind the S
           Corp as defined in the S Corp by-laws and other governing
           documents of the S Corp.

     3.    C Corps – Same attributes as S Corps.

C.   Familiarity

     1.    LLCs – Newer and, therefore, unfamiliar to many professionals
           and clients. They have had very few legal challenges to them so
           there are less authoritative rulings on them.

     2.    S Corps – More familiar to professionals and their clients. There is
           more legal and tax certainty when dealing with S Corps.

     3.    C Corps – Also more familiar to professionals and their clients, C
           Corps have a longer tax history than S Corps. As with S Corps,
           there is more legal and tax certainty when dealing with C Corps.


D.   Cost and complexity to establish
     1.    LLCs – More expensive and time consuming to establish. The
           costs related to evaluating, designing, and forming an LLC and its
           operating agreement are relatively higher because LLC flexibility
           requires more analysis for proper structuring. However, the LLC
           operating agreement typically includes provisions similar to a
           corporate buy-sell agreement.

     2.    S Corps – Typically, less expensive to establish because many
           provisions in the Articles of Incorporation and corporate by-laws
           are “boiler plate”. An S Corporation election must also be
           prepared and signed by all shareholders before it is filed (see
           further discussion in Section II. F. below). The shareholders may
           or may not enter into buy-sell agreements when establishing the S
           Corp (although this would be advisable).

     3.    C Corps – Typically, the least expensive of these three entities to
           establish because many provisions in the Articles of Incorporation
           and corporate by-laws are “boiler plate”. There is no taxation
           election required. The shareholders may or may not enter into
           buy-sell agreements when establishing the C Corp (although this
           would be advisable).

E.   Annual entity formalities

     1.    LLCs – Not required to hold annual member meetings with
           associated written minutes of such meetings. LLCs must file an
           Annual Statement with the Michigan Department of Consumer and
           Industry Services as well as annual income tax returns. No payroll
           tax returns are required if there are no employees and only LLC
           members provide services to the LLC.

     2.    S Corps – Statutorily required to hold annual shareholder meetings,
           etc. and the actions decided at such meetings recorded in official
           written corporate minutes. S Corps must file an Annual Report
           with the Michigan Department of Consumer and Industry Services
           as well as annual income tax and payroll tax returns.

     3.    C Corps – Same requirements as S Corps.


F.   IRS election requirements
            1.    LLCs – Permitted to have pass-through taxation as a partnership
                  without making an election; it may elect on Form 8832 to be
                  treated as an association taxable as a corporation.

            2.    S Corps – Must meet the statutory requirements to be an S Corp,
                  must make an election on Form 2553 within the first 2 ½ months
                  of its tax year to be subject to tax as an S Corp, and must monitor
                  itself and its shareholders to assure that it continues to qualify as an
                  S Corp.

            3.    C Corps – Income tax is paid at the corporation level on the C
                  Corp’s net taxable income. This is the default treatment if an S
                  Corp election is not made or the corporation is ineligible to be an S
                  Corp.

       G.   Tax year

            1.    LLCs – Generally required to use the same tax year as the majority
                  of its members.

            2.    S Corps – Generally required to use a calendar tax year unless they
                  can establish a business purpose to the IRS to use a fiscal tax year.
                  Alternatively, S Corps may elect under Section 444 to use a
                  September, October or November fiscal year; they must make a
                  non-interest bearing deposit with the IRS based on the calculated
                  deferred taxable income.

            3.    C Corps – Generally, may elect any fiscal tax year. However,
                  personal service corporations must use a calendar year unless they
                  make a Section 444 election which may defer the deductibility of a
                  portion of their shareholder/employee compensation and other
                  expenses paid to a shareholder/employee.

III.   OWNERSHIP ISSUES

       A.   Minimum number of owners

            1.    LLCs – Must have a minimum of two members to be classified as
                  a partnership for Federal tax purposes. LLCs owned by a single
                  member may be classified as an association (taxable as a
                  corporation) or disregarded as an entity separate from its owner
                  (i.e., it does not exist for all Federal tax purposes). Income tax
                  issues when changing from a single owner to multiple owner LLC
                  and vice versa.
     2.     S Corps – No minimum number of owners required to be a
            separate taxable entity with pass-through taxation.

     3.     C Corps – No minimum number of owners requirement.

B.   Maximum number of owners

     1.     LLCs – May have a limit on the maximum number of partners they
            are allowed under the publicly traded partnership provisions of
            Section 7704. Entities with more than 500 members may fall
            outside the partnership safe harbor and may be taxable as a
            corporation.

     2.     S Corp – May not have more than 75 shareholders. Joint owners
            each count as one shareholder unless they are married to each
            other.

     3.     C Corps – There is no maximum number of shareholders limit;
            entity-level taxation is always available. Publicly-traded
            corporations are C Corps for this reason.

C.   Eligible owners

     1.     LLCs – May be owned by any individual or entity, domestic or
            foreign.

     2.     S Corps – Specific restrictions limit permissible shareholders.
            Generally, only U.S. citizens, resident aliens, estates, qualified
            retirement plans, Section 501(c)(3) charitable entities, and certain
            trusts may be shareholders. Only grantor, voting, qualified
            subchapter S, electing small business, and decedent trusts (for 2
            years after the decedent's death) are allowed. Corporations are not
            allowed to be shareholders unless they are S Corps, own 100% of
            the stock of the subsidiary corporation, and make a Qualified
            Subchapter S Subsidiary election.

     3.     C Corps – Any individual or entity, domestic or foreign, may be a
            C Corp shareholder (subject to legal restrictions).

D.   Tiered entity structure

     1.     LLCs – May own any percentage of a C Corp or another LLC; it
            cannot own any S Corp stock.
           2.    S Corps – May be members of an affiliated group. Subsidiaries
                 may not be S Corps unless they are 100% owned by an S Corp
                 parent and a Qualified Subchapter S Subsidiary election is made.

           3.    C Corps – Similar to an LLC, may own any percentage of another
                 C Corp or an LLC. If a C Corp owns at least 80% of another C
                 Corp, it may elect to file a Federal consolidated income tax return.
                 A C Corp cannot own any S Corp stock.

IV.   FORMATION AND OPERATIONAL ISSUES

      A.   Limitations on classes of ownership

           1.    LLCs – Tremendous flexibility permitted in terms of their capital
                 structure. They may issue common equity interests, preferred
                 equity interests, hybrid debt instruments, etc., without jeopardizing
                 their tax status. LLCs may have distribution preferences and
                 special allocations of income or loss.

           2.    S Corps – May only have one class of stock, although voting
                 differences are permitted. The rights to an allocation of taxable
                 income or loss, and the distributions during operations and upon
                 liquidation, must be identical for each share of stock.

           3.    C Corps – Similar attributes and flexibility as an LLC.

      B.   Owner contributions of noncash property to entity

           1.    LLCs – Contributions of noncash property to an LLC are not
                 subject to gain or loss recognition. Exceptions apply if the LLC is
                 treated as an “investment company” or there are actual or deemed
                 distributions to the member under the disguised sale or related tax
                 rules. Subsequent allocations of depreciation, amortization and the
                 gain or loss on the sale of the contributed asset must be specially
                 allocated among the LLC members to reflect the initial difference
                 between the fair market value and tax basis of the assets
                 contributed under Section 704(c).

           2.    S Corps – Contributions of noncash property to an S Corp are
                 taxable to the contributing shareholder if the related liabilities
                 assumed by the corporation exceed the shareholder’s tax basis in
                 the assets contributed, the contributing shareholders as a group
                 own less than 80% of the corporation, or the S Corp is treated as an
            “investment company”. Special allocations of taxable income are
            not required or permitted by S Corps.

     3.     C Corps – Same tax treatment of noncash contributions by
            shareholders to the corporation as with S Corps.

C.   Tax basis of contributed property

     1.     LLCs – The tax basis, holding period and depreciation method (if
            applicable) of contributed noncash property to an LLC is the same
            as those of the contributing member. If any taxable gain is
            recognized by the contributing member, the LLC will increase its
            tax basis in the contributed property by the amount of such gain.

     2.     S Corps – Similar to a contribution to an LLC, the tax basis,
            holding period and depreciation method (if applicable) of
            contributed noncash property to an S Corp is the same as those of a
            contributing controlling shareholder. A similar rule applies if there
            is gain recognized by the contributing shareholder that increases
            the tax basis of the contributed assets to the S Corp.

     3.     C Corps – Same tax treatment as S Corps.

D.   Treatment of liabilities for basis purposes

     1.     LLCs – Members include their share of the entity level debt in
            their tax basis under Section 752. The members may also be able
            to include it in their at risk amount under Section 465 if the debt is
            either recourse to the member or is “qualified nonrecourse
            financing”.

     2.     S Corps – Shareholders do not increase their tax basis or at risk
            amount by entity level debt, even if it is guaranteed by the
            shareholders.

     3.     C Corps – Same tax treatment as S Corps.

     4.     Tax basis determines whether distributions to owners are taxable
            or not and the at risk amount determines whether an allocated
            taxable loss may be claimed by the owner (subject to the “passive
            activity loss” rules). This only applies to LLCs and S Corps and
            their owners, not to C Corps and their owners.

E.   Cash method of accounting
          1.     LLCs – Permitted to use the cash method of accounting unless the
                 LLC has inventories (subject to a $1 million or less gross receipt
                 exception), is a “tax shelter” (as defined by Section 448), or has a
                 C corporation member (other than a qualified personal service
                 corporation) and the LLC has average annual gross receipts in
                 excess of $5 million.

          2.     S Corps – Permitted to use the cash method of accounting unless
                 the S Corp has inventories or is a “tax shelter.”

          3.     C Corps – Not permitted to use the cash method of accounting
                 unless the C Corp has average annual gross receipts (on a three-
                 year lookback basis) of $5 million or less and does not have
                 inventories. A “qualified personal service corporation” may use
                 the cash method of accounting.

V.   DISTRIBUTION AND TRANSFER ISSUES

     A.   Distribution of cash to owners

          1.     LLCs – Distributions of cash to members are not taxable unless the
                 amount exceeds a member’s tax basis in the LLC (which includes
                 an allocation of the LLC’s debt). Generally, the excess distribution
                 is taxable as a capital gain (unless the “hot asset” rules of Section
                 751 characterize the gain as ordinary income).

          2.     S Corps – Distributions of cash to shareholders are not taxable
                 unless the amount exceeds a shareholder’s tax basis in the S Corp
                 stock (which does not include an allocation of the S Corp’s debt).
                 The excess distrubution is taxable as capital gain. If the S Corp has
                 been a profitable C Corporation with earnings and profits,
                 distributions in excess of the shareholder's share of S Corp
                 earnings are taxed as dividends to the extent of his/her share of C
                 Corp earnings (see discussion below for special rule for post-May
                 6, 2003 dividends tax rate). Any excess distributions are taxed as
                 discussed above.

          3.     C Corps – Distributions of cash to shareholders constitute
                 dividends that are taxable as ordinary income to the extent of the C
                 Corp’s earnings and profits. Dividends paid after May 6, 2003 and
                 before January 1, 2009 are taxed similarly to long term capital
                 gains (maximum tax rate of 15% for individual shareholders).
                 Distributions in excess of the C Corp’s earnings and profits are
            treated as a nontaxable return of invested capital to the extent of
            the shareholder’s tax basis in the stock. Any excess distributions
            are taxable as capital gain.

B.   Distribution of appreciated assets to owners

     1.     LLCs – Appreciated property may be distributed to an LLC
            member without the recognition of taxable gain by either the LLC
            or the distributee member subject to the “deemed sale” rules
            described in Sections 707(a)(2)(B), 704(c)(1)(B) or 737.

     2.     S Corps – Taxable gain is recognized at the corporate level when
            appreciated assets are distributed to the shareholders under Section
            311. The gain on this deemed sale is determined by comparing the
            fair market value of the distributed asset with its tax basis. This
            gain flows through pro rata to all of the S Corp shareholders. No
            loss is recognized on the distribution of depreciated assets to an S
            Corp shareholder.

     3.     C Corps – Same tax treatment as S Corps except that no gain flows
            through to the C Corp shareholders; tax on the gain is paid by the
            C Corp.

C.   Basis of distributed assets received by owners

     1.     LLCs – Tax basis, holding periods and depreciation methods (if
            applicable) of assets received by LLC members are the same as the
            LLC’s position with respect to the distributed assets. If the
            distributee member’s tax basis in the LLC membership interest is
            less than the LLC’s tax basis in the distributed asset, the member’s
            tax basis in such asset is limited to the member’s lower tax basis in
            the LLC membership interest.

     2.     S Corps – Tax basis of assets received by S Corp shareholders
            equals the fair market value of the assets received. The holding
            period and depreciation methods (if applicable) start anew to the
            distributee shareholder.

     3.     C Corps – Same tax treatment as S Corp shareholders.

D.   Taxability of transfer of ownership interests

     1.     LLCs – Members generally recognize capital gain or loss on the
            sale of their LLC membership interests. Any portion of the gain
            attributable to the sale of their share of the LLC’s “hot assets”
            under Section 751 is characterized as ordinary income. A similar
            “look through” rule applies to any portion of the gain that
            constitutes “unrecaptured Section 1250 gain” on the sale of
            depreciable real property; this long term capital gain is taxed at a
            25% rate.

            On a redemption, taxable gain to the distributee member is not
            recognized until any cash (or marketable securities) received
            exceeds the member's tax basis in the membership interest. The
            "unrecaptured Section 1250 gain" on the sale of depreciable real
            estate does not apply in a redemption (but Section 751 "hot asset"
            rules apply). LLC distributions in the redemption of an LLC
            membership interest may be treated as deductible by the LLC and
            taxable as ordinary income to the member in certain situations
            under Section 736.

     2.     S Corps – Shareholders recognize capital gain or loss on the sale of
            their S Corp stock unless the loss qualifies for ordinary loss
            treatment under Section 1244. S Corp distributions in redemption
            of a shareholder’s stock may be recharacterized as dividends (i.e.,
            ordinary income and no reduction in taxable income for the
            shareholder’s stock basis) if the S Corp was previously a profitable
            C Corp with earnings and profits and related parties retain more
            than 50% of the S Corp stock after the redemption.

     3.     C Corps – Same tax treatment as with the transfer of S Corp stock.


E.   Inside basis adjustments on redemption or transfers of interests

     1.     LLCs – May elect under Section 754 to step up the transferee
            owner’s proportionate share of the tax basis of the LLC’s assets to
            reflect the difference between the fair market value of the specific
            assets and their tax basis. This will allow the transferee to receive
            additional depreciation or amortization deductions or reduce their
            share of the gain on the sale of specific entity assets. This also
            applies to a transfer at death and to a redemption of an LLC
            membership interest.

     2.     S Corps – Not permitted to adjust the inside basis of assets to
            reflect a change in the tax basis of transferred stock.

     3.     C Corps – Same tax treatment as S Corps.
      F.   Special transfer issues

           1.     LLCs – When there is a sale or exchange of 50% or more of the
                  total interests in an LLC’s capital and profits within a 12-month
                  period, the LLC is deemed to terminate for tax purposes. The LLC
                  is deemed to transfer all of its assets and liabilities to a “new” LLC
                  in exchange for all of the “new” LLC’s membership interests
                  which it immediately distributes to its members (including any
                  new members) in full dissolution of the “old” LLC. This requires
                  the filing of two tax returns for the year of the transfer and requires
                  the “new” LLC to start depreciating its assets anew. The LLC
                  does not terminate for state law purposes.

           2.     S Corps – Transfers to ineligible shareholders will terminate S
                  Corp status as of the date of the transfer and the corporation will be
                  taxed as C Corp.

           3.     C Corps – C Corps do not have either of these special transfer
                  issues.

VI.   SPECIAL C CORP ISSUES

      A.   Accumulated earnings tax – Section 531 imposes a second tax at a 15%
           rate on unreasonably retained C Corp earnings. If the IRS determines that
           a C Corp is accumulating cash and other liquid investments (without any
           justifiable business purposes) that can be distributed as taxable dividends
           to its shareholders, it can assess this 15% tax in addition to the normal
           corporate income tax. $250,000 may be accumulated without any
           justification ($150,000 for personal service corporations).

      B.   Personal holding company tax – Section 542 imposes a second tax at a
           15% rate on undistributed personal holding company income. This self-
           assessed tax is imposed on closely-held C Corps with retained earnings
           that generate 60% or more of its income from nonactive business
           activities.

      C.   Separate tax rate structure – C Corps pay income tax on their taxable
           income at the corporation level. The taxable income is subject to tax
           based on a graduated rate schedule starting at 15% and having a maximum
           rate of 39%. This creates another set of graduated tax rates that are
           separate from the shareholders’ individual graduated rate schedules. In
           many situations, this results in an overall reduction in the current income
           tax paid by the C Corp and its owners. Personal service corporations,
            however, are subject to a flat 35% tax rate on their taxable income. Also,
            there is no special reduced tax rate on the sale of long term capital gain
            assets.

VII.   DISSOLUTION ISSUES

       A.   Entity level taxation

            1.     LLCs – Recognize no taxable gain at the entity level upon
                   dissolution.

            2.     S Corps – Recognize taxable gain on the distribution of
                   appreciated property as if the assets were sold at their fair market
                   values. This gain flows through ratably to all S Corp shareholders.
                   The S Corp may also pay corporate level tax if it was a C Corp in
                   the prior ten years and the built-in gains tax applies.

            3.     C Corps – Recognize taxable gain on the distribution of
                   appreciated property as if the assets were sold at their fair market
                   values. Tax on this recognized gain is paid by the C Corp at its
                   normal tax rates.

       B.   Owner level taxation

            1.     LLCs – For LLC members, gain is recognized only if the amount
                   of money and marketable securities (with certain exceptions)
                   received exceed their tax basis in their LLC membership interest.
                   Distributions of noncash property are generally nontaxable.

            2.     S Corps – For S Corp shareholders, the gain recognized by the S
                   Corp flows through to its shareholders. In addition, gain or loss is
                   recognized by the shareholders based on the difference between
                   the fair market value of the net assets distributed and the
                   shareholders’ tax basis in their S Corp stock.

            3.     C Corps – For C Corp shareholders, the gain recognized by the C
                   Corp on the distribution of appreciated assets does not flow
                   through to its shareholders. C Corp shareholders recognize taxable
                   gain or loss based on the difference between the fair market value
                   of the net assets distributed to them and their tax basis in their C
                   Corp stock.

       C.   Basis of distributed assets received by owners
          1.    LLCs – Tax basis of noncash assets received by LLC members
                equals the tax basis in their LLC interest, reduced by any cash or
                marketable securities received.

          2.    S Corps – Tax basis of assets received by S Corp shareholders
                equals the fair market value of the assets received.

          3.    C Corps – Same tax treatment as S Corp shareholders.

VIII. COMPENSATION ISSUES

     A.   FICA or self-employment tax on owners compensation

          1.    LLCs – Members providing services are compensated through
                “guaranteed payments”. These guaranteed payments are always
                subject to self-employment tax (“SE Tax”). In addition, the
                residual profits of an LLC allocated to its members may be subject
                to SE Tax whether or not they are distributed. This analysis, based
                on the current IRS proposed regulations, focuses on whether the
                LLC member has managerial authority and involvement (500
                hours or more annually) similar to a general partner or is a more
                passive owner similar to a limited partner. Residual profits
                allocated to a general partner are subject to SE tax, whereas a
                limited partner’s residual profits are not. The SE Tax rate is 15.3%
                on the first $90,000 (in 2005) and 2.9% on the excess on
                guaranteed payments and residual profits. The LLC members
                receive an “above-the-line” income tax deduction on their
                individual tax returns for 50% of the SE Tax.

          2.    S Corps – Employee/shareholders are compensated for services
                provided to the S Corp through wages. The wages are subject to a
                combined 15.3% tax on the first $90,000 of wages (in 2005) and
                2.9% on the excess. The S Corp pays and deducts one-half the
                FICA tax and the shareholder-employee pays the other one-half. If
                an employee’s wages are reasonable, she may be able to avoid the
                2.9% Medicare tax on wages over $90,000 if income is distributed
                pro rata to all S Corp shareholders in lieu of paying additional
                wages. S Corp shareholders are not subject to FICA tax on their
                share of residual profits.

          3.    C Corps - Employee/shareholders are compensated for services
                provided to the C Corp through wages. The wages are subject to a
                combined 15.3% tax on the first $90,000 of wages (in 2005) and
           2.9% on the excess. The C Corp pays and deducts one-half the
           FICA tax and the shareholder-employee pays the other one-half.

B.   Owner fringe benefits

     1.    LLCs – Fringe benefits are taxable to LLC members. The LLC
           may either deduct the cost of the fringe benefits and treat them as
           guaranteed payments to the LLC member or may specifically
           allocate this nondeductible cost to the LLC member who received
           these fringe benefits. LLC members are allowed to deduct 100%
           of health insurance premium expense in arriving at their adjusted
           gross income on their individual income tax returns.

     2.    S Corps – Employee/shareholders who own 2% or more of the
           corporation are treated as partners in a partnership and, therefore,
           must follow the rules that apply to LLC members. However, the S
           Corp deducts these fringe benefits and treats them as wages that
           are included on the employee/shareholders’ Form W-2. 2%
           shareholders are also allowed to deduct 100% of health insurance
           premium expenses.

     3.    C Corps – Employee/shareholders of C Corps not subject to tax on
           their fringe benefits (as described below). The C Corp deducts the
           cost of these fringe benefits.

     4.    The fringe benefits covered by this rule include any benefits
           received under a health or disability plan, the cost of the first
           $50,000 of group term life insurance on the owner, and meals and
           lodging furnished for the convenience of the employer.

C.   Retirement benefits

     1.    LLCs – Limited to making $42,000 maximum annual contribution
           per participant to all defined contribution plans. More-than-10%
           owners are no longer prohibited from borrowing from their
           retirement plans.

     2.    S Corps – Limited to making $42,000 maximum annual
           contribution per participant to all defined contribution plans.
           More– than–5% owners are no longer prohibited from borrowing
           from their retirement plans.

     3.    C Corps – Limited to making $42,000 maximum annual
           contribution per participant to all defined contribution plans.
                  Owners may borrow, and pay annual interest on, the lesser of
                  $50,000 or one-half of their nonforfeitable accrued benefits.

      D.   Receipt of ownership for services provided

           1.     LLCs – If an LLC member receives a capital interest in the LLC in
                  exchange for services provided or to be provided, the LLC member
                  will recognize taxable income to the extent of the fair market value
                  of the capital interest received. The taxable income recognition
                  may be delayed if there is a temporary substantial risk of forfeiture.
                  If the LLC member receives a future profits only interest in the
                  LLC in exchange for services, there is generally no taxable income
                  to the LLC member currently. See Revenue Procedure 93-27 for
                  limitations.

           2.     S Corps – Receipt of S Corp stock in exchange for services
                  provided or to be provided is currently taxable to the recipient
                  under Section 83. The income recognition may be delayed if there
                  is a temporary substantial risk of forfeiture. The taxable amount is
                  based on the fair market value of the stock received. The S Corp
                  may be permitted a deduction for the amount of and at the time
                  that such income is recognized by the shareholder unless this
                  amount is required to be capitalized under the Code (e.g., the
                  services are in the nature of start-up or organizational costs).

           3.     C Corps – Same tax treatment as the S Corp and its shareholders.

IX.   MICHIGAN TAX ISSUES

      A.   Michigan single business tax on the entity

           1.     LLCs – Subject to an entity level tax of 1.9% on its apportioned
                  adjusted tax base. There is a credit for conducting business as an
                  unincorporated business ranging from 10 to 20% depending on the
                  amount of the LLC’s business income.

           2.     S Corps – Subject to an entity level tax of 1.9% on its apportioned
                  adjusted tax base. There is a credit for conducting business as an S
                  Corp ranging from 10 to 20% depending on the amount of the S
                  Corp’s business income.

           3.     C Corps – Subject to an entity level tax of 1.9% on its apportioned
                  tax base. Because the C Corp shareholders do not pay Michigan
                   income tax on the C Corp’s taxable income, there is no comparable
                   credit available.

     B.     Michigan income tax on the owners

            1.     LLCs – Individual members are subject to a 3.9% income tax (in
                   2005) imposed on their guaranteed payments and share of residual
                   profits (allocated to Michigan) flowing through from the LLC
                   whether or not the profits are distributed.

            2.     S Corps – S Corp shareholders are subject to a 3.9% income tax (in
                   2005) imposed on their share of S Corp profits (allocated to
                   Michigan) that flow through from the S Corp whether or not the
                   profits are distributed.

            3.     C Corps – C Corp shareholders are not subject to Michigan income
                   tax on the C Corp’s taxable income.

EXHIBITS

1.   Comparison of Business Entities – Income Tax Aspects

2.   Entity Structuring Considerations Checklist
                                                                   EXHIBIT 1

                                                   COMPARISON OF BUSINESS ENTITIES
                                                        INCOME TAX ASPECTS

                                                              A. - General Issues

                           C                 S              Limited         Limited            General         Limited             Sole
                       Corporation       Corporation       Liability       Partnership        Partnership      Liability      Proprietorship
                                                           Company                                            Partnership
1. Limited Liability      Yes                Yes             Yes       Limited partners          No         No except for          No
   Protection for                                                      have limited                         malpractice and
   Owners                                                              liability; General                   negligence
                                                                       partners do not                      committed by
                                                                                                            other owners

2. Owners May             Yes                Yes             Yes       Limited partners          Yes             Yes               Yes
   Participate in                                                      risk losing
   Management                                                          limited liability if
                                                                       they participate
                                                                       in management
3. Pass-Through           No                 Yes             Yes              Yes                Yes             Yes               N/A
   Taxation

4. Entity Level           Yes        Generally not, but      No                No                No               No               N/A
   Taxation                          some former C
                                     corporations are
                                     subject to tax on
                                     recognized built-in
                                     gains, and excess
                                     net passive
                                     investment income
                                                                       1
                                                   COMPARISON OF BUSINESS ENTITIES
                                                        INCOME TAX ASPECTS

                                                       A. - General Issues (continued)

                         C                S                Limited           Limited       General        Limited           Sole
                     Corporation      Corporation         Liability         Partnership   Partnership     Liability    Proprietorship
                                                          Company                                        Partnership
5. IRS Election          No              Yes                 No                No            No             No              N/A
   Required

6. Tax Return        Form 1120       Form 1120 S       Form 1040, Sch.     Form 1065      From 1065     Form 1065      Form 1040,
   Default                                             C or Sch. E if                                                  Sch. C or
   Classification                                      one owner. Two                                                  Sch. E
                                                       or more owners-
                                                       Form 1065

7. Tax Year         Any year       Generally           Tax year of        Tax year of     Tax year of Tax year of      Generally
                    permitted      calendar year       majority of        majority of     majority of majority of      calendar year
                    (except PSC)                       members            partners        partners    partners




                                                                      2
                                                COMPARISON OF BUSINESS ENTITIES
                                                     INCOME TAX ASPECTS

                                                          B. - Ownership Issues

                          C                S                Limited          Limited        General         Limited            Sole
                      Corporation      Corporation         Liability        Partnership    Partnership      Liability      Proprietorship
                                                           Company                                         Partnership
1A. Maximum           No limit on          75          Limited by          Limited by     Limited by     Limited by            One
    Number of         number of                        publicly traded     publicly       publicly       publicly traded
    Owners            shareholders                     partnership rules   traded         traded         partnership
                                                       (500 partner        partnership    partnership    rules
                                                       limit)              rules          rules

1B. Minimum               One             One          One. Single             Two            Two             Two              One
    Number of                                          member LLC’s
    Owners                                             are disregarded
                                                       for tax purposes
2A. Corporation May       Yes        No unless S              Yes               Yes           Yes              Yes             N/A
    be an Owner                      Corp. owns a
                                     Qualified
                                     Subchapter S
                                     Subsidiary
                                     (100% ownership
                                     + election)
2B. Partnership May       Yes              No                 Yes               Yes           Yes              Yes             N/A
    be an Owner




                                                                       3
                                                  COMPARISON OF BUSINESS ENTITIES
                                                       INCOME TAX ASPECTS

                                                           B. - Ownership Issues (continued)

                            C                S                    Limited         Limited       General       Limited          Sole
                        Corporation      Corporation             Liability       Partnership   Partnership    Liability    Proprietorship
                                                                 Company                                     Partnership
2C. LLC May be an          Yes               No                    Yes              Yes           Yes           Yes            N/A
    Owner

2D. Trust May be an        Yes        Only Grantor,                Yes              Yes           Yes           Yes            N/A
    Owner                             Voting, Qualified
                                      Subchapter S,
                                      Electing Small
                                      Business, and
                                      Decedent (for 2
                                      years after death)
2E. Nonresident Alien      Yes               No                    Yes              Yes           Yes           Yes             Yes
    May be an Owner

2F. Qualified              Yes        401(a) entities              Yes              Yes           Yes           Yes            N/A
    Retirement Plan                   only
    May be an Owner

2G. Tax-exempt Entity      Yes        501(c)(3) entities           Yes              Yes           Yes           Yes            N/A
    May be an Owner                   only




                                                                             4
                                                 COMPARISON OF BUSINESS ENTITIES
                                                      INCOME TAX ASPECTS

                                                      B. - Ownership Issues (continued)

                           C                S                  Limited         Limited        General         Limited          Sole
                       Corporation      Corporation           Liability       Partnership    Partnership      Liability    Proprietorship
                                                              Company                                        Partnership
3. Type of Entity      Professional Professional          Professional           No         General        Limited         May practice
   Professionals May   Corporation Corporation            Limited Liability                 Partnership    Liability       without an
   Use                                                    Company                                          Partnership     entity
4. Affiliation             Yes       Yes- QSSS                   Yes             Yes            Yes              Yes            N/A
   Permitted                         election available
                                     for 100% owned
                                     subsidiary




                                                                          5
                                                      COMPARISON OF BUSINESS ENTITIES
                                                           INCOME TAX ASPECTS

                                                         C. - Formation and Operational Issues

                                C                       S                   Limited          Limited       General         Limited           Sole
                            Corporation             Corporation            Liability        Partnership   Partnership      Liability     Proprietorship
                                                                           Company                                        Partnership
1. Differentiation of           Yes              Voting right          Yes, if specified       Yes           Yes             Yes             N/A
   Owners’ Rights                                differences only      in the operating
   Permitted                                     permitted             agreement.
                                                                       Absent an
                                                                       operating
                                                                       agreement, each
                                                                       member has one
                                                                       vote and equal
                                                                       distribution
                                                                       rights
2. Contributions to     No recognition on        No recognition        No recognition      No             No            No recognition       N/A
   Entity               transfer of property     on transfer of        on transfer of      recognition    recognition   on transfer of
                        only if transferors      property only if      property by         on transfer    on transfer   property by
                        are in control of        transferors are in    member              of property    of property   partner
                        the corporation and      control of the                            by partner     by partner
                        liabilities are not in   corporation and
                        excess or tax basis      liabilities are not
                        of assets                in excess of tax
                        contributed              basis of assets
                                                 contributed




                                                                                6
                                                COMPARISON OF BUSINESS ENTITIES
                                                     INCOME TAX ASPECTS

                                            C. - Formation and Operational Issues (continued)

                           C             S                Limited               Limited         General            Limited               Sole
                       Corporation   Corporation         Liability             Partnership     Partnership         Liability       Proprietorship
                                                         Company                                                  Partnership
3. Treatment of      No basis        No basis        Basis increase        Basis increase    Basis increase    Basis increase      Basis increase
   Entity’s          increase for    increase for    for share of          for share of      for share of      for share of        for liabilities
   Liabilities for   share of        share of        liabilities;          liabilities;      liabilities;      liabilities;
   Basis Purposes    liabilities     liabilities     decrease in           decrease in       decrease in       decrease in
                                                     share of              share of          share of          share of
                                                     liabilities treated   liabilities       liabilities       liabilities treated
                                                     as cash               treated as cash   treated as cash   as cash
                                                     distribution          distribution      distribution      distribution

4. Cash Method of    Not allowed     Permissible     Permissible           Permissible       Permissible       Permissible         Permissible
   Accounting        unless gross    unless a tax    unless a tax          unless a tax      unless a tax      unless a tax        unless have
                     receipts less   shelter or      shelter, have         shelter, have     shelter, have     shelter, have       inventories
                     than $5         have            inventories, or       inventories, or   inventories, or   inventories, or     ($10 million
                     million, or a   inventories     have a C corp.        have a C corp.    have a C corp.    have a C corp.      service
                     personal        (exception      member and            partner and       partner and       partner and have    business
                     service         for service     have gross            have gross        have gross        gross receipts of   exception)
                     corporation     business        receipts of more      receipts of       receipts of       more than $5
                                     with gross      than $5 million       more than $5      more than $5      million
                                     receipts less   ($10 million          million           million           ($10 million
                                     than $10        service business      ($10 million      ($10 million      service business
                                     million)        exception)            service           service           exception)
                                                                           business          business
                                                                           exception)        exception)


                                                                           7
                                           COMPARISON OF BUSINESS ENTITIES
                                                INCOME TAX ASPECTS

                                        C. - Formation and Operational Issues (continued)

                         C               S             Limited            Limited         General          Limited          Sole
                     Corporation     Corporation       Liability         Partnership     Partnership       Liability    Proprietorship
                                                      Company                                             Partnership
5. Accumulated    Possible 15%       No A.E.T.     No A.E.T.           No A.E.T        No A.E.T.       No A.E.T.        No A.E.T.
   Earnings Tax   corporate level    exposure      exposure            exposure        exposure        exposure         exposure
                  tax on
                  unreasonable
                  accumulations of
                  earnings
                  ($250,000 may
                  be accumulated
                  without reason-
                  $150,000 for
                  personal service
                  corporations)




                                                                   8
                                                     COMPARISON OF BUSINESS ENTITIES
                                                          INCOME TAX ASPECTS

                                                                D. - Distribution Issues

                              C                   S                Limited           Limited            General            Limited             Sole
                          Corporation         Corporation         Liability         Partnership        Partnership         Liability       Proprietorship
                                                                  Company                                                 Partnership
1. Distributions of   Taxable dividends     Not taxable to     Not taxable to     Not taxable to     Not taxable to     Not taxable to         N/A
   Cash from          to extent of          extent of          extent of          extent of          extent of          extent of
   Entity             earnings and          shareholder’s      member’s           partner’s basis;   partner’s basis;   partner’s basis;
                      profits; tax-free     basis; excess is   basis; excess is   excess is          excess is          excess is
                      basis return;         capital gain (if   capital gain       capital gain       capital gain       capital gain
                      excess is capital     always an S
                      gain                  corporation)

2. Distributions of   Distribution of       Distribution of    No gain            No gain            No gain            No gain                N/A
   Property from      appreciated           appreciated        recognition on     recognition on     recognition on     recognition on
   Entity             property results in   property results   a distribution     a distribution     a distribution     a distribution
                      taxable gain at the   in taxable gain    of property        of property        of property        of property
                      corporate level       passing through    until the          until the          until the          until the
                      and to the            pro-rata to        member             partner            partner            partner
                      distributee           shareholders       disposes of the    disposes of the    disposes of the    disposes of the
                      shareholder           (based on FMV      property           property           property           property
                      (based on FMV of      of assets          (unless a          (unless a          (unless a          (unless a
                      assets distributed)   distributed)       disguised sale)    disguised sale)    disguised sale)    disguised sale)




                                                                              9
                                                  COMPARISON OF BUSINESS ENTITIES
                                                       INCOME TAX ASPECTS

                                                        D. -Distribution Issues (continued)

                           C                 S               Limited              Limited           General             Limited              Sole
                       Corporation       Corporation        Liability            Partnership       Partnership          Liability        Proprietorship
                                                            Company                                                    Partnership
3. Inside Basis      No adjustment      No adjustment    Special election    Special election    Special election    Special election        N/A
   Adjustments on    in basis of        in basis of      to adjust basis     to adjust basis     to adjust basis     to adjust basis
   Redemption of     assets due to      assets due to    of LLC assets       of partnership      of partnership      of partnership
   Interest (Sec.    redemption of      redemption of    to reflect value    assets to reflect   assets to reflect   assets to reflect
   734 & 754)        stock              stock            of assets           value of assets     value of assets     value of assets
                                                         distributed in      distributed in      distributed in      distributed in
                                                         excess of           excess of           excess of           excess of
                                                         redeemed            redeemed            redeemed            redeemed
                                                         member's basis      partner's basis     partner's basis     partner's basis
4. Owner Basis       Basis reduced      Basis reduced    Basis reduced       Basis reduced       Basis reduced       Basis reduced       Basis
   Reduction Rules   for                for              for distributions   for distributions   for distributions   for distributions   reduced for
                     distributions in   distributions    first, then         first, then         first, then         first, then         distributions
                     excess of          first, then      losses              losses              losses              losses              first, then
                     taxable            losses                                                                                           losses
                     earnings and
                     profits




                                                                            10
                                                   COMPARISON OF BUSINESS ENTITIES
                                                        INCOME TAX ASPECTS

                                                           E. - Transfers and Dissolution

                            C                S                Limited             Limited         General           Limited              Sole
                        Corporation      Corporation         Liability           Partnership     Partnership        Liability      Proprietorship
                                                             Company                                               Partnership
1. Transfer of        Capital gain     Capital gain or    Capital gain or    Capital gain or   Capital gain or   Capital gain or   Capital gain or
   Ownership          or loss; if      loss; if Sec.      loss except for    loss except for   loss except for   loss except for   loss except for
   Interest           Sec. 1244        1244 stock, loss   pro rata share     pro rata share    pro rata share    pro rata share    gain or loss on
                      stock, loss is   is ordinary        of ordinary        of ordinary       of ordinary       of ordinary       ordinary
                      ordinary                            income assets      income assets     income assets     income assets     income assets
                                                          (Sec.751)          (Sec.751)         (Sec.751)         (Sec.751)

2. Special Transfer   Sec. 1202-       Transfer to        Transfer of        Transfer of       Transfer of       Transfer of            None
   Issues             50% of gain      ineligible SH      50% of profits     50% of profits    50% of profits    50% of profits
                      exclusion if     terminates S       and capital        and capital       and capital       and capital
                      certain stock    Corp. status       interests          interests         interests         interests
                      held > 5 years                      terminates tax     terminates tax    terminates tax    terminates tax
                      (based on                           partnership        partnership       partnership       partnership
                      28% LTCG
                      rate)




                                                                            11
                                                   COMPARISON OF BUSINESS ENTITIES
                                                        INCOME TAX ASPECTS

                                                    E. - Transfers and Dissolution (continued)

                          C                  S                 Limited             Limited         General           Limited                Sole
                      Corporation        Corporation          Liability           Partnership     Partnership        Liability        Proprietorship
                                                              Company                                               Partnership
3. Inside Basis     No                No adjustment        Special            Special           Special           Special election          N/A
   Adjustments on   adjustment in     in basis of assets   election to        election to       election to       to adjust basis
   Transfer of      basis of assets   to reflect change    adjust basis of    adjust basis of   adjust basis of   of partnership
   Interest (Sec.   to reflect        in basis of          LLC assets to      partnership       partnership       assets to reflect
   743 & 754)       change in         transferred stock    reflect change     assets to         assets to         change in basis
                    basis of                               in basis of        reflect change    reflect change    of transferred
                    transferred                            transferred        in basis of       in basis of       partnership
                    stock                                  membership         transferred       transferred       interest
                                                           interest           partnership       partnership
                                                                              interest          interest

4. Dissolution      Gain              Gain recognized      Generally, no      Generally, no     Generally, no     Generally, no             N/A
          Issues:   recognized on     on distribution      gain               gain              gain              gain recognized
  A. Entity Level   distribution of   of appreciated       recognized at      recognized at     recognized at     at partnership
                    appreciated       assets; corporate    LLC level          partnership       partnership       level
                    assets;           level tax paid                          level             level
                    corporate         only if built-in
                    level tax paid    gains tax applies




                                                                             12
                                                 COMPARISON OF BUSINESS ENTITIES
                                                      INCOME TAX ASPECTS

                                                 E. - Transfers and Dissolution (continued)

                        C                S               Limited             Limited          General          Limited              Sole
                    Corporation      Corporation        Liability           Partnership      Partnership       Liability      Proprietorship
                                                        Company                                               Partnership
B. Owner Level    Capital gain     Gain recognized   Gain               Gain              Gain recognized   Gain                    N/A
                  or loss          by corporation    recognized         recognized        only if money     recognized
                  recognized       flows to SHs;     only if money      only if money     received          only if money
                  based on         capital gain or   received           received          exceeds tax       received
                  FMV of net       loss recognized   exceeds tax        exceeds tax       basis in          exceeds tax
                  assets > basis   based on FMV      basis in LLC       basis in          partnership       basis in
                  of stock         of net assets >                      partnership                         partnership
                                   increased basis
                                   of stock
C. Basis of Assets Fair market     Fair market       Basis in assets    Basis in          Basis in assets   Basis in assets         N/A
   Received        value           value             equals basis in    assets equals     equals basis in   equals basis in
                                                     LLC interest       basis in          partnership       partnership
                                                                        partnership       interest          interest
                                                                        interest




                                                                       13
                                                  COMPARISON OF BUSINESS ENTITIES
                                                       INCOME TAX ASPECTS

                                                           F. - Compensation Issues

                         C             S                  Limited               Limited           General         Limited               Sole
                     Corporation   Corporation            Liability            Partnership       Partnership      Liability       Proprietorship
                                                         Company                                                 Partnership
1. Owner/           Reasonable      Reasonable     Guaranteed                Guaranteed         Guaranteed     Guaranteed              Draws
   Employee         wages (too      wages (too     payments                  payments           payments       payments
   Compensation     high?)             low?)
2. FICA or Self-    Social         Social          Manager subject to        Self-              Self-          Self-              Self-
   employment Tax   security tax   security tax    self-employment tax       employment         employment     employment         employment
   on Owner’s       of 6.2% on     of 6.2% on      of 15.3% on               tax of 15.3%       tax of 15.3%   tax of 15.3%       tax of 15.3% on
   Wages            $90,000        $90,000         $90,000, 2.9% on          on $90,000,        on $90,000,    on $90,000,        $90,000, 2.9%
                    Medicare tax   Medicare        excess of guaranteed      2.9% on            2.9% on        2.9% on            on excess
                    of 1.45%;      tax of          payments and              excess of          excess of      excess of          earnings
                    both           1.45%; both     residual profits; non-    guaranteed         guaranteed     guaranteed
                    employer       employer        managers only             payments and       payments and   payments and
                    and            and             subject on                residual           residual       residual profits
                    employee       employee        guaranteed payments       profits; limited   profits
                                                   if there is a manager     partners only
                                                   and <500 hours of         subject on
                                                   service provided          guaranteed
                                                                             payments




                                                                        14
                                                COMPARISON OF BUSINESS ENTITIES
                                                     INCOME TAX ASPECTS

                                                  F. - Compensation Issues (continued)

                       C              S                Limited                 Limited         General         Limited             Sole
                   Corporation    Corporation         Liability               Partnership     Partnership      Liability     Proprietorship
                                                      Company                                                 Partnership
3. Owner Fringe   Health and     Taxable to >    Taxable to                 Taxable to       Taxable to     Taxable to       Taxable to
   Benefits       disability     2% owner/       members; 100% of           partners; 100%   partners;      partners; 100%   owner; 100%
                  insurance      employee;       health insurance is        of health        100% of        of health        of health
                  tax-free to    100% of         pre-AGI deduction          insurance is     health         insurance is     insurance is
                  owner/         health          on Form 1040               pre-AGI          insurance is   pre-AGI          pre-AGI
                  employees      insurance is                               deduction on     pre-AGI        deduction on     deduction on
                                 pre-AGI                                    Form 1040        deduction of   Form1040         Form 1040
                                 deduction on                                                Form 1040
                                 Form 1040
4. Retirement     $42,000        $42,000         $42,000 maximum            $42,000          $42,000        $42,000          $42,000
   Benefits       maximum        maximum         annual contribution        maximum          maximum        maximum          maximum
                  annual         annual          per member                 annual           annual         annual           annual
                  contribution   contribution                               contribution     contribution   contribution     contribution
                  per            per                                        per partner      per partner    per partner
                  employee       employee




                                                                       15
                                              COMPARISON OF BUSINESS ENTITIES
                                                   INCOME TAX ASPECTS

                                                  F. - Compensation Issues (continued)

5. Ownership      FMV of          FMV of          No tax if profits          No tax if          No tax if      No tax if        N/A
   for Services   stock taxable   stock taxable   only interest              profits only       profits only   profits only
                  when            when            received; FMV of           interest           interest       interest
                  received by     received by     capital interest           received; FMV      received;      received; FMV
                  SH for          SH for          taxable when               of capital         FMV of         of capital
                  services (or    services (or    received (or when          interest taxable   capital        interest taxable
                  when            when            substantial risk of        when received      interest       when received
                  substantial     substantial     forfeiture lapses)         (or when           taxable when   (or when
                  risk of         risk of                                    substantial risk   received (or   substantial risk
                  forfeiture      forfeiture                                 of forfeiture      when           of forfeiture
                  lapses)         lapses)                                    lapses)            substantial    lapses)
                                                                                                risk of
                                                                                                forfeiture
                                                                                                lapses)




                                                                        16
                                                       COMPARISON OF BUSINESS ENTITIES
                                                            INCOME TAX ASPECTS

                                                           G. - Michigan Tax Comparison

                           C                 S                Limited                Limited           General           Limited              Sole
                       Corporation       Corporation          Liability             Partnership       Partnership        Liability      Proprietorship
                                                             Company                                                    Partnership
1. Michigan          1.9 % tax on       1.9% tax on     1.9% tax on               1.9% tax on       1.9% tax on       1.9% tax on       1.9% tax on
   Single Business   apportioned        apportioned     apportioned               apportioned       apportioned       apportioned       apportioned
   Tax               adjusted tax       adjusted tax    adjusted tax base;        adjusted tax      adjusted tax      adjusted tax      adjusted tax
                     base               base; credit    credit of 10% to          base; credit of   base; credit of   base; credit of   base; credit of
                                        of 10% to       20% based on              10% to 20%        10% to 20%        10% to 20%        10% to 20%
                                        20% based       business income           based on          based on          based on          based on
                                        on business                               business          business          business          business
                                        income                                    income            income            income            income

2. Michigan Income   3.9% tax           3.9% tax        3.9% tax imposed          3.9% tax          3.9% tax          3.9% tax          3.9% tax
   Tax               imposed on         imposed on      on members                imposed on        imposed on        imposed on        imposed on
                     owner/             owner/          guaranteed                partners          partners          partners          owner’s income
                     employee           employee        payments and share        guaranteed        guaranteed        guaranteed
                     wages and          wages and       of pass-through           payments and      payments and      payments and
                     dividends          share of        income                    share of pass-    share of pass-    share of pass-
                                        pass-through                              through           through           through
                                        income                                    income            income            income

Revised October 2005
(Rates and Limits Shown are for 2005)




                                                                             17
                                     EXHIBIT 2

           ENTITY STRUCTURING CONSIDERATIONS CHECKLIST

Entity Choices
Main Alternatives:                               Other Alternatives:
C Corporation                                    Limited Partnership
S Corporation                                    General Partnership
Limited Liability Company                        Limited Liability Partnership
                                                 Sale Proprietor (Nonentity)

                                                 Entity Advantage
                                                 LLC      S Corp C Corp N/A

Ownership Interests
Economic Differences
Voting or Control Differences
Receipt of Ownership for Services Provided
 (IRC §83)
Buy-Sell Restrictions on Transfers
Written vs. Oral Agreements/Side Agreements


Owner Liability Protection
Isolation Risk/Single Purpose Entity
Tax Consequences/Reporting
Precontribution Liability Exposure
Liability Exposure During Operations
Liability Protection Maintenance
Post-termination Liability of Owners




                                                 Entity Advantage
                                                 LLC      S Corp C Corp N/A
Contributions
Contribution of Appreciated Property
Contributions Subject to Liabilities
Exceeding Contributor’s Basis
Basis of Assets to Entity
Allocation of Pre-Contribution Gain
  (IRC §704(c))
Contribution of Past or Future Services
  (IRC §83)
Sale vs. Contribution of Property
Impact on Real Estate Transfer Tax
  and Property Tax Assessment
Post-Formation Additional Contributions
  of Capital or Property


Financing
Owner Loan to Entity
Lender Requirements Influencing Structure
Entity Borrowing:
       Owner Tax Basis: Share of Entity
        Liability - Recourse vs. Nonrecourse
        (IRC §752)
       Owner Guarantees
       Owner Deduction of Loss - Basis
        Limits; At Risk Rules (IRC §465)
Tax Treatment of Interest Expense



                                               Entity Advantage
                                               LLC      S Corp C Corp N/A
Distributions to Owners/Allocations to
Owners
Cash Distribution to Owners
Non-Cash Distributions to Owners
Tax Basis and Holding Periods to Owners
Intended Tax Deferred Exchange of Property
  Received by Owners (IRC §1031)
Allocation of Cash Flow vs. Taxable Income
  or Loss
Special Allocations of Tax Items
Cash Flow Preferences to Owners


Transfer of Owner Interests
Entity Look-Through Rules (Ordinary Income
  (IRC §751) / 25% LTCG (IRC §1(h))
Buy-Sell Restrictions and Terms
Entity Basis Adjustments on Death, Sale or
Redemption of Owner Interest (IRC §754)
Termination of Tax Status
Securities Law Limitations
Lender Restriction
Estate and Gift Tax Impact of Transfer
                                              Entity Advantage
                                              LLC      S Corp C Corp N/A


Operations
Management/Participation by Owners and
  Nonowners
Self-Employment Tax/FICA
Allocation of Income Tax Between Entity and
  Owners
Hiring of Employees and Independent
  Contractors
Obtaining Local Government Approvals for
  Projects
Special Entity Tax Considerations
Retirement Plan Considerations
Employee Benefit Plan Considerations


Dissolution/Liquidation
Priority of Liquidating Distributions
Recognition of Gain at Entity Level
Recognition of Gain by Owners
Basis of Assets Received
Control Over Liquidation Process
Title Insurance Issues


Conflict of Interest
Who is your client?
Protection for the attorney, CPA and other
  advisors
Communication and documentation with all
  parties
         CHOICE OF ENTITY FOR REAL ESTATE ACTIVITIES


                      REAL PROPERTY LAW SECTION
                       HOMEWARD BOUND SERIES
                           NOVEMBER 3, 2005



                TAX PLANNING FOR REAL ESTATE OWNERS


                                 Dean A. Rocheleau
                                  William B. Acker
                                 Richard A. Shapack




    SCENARIO I - REAL ESTATE RENTAL
      FOLLOWED BY REFINANCING

Sisters Kim and Karen Kash, who just inherited a substantial amount from their
    deceased mother, have decided to buy a shopping center. This center has been
    run down and has lost its anchor tenant and has only 30% occupancy. The
    sisters, one who is a real estate leasing agent, believe they can refurbish this
    shopping center, acquire an anchor tenant and increase the occupancy to at
    least 90% in a two year period. At that time, they hope to refinance this
    property and take out part of their invested capital.

ISSUE: What type of business entity would be most appropriate for this shopping
   center venture?




    SCENARIO I - REAL ESTATE RENTAL
      FOLLOWED BY REFINANCING

ISSUE: What type of business entity would be most appropriate for this shopping
   center venture?

•    Entity allowing flow-through taxation.
•    Traditionally general partnership; now a limited liability company should be
     considered for limited liability protection.
•    Need sufficient tax basis and at-risk amounts to deduct losses during lease up
     period.
•    Passive activity loss rules may limit deductibility of losses if sisters are not
     “full time real estate professionals”.
•    Real estate rental operation is exempt from self-employment tax.
•    Tax impact of distributing refinancing proceeds favors LLC or partnership.
•    May want a special allocation of wages to sister in the real estate business.
    SCENARIO I - REAL ESTATE RENTAL
      FOLLOWED BY REFINANCING

•     ISSUE: What type of business entity would be most appropriate for this
      shopping center venture?



•     CHOICE: Limited liability company best facilitates claiming losses currently
      and distributing refinancing proceeds tax-free in the future.




              SCENARIO II - REAL ESTATE
      DEVELOPMENT/OUTSIDE INVESTOR

    Five individuals are breaking away from Draconian Development Co. to start
    their own development business. They believe they can profitably develop a
    parcel of land into 130 residential lots that they will sell to builders.

    Because they do not have sufficient capital to fund this project themselves, they
    have asked Conrad Cash to be an investor in their project. Conrad will be a
    financial owner but not involved in the management of this development project.

    ISSUE: What entity would you recommend to this development group?




       SCENARIO II - REAL ESTATE
    DEVELOPMENT/OUTSIDE INVESTOR
ISSUE: What entity would you recommend to this development group?


•     Flow-through taxation entity probably better choice-this is not an entity that
      will have a long duration.
•     Limited liability protection, especially for Conrad, is important.
•     Special allocations (preferred return) between Conrad Cash and the other five
      owners may be required.
•     Participation in management: 5 general partners or LLC managers?
•     Tax aspects of the receipt of an ownership interest for services for 5
      developers. (Tax rules more favorable in a LP or LLC vs. Corporation).
•     Self-employment tax, especially for Conrad Cash, should be minimized.
•     Tax impact of distributing appreciated property to redeem a disgruntled owner
      some time in the future or of remaining lots at the end of the project. (S
      corporation’s is a taxable distribution; typically tax free if from an L.P. or
      L.L.C.)
       SCENARIO II - REAL ESTATE
    DEVELOPMENT/OUTSIDE INVESTOR


ISSUE: What entity would you recommend to this development group?

CHOICE: Limited liability company because of flow-through taxation, better
  operational tax treatment, and flexibility provided by it.




    SCENARIO III - DEVELOPMENT OF
     LONG-TERM HOLD PROPERTY
Fillmore Farmer has farmed a piece of land on the edge of town for over thirty
    years. The suburban sprawl has finally reached Fillmore’s property and he has
    decided to retire from farming and develop his farmland into residential lots.
    Fillmore believes he can hire an experienced developer to develop the property
    for him but believes he may have to give this developer a piece of the deal.

ISSUE: What entity would you recommend that Fillmore use for this
   development?




    SCENARIO III - DEVELOPMENT OF
     LONG-TERM HOLD PROPERTY

•   ISSUE: What entity would you recommend that Fillmore use for this development?

•    Entity allowing flow-through taxation would be preferred.
•   Limited liability protection is key for development activities.
•   Preserving long term capital gain treatment on the sale of the farmland; Fillmore should sell the
    property to the development entity at its current fair market value to receive long term capital gain
    treatment (cannot sell to an LP or LLC or will not get capital gain treatment if Fillmore owns more
    than 50% of purchasing entity).
•   If selling property, Fillmore will want installment reporting treatment, since cash flow will be
    deferred until the end of the development. (Installment reporting rules more restrictive if Fillmore
    owns more than 50% of development entity).
•   Is the experienced developer eligible to be an S corporation shareholder?
•   Flexibility in development entity for special allocations may be desired (not permitted in an S
    corporation).
•   F.I.C.A or self-employment tax concerns, especially if Fillmore is not involved in management.
•   If Fillmore wants to be involved in day-to-day management, he cannot be a limited partner.
•   Tax impact of distributing appreciated lots to either owner in the future will depend on entity
    selected ( taxable distribution if an S corporation; typically tax-free if from an L.P. or L.L.C).
•   Possible Section 754 advantage in an L.P. or L.L.C. if Fillmore should die during development
    project.
    SCENARIO III - DEVELOPMENT OF
     LONG-TERM HOLD PROPERTY
ISSUE: What entity would you recommend that Fillmore use for this
   development?

CHOICE: If Fillmore is selling land to the entity to obtain long term capital gain
  treatment on the appreciation in the land, S corporation is the choice. If
  Fillmore will contribute the land to the new entity and forego long term capital
  gain treatment, choice would be an L.L.C.




  SCENARIO IV - DEVELOPMENT OF
UNNEEDED LAND WITH AN UNRELATED
           DEVELOPER
Michigan Manufacturing Company, an S corporation, has held vacant land
that is contiguous to their plant for over 20 years. The new management
team of 2M has ruled out expansion plans and has decided to build and
lease an industrial building on this vacant property.

2M does not have any development nor leasing expertise. They believe
that it would be best to joint venture with an individual who has the
unique combination of development expertise and the financial
wherewithal to either finance or fund this development project.


ISSUE: What entity would you suggest for this development?




      SCENARIO IV - DEVELOPMENT OF
    UNNEEDED LAND WITH AN UNRELATED
               DEVELOPER
ISSUE: What entity would you suggest for this development?

•   Limited liability protection is important to protect 2M’s assets even though
    2M’s shareholders’ assets are protected).
•   2M cannot be an investor in an S corporation unless it can be a Qualified
    Subchapter S Subsidiary.
•   Should subsidiary be a C corporation, partnership or LLC? (No consolidation
    for tax purposes unless 2M becomes a C corporation and 80% of corporate
    subsidiary is owned by 2M.)
•   Special allocations of cash flow or tax attributes may be important.
•   Disguised sale concern in a partnership/LLC if there is a special allocation of
    cash to 2M; not applicable to S or C corporations.
•   Section 704(c) rules on contribution of appreciated property by a partner -
    must specially allocate gain on sale to 2M.
      SCENARIO IV - DEVELOPMENT OF
    UNNEEDED LAND WITH AN UNRELATED
               DEVELOPER


ISSUE: What entity would you suggest for this development?

CHOICE: If formed as a joint venture with another individual or corporation, use
  an L.L.C. to provide flexibility and flow-through taxation.




       SCENARIO V - 2 UNRELATED
    CLIENTS DEVELOPING A SHOPPING
               CENTER
Dave Davis, a long time client of yours, has held a piece of vacant land that he has
   always wanted to develop into a shopping center. Dave has had success in
   refinancing this vacant property over the 30 year period that he has held it and
   the amount of the debt ($300,000) now exceeds the $100,000 cost of this
   property. The property is currently worth $600,000 and Dave has found
   tenants to lease 60% of the center.
Dave has asked you to recommend a developer to help him build this office center.
   He would like to give the developer a piece of the center in return for a lower
   developer’s fee. You believe that Bill Builder, a long time developer client,
   would be interested in doing this deal

ISSUE: What type of entity would you recommend that Dave and Bill use and
   should you represent both of your long time clients in this venture?




       SCENARIO V - 2 UNRELATED
    CLIENTS DEVELOPING A SHOPPING
               CENTER
ISSUE: What type of entity would you recommend that Dave and Bill use and
   should you represent both of your long time clients in this venture?

•   Limited liability protection is important.
•   Contribution of appreciated land to entity - Section 704(c) issue in a LLC or
    LP - avoid by using an S corporation?
•   Tax impact of debt in excess of tax basis of property contributed to an S or C
    corporation.
•   Tax aspects of the receipt of ownership interest in exchange for services.
•   May desire to have special allocations to either Dave or Bill.
•   Dave’s involvement in day-to-day management; FICA or self-employment tax
    to Dave and Bill.
•   Conflict of interest representation issue must be addressed.
•   If Section 704(c) applies, which method would you recommend (due to
    conflict)?
       SCENARIO V - 2 UNRELATED
    CLIENTS DEVELOPING A SHOPPING
               CENTER

ISSUE: What type of entity would you recommend that Dave and Bill use and
   should you represent both of your long time clients in this venture?

CHOICE: Limited liability company because of flow-through taxation, flexibility
  of entity, and avoid taxable income on contribution of land subject to debt by
  Dave.




    SCENARIO VI - ESTATE PLANNING
     WITH FAMILY-OWNED RENTAL
            REAL ESTATE
Wanda Wealthy owns a warehouse and vacant land a quarter-mile from
  where the Michigan Department of Transportation is seriously
  considering adding a new interchange to I-75. Wanda’s grandson,
  Wellington, recently attended a presentation regarding the use of
  entities to reduce estate and gift taxes. Wanda would like you to meet
  with Wellington and her to discuss how this concept would apply to
  her warehouse and vacant land.


ISSUE: What entity would you recommend be used to help Wanda save estate
   and gift taxes?




    SCENARIO VI - ESTATE PLANNING
     WITH FAMILY-OWNED RENTAL
            REAL ESTATE
•   ISSUE: What entity would you recommend be used to help Wanda save estate and gift
    taxes?

•   Better alternatives are LP and LLC (no general partnership, S corp or C corp).
•   May want limited liability protection for all owners (Corporate G.P. if LP is used).
•   Wanda will want to retain control.
•   Wanda may want one or more of her children or grandchildren to be involved in the
    management of this entity.
•   Wanda would like to maintain privacy about her affairs.
•   Wanda would like the real estate to be protected from creditors of her children and
    grandchildren.
•   Wanda would like to give the maximum amount of this entity to her children and
    grandchildren, using her unified credit equivalent, but not paying any current gift tax.
•   Wanda may want to differentiate between current distribution rights to herself, to her
    children, and to her grandchildren.
•   Availability of valuation discounts - Wanda is quite conservative and does not want to
    have any problems with the IRS.
   SCENARIO VI - ESTATE PLANNING
    WITH FAMILY-OWNED RENTAL
           REAL ESTATE
ISSUE: What entity would you recommend be used to help Wanda save estate?

CHOICE: Limited liability company because there is no general partner with
  liability exposure and because Michigan L.L.C. is better than L.P. for
  valuation discounts on transfers of ownership interests.
                      FAMILY ENTITIES:
                  SELECTED FUNDAMENTALS
                 REAL PROPERTY ATTORNEYS
                       NEED TO KNOW
                                By: William B. Acker*


I.     Family Limited Partnerships/Family Limited Liability Companies.
       Generally, a family entity is organized under state law as a limited
partnership (“FLP”) or a limited liability company (“FLLC”) exclusively or
predominately owned by family members, and capitalized by contribution by
taxpayer(s) (“TPs”) of assets they choose to dedicate and grow for the benefit of
their family. FLPs have been used for many years for many of the non tax
purposes described later in this outline, and prior to income tax reforms by some
taxpayers to shift income to younger generation beneficiaries in lower income tax
brackets, while preserving the benefit of losses from FLP owned real estate (prior
to the reforms under the Tax Reform Act of 1986) or FLP owned business
operations to the older generation taxpayers.1 The “kiddie tax” income tax reform
provisions2 stymied a significant measure of income shifting by requiring
inclusion of the income of a child under 14 years of age on the child’s parent’s
income tax returns. The demise of income shifting seemed to diminish interest in
FLPs until later developments in estate tax case law and IRS rulings permitted
separate valuation for estate tax purposes of undivided interests in assets owned

1
  Commissioner v. Tower, 327 U.S. 280 (1946); Commissioner v. Culbertson, 337 U.S. 733
(1949).



* William B. Acker is a shareholder and director of the Kemp Klein Law Firm. He is a
member of the Council of the Real Property Law Section, and the Chairperson of the
Section’s Federal Tax Aspects of Real Estate Transactions Committee. He concentrates
on business and estate planning, tax dispute administrative appeals and tax litigation,
including planning for real property transactions. He has authored articles for the Journal
of Taxation, State Bar Journal, the Section’s Real Property Review, the Tax Section’s
“Michigan Tax Lawyer,” and other professional publications. He has often lectured in
the Real Property Law Section’s Homeward Bound series, the Tax Section’s After Hours
Tax Seminars, and has lectured for the Real Property Section of the ABA and ICLE. Mr.
Acker is a member of the ICLE Real Property Advisory Board.
by family members. This sea change in valuation techniques opened the door for
minority interest, lack of marketability and other “discounts,” that offer estate
planners a means of leveraging lifetime gift transfers of family entity ownership
interests. Today, for simplicity, choice of entity, and other reasons, most family
entities seem to be formed as FLLCs, at least in Michigan. This outline will refer
to family entities as FLLCs, which are subject to federal tax treatment as
partnerships, and will comment from a conservative viewpoint. TPs and their tax
counsel will need to decide how to plan for IRS attacks on FLLCs and how to
react to the present status of issues and case law concerning FLLCs.


II.    Primary Reasons Why A Client Forms an FLLC.
A.     Transfer of Wealth to Beneficiaries.
       TPs plan to transfer wealth by giving ownership interests in their assets to
their beneficiaries, and thereby remove the gifted portion of their assets from their
taxable estate. Without an FLLC, gifting of direct ownership split interests can
soon involve unduly awkward dealings with trustees, custodians and other third
parties, and be complex to track. If assets to be gifted are owned by an FLLC,
gifting of fractional member ownership interests is simplified. Preferably, the gift
is accomplished by written assignment of an FLLC interest.             Transfer of a
fractional interest in an FLLC has the effect of a transfer of both a portion of:
       1.      Current Assets, and
       2.      Future Appreciation of Current Assets.
Gifted FLLC member interests may be held by a trustee of an irrevocable trust
established for TPs’ beneficiaries.


B.     Control of Assets Contributed to an FLLC.
       By managing or participating in management of the FLLC, TPs can
maintain control of, or influence:



2
 Section 1(g) of the Internal Revenue Code of 1986, as amended (“Code”). U.S. Treasury
Regulation (“Reg.”) §1.1(i), and see Code §59(j).


                                          2
       1.      Management of Real Property, Business Assets, and Portfolio
Investments.
       2.      Determination of Management/Investment Objectives.
       3.      Determination of Amount and Timing of Accumulations/
               Distributions.

C.     Preserve Family Wealth.
       TPs may seek to maintain accumulations of assets for the long term benefit
of TPs and their younger generation beneficiaries, and thus to assure family
security and wealth.


D.     Liability Limitation.
       Use of an FLLC may discourage potential creditors from seeking recourse
to FLLC interests.


III.   Funding FLLCs In Exchange For Member Ownership Interests.
A.     Funding on Formation of FLLC.
       All transfers of all assets contributed to the FLLC should be made by
written formal assignments, or by deeds properly recorded. Sample basic FLLC
formation contribution transactions are described below:
       1.      Scenario 1:     TPs contribute one half of the total value of assets
contributed on formation to the FLLC, and receive 50% of the member interests
issued on formation, split between two classes of ownership interests, a voting
class “A” and a non voting class “B. TPs’ children contribute the other 50% of
the total value of assets contributed, and receive like class “A” voting and class
“B” non voting ownership interests, aggregating the remaining 50% of the
FLLC’s outstanding ownership interests.
       2.      Scenario 2:     TPs contribute all of the assets contributed on
formation to the FLLC, and receive 100% of the member interests issued on
formation, split between class “A” voting and class “B” non voting member
interests.



                                         3
B.    Post Formation Funding of Capital Contributions.
      An FLLC may provide for member TP, and/or TP’s member or non
member beneficiaries, to contribute additional assets after initial capitalization of
the FLLC. If any non prorata funding is contemplated or admission of a new
member may occur, FLLC member ownership interests must be issued.


IV.   Transfers of Wealth to Beneficiaries:            Gifts of FLLC Member
      Ownership Interests.

A.    Gifting FLLC Member Ownership Interests.
      Under either sample formation scenario, TPs interested in transferring
FLLC member ownership interests to their beneficiaries may transfer most of the
FLLC’s value by gifting class “B” member ownership interests, and when
participation in control is to be transferred, by gifting class “A” member
ownership interests.    TPs should sign written formal assignments of FLLC
member interests.
      1.       Present Interest Gifts.
      In making yearly gifts under the gift tax annual exclusion, Code §2503(b),
the gift must be a “present interest.” The FLLC voting or non voting member
interests transferred by gift may, depending on the provisions of the FLLC and/or
the nature of the FLLC’s assets, not be treated as “present interests,” and thus not
qualify for the gift tax annual exclusion. Hackl v, Commissioner, 118 TC 279,
No. 14 (2002) (gifted member interests must confer on the donee current
substantial economic or other benefit from use, possession or enjoyment of the
property under Code §2503(b)). In Hackl, the transferring TP was named in the
operating agreement to be the lifetime manager, and controlled distributions,
withdrawals and dispositions of the donee member’s FLLC ownership interests.
To seek to avoid this result, each assignment could include a time limited “put”
right for the donee to require the donor to purchase the gifted FLLC member
ownership interest at fair market value. The “put” right would grant the donee a



                                         4
“present interest” in the nature of a “Crummey” right that should be respected by
the IRS. The “put” right should have typical “Crummey” lapsing provisions. If
the donees’ interests are held in an irrecovable trust for benefit of the donees, the
donees should have the right to exercise the “put” right and/or cause the trustee to
do so.
         2.     Taxable Gifts/Utilizing “Applicable Credit Amount.”
         Taxable gifts of class “A” voting member ownership interests, whether to
give increased participation or establish controlling interests, may be desired to
provide some or all of the younger generation beneficiaries more management
responsibilities. Substantial gifts of non voting class “B” member ownership
interests may be desirable to shift value.


B.       Post Death Transfers of FLLC Member Ownership Interests.
         TPs may provide in their estate planning documents for testamentary
transfers to the FLLC.


V.       FLLC Purposes.
A.       Non-Tax Purposes.
         An FLLC’s non tax purposes should be expressed in the FLCC operating
agreement.     Bongard v. Commissioner, 124 TC No. 8 (2005).             This helps
document and establish the “substance” of the non tax reasons for formation and
operation of the FLLC, evidences that formation was not solely for tax purposes
and bolsters the argument that TPs’ funding contributions were not “transfers” for
federal estate purposes, to arguably preclude application of Code §2036(a)(1) and
(2). See Church, 85 AFTR 2d 2000-804 (W.D. Tex 2000). Where significant
non tax business or other financial reasons for the FLLC are evident, FLLCs
formalities are followed (see D.2 below), and contributors receive FLLC member
ownership interests proportionate to the value of assets contributed, the formation
contribution transaction may qualify under the ‘bona fide sale of interest for
adequate and full consideration’ exception to the application of Code §2036(a)(1)
and (2), which could otherwise apply to bring back the transferred interest into the


                                             5
TPs’ taxable estate. Bongard, supra. Estate of Stone, III, TCM 2003-309 (note,
however, that the beneficiaries in Estate of Stone made meaningful formation
contributions of assets). A non tax purpose is important because on formation,
FLLC contributors receive FLLC member ownership interests that are often less
marketable than the assets they contribute, due to typical FLLC operating
agreement restrictions and state law restrictions. If the FLLC has no business or
other non tax purpose except to save taxes, the IRS may argue that the reduction
in marketability translates into a gift to TPs’ beneficiaries on formation that
constitutes a “transfer” for federal estate tax purposes, and the inclusion
provisions of Code §2036(a) may apply. Estate Schauerhammer, TC Memo.
1997-242; Estate of Thompson, TC Memo 2002-206; Kimball v. U.S., 244 F.
Supp. 2d 700 (N.D. Tex. 2003), reversed by 371 F.3d 257 (5th Cir. 2004). The
following are examples of non tax reasons for the establishment and operation of
an FLLC.
      1.       Pooling Financial Investments.
      Combining investment assets aligns family investment and management
decision making.     Forming a partnership solely for investment purposes is
sufficient for federal partnership income tax purposes, without the necessity of the
partnership engaging in the active conduct of a separate business. Rev. Rul. 75-
523. See Reg. 1.701-2(a).
      2.       Centralized Management, Dedication and Growth of Family
Wealth.
      Sheer convenience and manageability of investments results from use of
FLLC. Establishing long term family wealth building goals will drive and focus
management and investment goals.
      3.       Involving and Training Younger Beneficiaries.
      Educating and aiding the younger generation beneficiaries in the course of
their participation in management and investment of the FLLC’s assets can be an
important “hands on” family opportunity valued by TPs.
      4.       Business Judgment Rule.




                                         6
      The Business Judgment Rule offers protection for FLLC management,
particularly regarding operating business and investment decision making.
      5.       Economies of Scale.
      Investment cost efficiencies may become available.
      6.       Private Placement Accredited Investor Qualification.
      The large value of some FLLC portfolios may assist in qualifying the
FLLC as an accredited investor under securities laws and otherwise for alternative
investments and private placements.
      7.       Litigation Avoidance.
      FLLC operating agreement may include an arbitration provision, although
care should be taken to limit the scope of matters covered to matters that may be
finally determined by arbitration.
      8.       Liability Limitation.
      Asset protection planning may involve placing the unsavory taste of a
limited liability interest between family wealth and unknown potential future
creditors. State law charging orders, and even foreclosure of member interests
may provide discouraging targets for creditors.


B.    Tax Purposes.
      The fundamental federal transfer tax purpose for establishing and operating
an FLLC is to organize and facilitate the transfer and removal of the value of
FLLC ownership interests from the TPs’ taxable estate for federal estate tax
purposes. This accomplishes removing from exposure to federal estate tax both
the current value and future appreciation of the TPs’ assets contributed to the
FLLC. The primary tax motivation most often discussed by FLLC commentators
is to leverage the value of the assets removed from TPs’ estate from estate tax
exposure, by claiming valuation discounts, primarily for minority interest and
lack of marketability of the gifted FLLC member ownership interests. Generally,
the so called “discounts” are really valuation adjustments to the member
ownership interest’s proportionate share of the total value of the FLLC’s assets,




                                        7
made to reflect the impact in the marketplace of the member ownership interest’s
lack of marketability and minority stature.


VI.   Checklist.
      The following circumstances should be recognized, and call for further
review and analysis.


A.    Funding FLLC Only with Investment Assets.
      Taxpayers’ tax advisor must use care to avoid prohibited diversification of
investments assets on contributions to the FLLC. Code §721(b). Taxpayers’
members should contribute already widely diversified or identical assets. See
Reg. §1.351-1(c). The Tax Court seems to doubt that any non-tax motivations
can exist for funding an FLLC solely with untraded marketable securities, absent
operating real property or other ongoing business operations. Strangi (II), 302
F.2d at 380.


B.    Death Bed FLLCs.
      Much of the bad law emerging from decided cases in recent years has been
from death bed last minute FLLCs, where many of the following checklist items
have been present. See Estate of Bigelow, TCM 2005-65 (2005), Strangi (IV), 96
AFTR 2d 2005-5230 (CA5 2005).


C.    Creating Misleading Evidence of Primary Motivations for Tax
      Purposes.

      Unprivileged communications touting or calculating estimates of tax
benefits as preeminent or primary motivations for creating or operating FLLCs
may build evidence for IRS attack. As lethal, is unprivileged witness testimony
of any sort of agreement, whether stated or implied, to act contrary to the
separateness of the FLLC’s assets or non tax purposes of the FLLC, which may
provide a foundation for IRS Code §2036 arguments that the contributing TPs
reserved an interest in the contributed property.


                                         8
D.    Creating Facts Supporting the Existence of a Direct or Implied
      Agreement to Retain Control and/or Economic Benefit for
      Contributed Assets.

      Indicia of the probability of the existence of an express, implicit or implied
agreement that TPs would continue to enjoy control over, and/or economic
benefits (e.g., distributions) from, assets contributed to the FLLC after
contribution must be avoided, or the value of the FLLC interest in contributed
assets may be included in a contributing members’ estate for federal estate tax
purposes under Code §2036. Strangi v. Commissioner, (IV), supra. Strangi, (IV)
indicated that the agreement must be made at the time of transfer and be that the
transferor TP will retain “substantial present economic benefit” from the
contributed property. Substantial uncertainty remains under Code §2036. See
Strangi, (II), TCM 2003-145 (2003).
      1.       Funding FLLC with Too Much of Taxpayers’ Assets.
      FLLC’s funded with virtually all of TPs’ assets, make implausible any
premise that TPs would do so without an express or implicit assurance or
agreement that TPs would receive income/capital from FLLC to provide for their
personal expenses. The IRS will argue that this amounts to a reservation of
interest under Code §2036.
               a.      Example: Funding an FLLC with 90-99% of TPs’ assets,
and not leaving enough income producing and/or other assets to support TPs at
their accustomed standard living for at least the rest of their life expectancy, and
also to provide for post death expenses). Strangi, (IV), supra.
               b.      Funding with TPs’ personal use property.
               c.      TPs control or cause the timing and/or amount of
distributions to be determined based not on the FLLC’s operational, management
or accounting considerations, but rather coincidental with, or based on the timing
and/or amount of, the personal expenses of TPs.
               d.      TPs’ control, or cause the FLLC’s manager to make,
distributions for TPs or even other beneficiary members, on a non pro rata basis.


                                         9
Arguably, this concern does not include routine mandatory distributions for
member’s tax obligations resulting from FLLC allocations of its income tax
consequences.
                e.     TPs rely on FLLC distributions for TPs’ personal living
expenses (by periodic payments, as needed, or otherwise), or TPs’ post death
funeral and estate expenses. Strangi, (IV), supra.
                f.     TPs’ personal residence is contributed to the FLLC and
even worse, TP uses the residence without paying rent or an arms length lease.
      2.        Failure to Follow FLLC Formalities.
      Failure to operate, account for and control the FLLC as a separate entity
under state law and the FLLC’s operating agreement, and the failure to have the
FLLC act by and through formal FLLC manager/board decisions under state law
and the operating agreement. Example indicia of such failures follow.
                a.     Assets contributed are not actually assigned to the FLLC.
                b.     Capital contributions are not actually allocated to the
capital account of the contributor. Income, loss, gain or credit is not allocated pro
rata to capital accounts of FLLC members. Distributions on liquidation are not
required to be made based on capital accounts. Reasonable compensation is not
paid to service provider and/or managing FLLC members.
                c.     Separate bank/brokerage accounts are not promptly
established.
                d.     Failure to document formal FLLC decision making/voting
per FLLC operating agreement, including all major actions and decisions by
formal FLLC consent action or written minutes.
                e.     No change occurs upon formation of FLLC in management
or in investment practices.
                       1.     Management goals or practices should be consistent
with the objectives of the FLLC owner. See Bongard, supra.
                       2.     Investment style/identity of professional investment
advisor or money manager. Changes in investment time horizons and investment




                                         10
decision techniques should be considered to suit the goals of the FLLC owner, as
appropriate.
                f.      TPs transfer assets to FLLC and the assets are allocated all
or in part to other members’ capital accounts. To qualify for valuation discounts,
a gift needs to be of an FLLC member interest.              An allocation of TPs’
contributions to their beneficiary members’ capital account would be a taxable
capital shift, and would be a gift of assets with no discounts.        Shepherd v.
Commissioner, 285 F.3d 1258 (11th Cir. 2002), aff’g 115 TC 376 (2000).
                g.      TPs Retain Too Much Control Over the FLLC. Retention
of too much control can lead to inclusion of TPs’ contributed assets in TPs’
taxable estate at their date of death value, and probably would eliminate any
discounts. Code §2036, Strangi, (IV), supra.
                        1.     TPs should not retain discretion as to the timing and
amount of distributions. To counter retention of control arguments, mandatory
pro rata distributions of available cash should be required, arguably subject to the
managing TP’s determination of the amount of reserves for the goals and
operation of the FLLC.        The FLLC operating agreement should state an
enforceable standard for the FLLC manager’s determination of reserves and the
needs of the FLLC’s business. See Rev. Rul. 73-143. Note, however, that by
mandating distributions and attempting to avoid the IRS’ attack on TP’s control,
the price may be significant reductions of discounts, and reduced creditor
protection.
                        2.     TPs should not control dissolution or liquidation,
which should be determined by vote of all members.
                        3.     Retention of voting control. A mere retention of the
right to vote on distributions or dissolution/liquidation of the FLLC may cause
inclusion of TPs’ property contributed to the FLLC in a deceased TP’s estate for
federal estate tax purposes.      See Code §2036(a)(2), Reg. §20.2036-1(b)(3).
However        elimination   of    TPs’        control   over   distributions   and
dissolution/liquidation may ease this concern. Some of the following suggestions
to avoid this may have income tax consequences.


                                          11
                               i.      TP could transfer all of TP’s voting FLLC
member interest to TP’s spouse, so that TP retains no voting control. This may
eliminate concern as to property contributed by TP to the FLLC. Note however,
this transfer will result in the transferring TP ceasing to be entitled to receive
distributions from the FLLC, and TP’s spouse will be free to dispose of the
transferred member interest.
                               ii.     TP could transfer all of TP’s voting FLLC
member interest to TP’s beneficiaries, and thus retain no voting control. TP may
make taxable gifts that could, to the extent exceeding TP’s available applicable
credit amount, result in gift tax. Obviously, any transfer before its time may have
undesirable family control implications.
                               iii.    TP could transfer all of TP’s voting FLLC
member interest to an irrevocable trust for the benefit of TP’s beneficiaries, and
retain certain rights to render the transfer an incomplete gift. One such power is a
lifetime limited power of appointment. Reg. §25.2522-2(c).
                               iv.     TP could transfer all of TP’s voting FLLC
member interest to a lifetime QTIP trust. Code §2523(f)(5)(A)(i) would arguably
prevent the inclusion of the member interest in TP’s taxable estate.             This
alternative allows TP to act as, or pick an independent trustee of the lifetime
QTIP trust and control the disposition of the property after TP’s spouse’s death.
               h.       FLLC operating agreement provisions entitling TPs to
solely determine the FLLC’s manager, or failing to provide a limit to the FLLC
manager’s term without a provision for removal and/or replacement. The FLLC
operating agreement should provide all members to vote to determine the
manager.
               i.       Failure to prohibit amendment of the FLLC operating
agreement by other than unanimous consent of all members. See Sidney E. Smith
III v. U.S., _______ (USDC No. 02-264 ERIE).
               j.       Failure to gift only capital investments. It is not sufficient
to gift a profits interest. Reg. §1.704(e)(1)(v).




                                          12
               k.      FLLC operating agreement provisions should confirm that
TP, as donor and manager is subject to a fiduciary duty. See Strangi, (IV), supra.
               l.      Failure to timely maintain accurate FLLC books and
records, including FLLC financial accounting.


E.    Taxpayers’ Claim Inadequately Documented Gift Valuations and
      Discounts.

      Valuing FLLC member ownership interests for transfer tax purposes
requires an appraisal of the assets owned by the FLLC, and a second appraisal of
the FLLC member ownership interests that builds on the first, and establishes a
basis for any “discounts.”


F.    Taxpayers’ Claim Excessive “Discounts.”
      All discounts are based on an appropriate analysis by the appraiser of the
operating agreement, and no expectation is universally appropriate, however,
aggressive discounts are often evident after analysis of the FLLC operating
agreement and the appraiser’s report.


483694v1




                                        13
 OPERATING AGREEMENT
                  for


SAMPLE FAMILY, L.L.C.,
  a Michigan limited liability company




            by and among

           JOHN DOE TRUST
           JANE DOE TRUST
             ABC TRUST,
             BCD TRUST,
             CDE TRUST,
             DEF TRUST
                 and
             EFG TRUST


           (the "Members")




       PREPARED BY
   RICHARD A. SHAPACK
               FOR THE
  REAL PROPERTY SECTION
  HOMEWARD BOUND SERIES
     NOVEMBER 3, 2005
THE INTERESTS DESCRIBED AND REPRESENTED BY THIS OPERATING AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT" OR
ANY APPLICABLE STATE SECURITIES LAWS ("STATE ACTS") AND ARE RESTRICTED
SECURITIES AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER THE ACT AND APPLICABLE STATE ACTS OR PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE
ACTS, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION
OF THE COMPANY.




                                  OPERATING AGREEMENT
                                                         for
                             SAMPLE FAMILY, L.L.C.,
                                a Michigan limited liability company


                                      TABLE OF CONTENTS

Article I - Organization................................................................................ 1
        1.1     Formation...............................................................................................1
        1.2     Name ......................................................................................................1
        1.3     Purposes................................................................................................1
        1.4     Duration .................................................................................................2
        1.5     Registered Office and Resident Agent ...................................................2
        1.6     Principal Place of Business ...................................................................2
        1.7     Intention for Company ...........................................................................2
        1.8     Number of Members...............................................................................2
        1.9     Definitions..............................................................................................2

Article II - Books, Records and Accounting ............................................ 5
        2.1     Books and Records................................................................................5
        2.2     Fiscal Year Accounting ..........................................................................5
        2.3     Reports ..................................................................................................5
        2.4     Member's Capital Account .....................................................................6
        2.5     Company's Designated Tax Matters Member.........................................8


Article III - Capital Contributions............................................................... 9
        3.1     Membership Interest ..............................................................................9
        3.2     Initial Contribution .................................................................................9
        3.3     Loans .....................................................................................................9
        3.4     Ownership of Company by Members ................................................... 10
        3.5     Interest on and Return of Capital Contribution .................................... 10
Operating Agreement for
Sample Family, L.L.C.


                                                           ii
Article IV - Allocations and Distributions .............................................. 10
        4.1     Definition of Net Cash Flow.................................................................. 10
        4.2     Allocation of Net Profits and Losses.................................................... 11
        4.3     Distribution of Net Cash Proceeds....................................................... 13
        4.4     Allocation of Residual Profits and Losses ........................................... 13
        4.5     Interpretation........................................................................................ 14


Article V - Disposition of Membership Interests................................... 14
        5.1     Restrictions on Transfer....................................................................... 14
        5.2     Rights of Assignee(s)........................................................................... 15
        5.3     Non-Registration .................................................................................. 16
        5.4     Right of First Refusal ........................................................................... 16
        5.5     Acquisition of Manager's Interest......................................................... 17
        5.6     Limitation upon Withdrawal of a Member............................................. 18
        5.7     Transfer Election.................................................................................. 18
        5.8     Price on Involuntary Sales ................................................................... 19
        5.9     Discounts ............................................................................................. 19
        5.10    Interest ................................................................................................. 19
        5.11    Time of Closing .................................................................................... 19


Article VI - Meetings of Members............................................................ 19
        6.1     Voting................................................................................................... 19
        6.2     No Required Meetings.......................................................................... 20
        6.3     Place of Meetings................................................................................. 20
        6.4     Notice of Meetings ............................................................................... 20
        6.5     Meeting of all Members ........................................................................ 20
        6.6     Record Date ......................................................................................... 20
        6.7     Quorum ................................................................................................ 20
        6.8     Manner of Acting.................................................................................. 21
        6.9     Proxies ................................................................................................. 21
        6.10    Action by Members Without a Meeting ................................................ 21
        6.11    Waiver of Notice ................................................................................... 21

Article VII - Management and the Rights, Powers and
      Obligations of the Manager............................................................ 22
        7.1     Management Vested With the Manager................................................ 22
        7.2     Limitations on Manager Authority........................................................ 24
        7.3     Member Activities ................................................................................ 24
        7.4     Annual Operating Plan ......................................................................... 24
        7.5     Reimbursement; Operating Expenses ................................................. 25
        7.6     Compensation...................................................................................... 25
        7.7     Transactions with Affiliates.................................................................. 25
        7.8     Other Activities Permitted .................................................................... 26
        7.9     Officers ................................................................................................ 26
        7.10    Failure to Take Action .......................................................................... 26
        7.11    Standard of Care; Liability.................................................................... 26
Operating Agreement for
Sample Family, L.L.C.


                                                           iii
        7.12    Changes in Manager ............................................................................ 26
        7.13    Removal of a Manager.......................................................................... 27
        7.14    Limitations on Liability of Members and Managers.............................. 27


Article VIII - Separateness/Operations Matters..................................... 28

Article IX - Exculpation of Liability: Indemnification........................... 29
        9.1     Exculpation of Liability......................................................................... 29
        9.2     Indemnification .................................................................................... 29


Article X: Effect of Bankruptcy, Death or Incompetency of a
      Member ............................................................................................. 30

Article XI - Dissolution and Winding Up ................................................ 30
        11.1    Dissolution ........................................................................................... 30
        11.2    Winding Up .......................................................................................... 30
        11.3    Return of Capital .................................................................................. 31


Article XII - Miscellaneous Provisions ................................................... 31
        12.1    Representations and Warranties.......................................................... 31
        12.2    Federal Income Tax Elections .............................................................. 32
        12.3    Consent of Member.............................................................................. 32
        12.4    Further Execution................................................................................. 32
        12.5    Opportunity for Independent Representation, Separate Counsel
                and Conflicts of Interest ....................................................................... 33
        12.6    Fees to Prevailing Parties .................................................................... 33
        12.7    Waiver of Partition................................................................................ 33
        12.8    Jurisdiction and Choice of Law............................................................ 33
        12.9    Notices ................................................................................................. 34
        12.10   Binding Effect ...................................................................................... 34
        12.11   Alternate Dispute Resolution / Arbitration............................................ 34
        12.12   Words - Gender and Number ............................................................... 35
        12.13   Article Headings................................................................................... 35
        12.14   Severability .......................................................................................... 35
        12.15   Counterparts ........................................................................................ 35
        12.16   Confidentiality ...................................................................................... 35
        12.17   Power of Attorney ................................................................................ 36
        12.18   Estoppel Certificate.............................................................................. 36
        12.19   No Third Party Rights ........................................................................... 37
        12.20   Rule Against Perpetuities..................................................................... 37
        12.21   Waivers, Defaults, and Joint Exercise of Rights .................................. 37
        12.22   Amendments........................................................................................ 37
        12.23   Entire Agreement ................................................................................. 37

Operating Agreement for
Sample Family, L.L.C.


                                                           iv
             This Operating Agreement (the "Agreement") is made and entered into
effective the ______ day of October, 2005 by and among the Members, as set forth in
Section 3.1 below (each referred to individually as a "Member" and collectively as the
"Members"), and the JOHN DOE TRUST (the "Manager") who agree as follows:


                                    Article I - Organization

       1.1    Formation. The Company is organized as a Michigan limited liability
company under and pursuant to the Michigan Limited Liability Company Act, being Act No.
23, Public Acts of 1993, as amended by Act No. 52, Public Acts of 1997 and further
amended by Act No. 686, Public Acts of 2002 (the "Act"), by the filing of Articles of
Organization (the "Articles") with the Department of Labor and Economic Growth of the
State of Michigan on _____________, as required by the Act.

     1.2  Name. The name of the Company shall be SAMPLE FAMILY, L.L.C. The
Company may also conduct its business under one or more assumed names.

        1.3     Purposes.        The Company's business and purposes shall consist of:

               (i)    to own and operate some of the various commercial real estate and
        real estate entity interests presently owned directly or indirectly by John Q. Doe
        and/or Jane X. Doe; and

                (ii) to maintain a portion of the family’s commercial real estate interests
        in this one entity based on the premise that all members will benefit from the
        synergy of the collective size and power of the entity; and

                (iii)     to consolidate certain fragmented family interests; and

              (iv)  to continue to operate such properties in the manner in which they
        have been managed heretofore; and

              (v)    to continue the growth of the Company through acquisitions and
        development; and

              (vi)  to prepare and provide for the future participation in such ownership
        and management either directly or through trusts for the children and other lineal
        descendants of the initial parties; and



Operating Agreement for
Sample Family, L.L.C.

                                                  1
               (vii) to continue the charitable gifting program of the initial parties on behalf
        of such parties; and

              (viii) to engage in such other lawful activities permitted to limited liability
        companies by the laws of the State of Michigan as are incidental, necessary or
        appropriate to the foregoing.

        1.4     Duration. The Company shall continue in existence for the period fixed in
the Articles for the duration of the Company or until the Company shall be sooner dissolved
and its affairs wound up in accordance with the Act or this Agreement.

       1.5    Registered Office and Resident Agent. The registered office and resident
agent of the Company shall be as designated in the initial Articles or any amendment
thereof. The registered office and/or resident agent may be changed from time to time.
Any such change shall be made in accordance with the Act and its Agreement. If the
resident agent resigns or is unable to act, the Company shall promptly appoint a
successor.

       1.6    Principal Place of Business. The principal place of business shall be
________________________, ____________, Michigan 483___, or such other place or
places as the Manager may designate from time to time.

       1.7    Intention for Company. The Members specifically intend and agree that the
Company not be a partnership (including a limited partnership) except for tax purposes or
any other venture but a limited liability company under and pursuant to the Act. No
Member shall be construed to be a partner in the Company or a partner of any other
Member, or person, and the Articles, this Agreement and the relationships created thereby
and arising therefrom shall not be construed to suggest otherwise.

       1.8   Number of Members. This Agreement contemplates ___________ (___)
Members and the parties acknowledge that this Agreement will require amendment in the
event the Company should have a different number of Members.

        1.9      Definitions.

              a) “Affiliate” means (i) any entity which, directly or indirectly, is controlled by
                 any Member or Manager or in which any Member or Manager has a
                 material financial interest, (ii) any individual related by blood or marriage to
                 any Member or Manager and (iii) any trust or other entity created for the
                 benefit of any persons named in clauses (i) or (ii) hereof.




Operating Agreement for
Sample Family, L.L.C.

                                                 2
            b) "Agreed Value of Contributed Property" shall be as defined in Section 2.4(a)
               below.

            c) "Assignor" and “Assignee” shall be as defined in Section 5.1 below.

            d) "Capital Account" shall be as defined in Section 2.4 below.

            e) "Capital Contributions" shall be as defined in Section 2.4(a) below.

            f) "Carrying Value" shall be as defined in Section 2.4(c)(1) below.

            g) “Code” means the Internal Revenue Code of 1986, as amended.

            h) "Company" shall mean "SAMPLE FAMILY, L.L.C.," a Michigan limited
               liability company.

            i) “Company Minimum Gain” has the same meaning as that term in Section
               1.704-2(b)(2), (d) of the Regulations.

            j) “Company Nonrecourse Deductions” has the same meaning as that term
               in Section 1.704-2(b)(1) of the Regulations.

            k) "Company Property" and “Company Properties” shall be the assets of the
               Company as referred to in Section 2.4(d)(1) below.

            l) "Contributed Property" shall be as defined in Section 2.4(d)(1) below.

            m) "Disposition of a Membership Interest" shall be as defined in Section 5.1
               below.

            n) “Family” shall, as set forth in Sections 5.1 and 5.4 below, be the spouse and
               lineal descendants of (i) a Member or (ii) the grantor of a trust or controlling
               individual of a family entity which is a Member.

            o) "Fiscal Year" shall be the calendar year.

            p) "Majority in Interest" - for the purposes of voting on Company action, Majority
               in Interest shall mean Members owning more than fifty (50%) percent of the
               profit and loss interest and more than fifty (50%) percent of the capital
               interest in the Company.




Operating Agreement for
Sample Family, L.L.C.

                                               3
            q) "Manager" shall mean the JOHN DOE TRUST and successors as herein
               provided.

            r) "Member" and "Members" shall mean each and/or every Member individually
               and/or collectively and shall include the Manager unless otherwise provided.

            s) “Member Minimum Gain” means an amount, with respect to any Member
               Nonrecourse Debt, as determined in accordance with Section 1.704-2(i)(3) of
               the Regulations.

            t) “Member Nonrecourse Debt” has the same meaning as that term in Section
               1.704-2(b)(4) of the Regulations.

            u) Member Nonrecourse Deductions” has the same meaning as that term in
               Section 1.704-2(i)(2) of the Regulations.

            v) "Membership Interest" and Membership Unit" shall be as defined in Section
               3.1 below

            w) "Net Cash Flow" shall be as defined in Section 4.1 below.

            x) "Net Cash Proceeds" shall be as defined in Section 4.3 below.

            y) “Ordinary Course of Business” shall include the management, acquisition,
               development and sale of real property and such other actions normally taken
               in the ownership and operation of real property.

            z) “Permitted Transferee” shall be defined as an individual who is a member,
               shareholder or partner in a Member and to whom such other member(s),
               shareholder(s) or partner(s) of the Member desire to transfer all or a portion
               of such Member’s Membership Interest.

            aa) "Profits and Losses" shall be as defined in Section 4.2.1 below.

            bb) “Property” shall mean any assets contributed to or owned by the Company.

            cc) “Regulations” means the regulations issued by Treasury to the Internal
               Revenue Code of 1986, as amended.

            dd) "Residual Profits and Losses" shall be as defined in Section 4.4 below.




Operating Agreement for
Sample Family, L.L.C.

                                              4
            ee) “Super-Majority” - For Company actions which require a Super-Majority, (i)
               “seventy (70%) percent or more” shall replace “more than fifty (50%) percent”
               in Section 1.9(p) above and (ii) a "Super Majority" shall include seventy
               (70%) percent or more of the capital interests in the Company.

            ff) "Unrealized Gain" and Unrealized Loss shall be as defined in the
                Regulations under IRC Section 704 and as referred to in Section 2.4(d)(1)
                below.

            gg) “Voting Interests” shall be the Interests used to determine the Members'
                respective voting rights on certain matters as provided in this Agreement
                and shall be the Class “A” Membership Interests which are initially set
                forth in Section 3.1 below.



                    Article II - Books, Records and Accounting

       2.1    Books and Records. The Company will maintain full and accurate books
and records at the principal office of the Company or at such other location or locations
as the Manager determines from time to time, which reflect all Company transactions.
The Company will maintain at the principal office of the Company a list of the names
and last known addresses of all Members and a copy of the Articles of Organization and
amendments, corrections, and restatements to it. Except as otherwise provided in this
Agreement, each Member (but no assignee of a Member who has not been admitted as
a Member) and his or her representatives or successors in interest will, at all reasonable
times, at reasonable request, on reasonable notice, and at the expense of the Member,
have access to and the right to inspect and copy (at the Member’s expense) the books
and records.

       2.2    Fiscal Year Accounting. The Company's fiscal year shall be the calendar
year. The particular accounting methods and principles to be followed by the Company
shall be the generally accepted accounting principles applied on a consistent basis.

       2.3     Reports. The Members of the Company (discussed in greater detail below)
shall be provided reports by the Manager concerning the financial condition and results of
operation of the Company and the Capital Accounts (defined below) of the Members. On
an annual basis, by March 31st for the preceding year, Members shall be provided with
financial statements of the Company, including balance sheet, cash flow and income
statements.



Operating Agreement for
Sample Family, L.L.C.

                                              5
        2.4     Member's Capital Account. A separate capital account ("Capital Account")
for each Member shall be maintained by the Company. Each Member's Capital Account
shall reflect increases for the Member's share of any net income or gain of the Company.
Each Member's Capital Account shall also reflect decreases for distributions made to the
Member and the Member's share of any losses and deductions of the Company.

                  (a)      Maintenance. A Capital Account shall be established and maintained
        for each Member. Each Member's Capital Account (i) shall be increased by (A) the
        Member's capital contributions ("Capital Contributions") consisting of (1) the amount
        of money contributed by that Member to the Company and (2) the Agreed Value of
        Contributed Property contributed by that Member to the Company (net of liabilities
        secured by the Contributed Property that the Company is considered to assume or
        take subject to under the provisions of IRC Section 752) and (B) allocations to that
        Member of Company income and gain (or items thereof), including income and gain
        exempt from tax and income and gain described in Section 1.704-1(b)(2)(iv)(g) of
        the Regulations, but excluding income and gain described in Section
        1.704-1(b)(4)(i) of the Regulations, and (ii) shall be decreased by (A) the amount of
        money distributed to that Member by the Company, (B) the fair market value of
        property distributed to that Member by the Company (net of liabilities secured by the
        distributed property that the Member is considered to assume or take subject to
        under the provisions of IRC Section 752), (C) allocations to that Member of
        expenditures of the Company described in IRC Section 705(a)(2)(B), and (D)
        allocations of the Company's losses and deductions described in Section
        1.704-1(b)(2)(iv)(g) of the Regulations (but excluding items described in clause
        (b)(iii), above and losses or deductions described in Section 1.704-1(b)(4)(i) or
        Section 1.704-1(b)(4)(iii) of the Regulations). Except as otherwise provided in this
        Agreement, whenever it is necessary to determine the Capital Account of any
        Member for purposes of this Agreement, the Capital Account of the Member shall
        be determined after giving effect to (i) all Capital Contributions made to the
        Company on or after the date of this Agreement, (ii) all allocations of income, gain,
        deduction, and loss pursuant to Article IV entitled "Allocations and Distributions" for
        operations and transactions effected on or after the date of this Agreement and prior
        to the date such determination is required to be made under this Agreement, and
        (iii) all distributions made on or after the date of this Agreement.

                (b)     Transfers. Upon the transfer of all or a part of a Member's
        Membership Interest, the Capital Account of the transferor Member that is
        attributable to the transferred interest shall be carried over to the transferee.




Operating Agreement for
Sample Family, L.L.C.

                                               6
               (c)     Book/Tax Disparities. The realization, recognition, and classification
        of any item of income, gain, loss, or deduction for Capital Account purposes shall be
        the same as its realization, recognition, and classification for federal income tax
        purposes, provided, however, that:
                       (1)     Any deductions for depreciation, cost recovery, or amortization
               attributable to Contributed Property shall be determined as if the adjusted tax
               basis of such property on the date it was acquired by the Company was
               equal to the Agreed Value of such property. Upon adjustment pursuant to
               this subsection of the Carrying Value of the Company Property (defined in
               subsection (d) below) subject to depreciation, cost recovery, or amortization,
               any further deductions for such depreciation, cost recovery, or amortization
               shall be determined as if the adjusted tax basis of such property were equal
               to its Carrying Value immediately following such adjustment. Any deductions
               for depreciation, cost recovery, or amortization under this subparagraph shall
               be computed in accordance with Section 1.704-1(b)(2)(iv)(g)(3) of the
               Regulations.
                       (2)     Any income, gain, or loss attributable to the taxable disposition
               of any property shall be determined by the Company as if the adjusted tax
               basis of such property as of such date of disposition were equal in amount to
               the Carrying Value of such property as of such date.
                       (3)     All items incurred by the Company that can neither be
               deducted nor amortized under IRC Section 709 shall, for purposes of Capital
               Accounts, be treated as an item of deduction and shall be allocated among
               the Members according to Article IV entitled "Allocations and Distributions."

        (d)     Adjustment for Contribution/Distribution.

                        (1)     Upon the contribution to the Company by a new or existing
                Member of cash or Contributed Property, the Capital Accounts of all
                Members and the Carrying Values of all Company Properties immediately
                prior to such contribution shall be adjusted (consistent with the provisions
                hereof and with the Regulations under IRC Section 704) upward or
                downward to reflect any Unrealized Gain or Unrealized Loss attributable to
                each Company Property, as if such Unrealized Gain or Unrealized Loss had
                been recognized upon an actual sale of each such property immediately prior
                to such contribution and had been allocated to the Members in accordance
                with Article IV entitled "Allocations and Distributions."
                        (2)     Immediately before the actual distribution of any Company
                Property (other than cash or deemed cash) or the distribution of cash or
                deemed cash in redemption of all or a portion of a Member's Membership
                Interest, the Capital Accounts of all Members and the Carrying Value of all
                Company Property shall be adjusted (consistent with the provisions of this

Operating Agreement for
Sample Family, L.L.C.

                                               7
                Agreement and Regulations under IRC Section 704) upward or downward to
                reflect any Unrealized Gain or Unrealized Loss attributable to each item of
                Company Property, as if such Unrealized Gain or Unrealized Loss had been
                recognized upon an actual sale of each such item of Company Property
                immediately prior to such distribution and had been allocated to the Members
                at such time in accordance with Article IV entitled "Allocations and
                Distributions."

                (e)      General Requirement. In addition to the adjustments required by the
        foregoing provisions of this subsection, the Capital Accounts of the Members shall
        be adjusted in accordance with the capital account maintenance rules of Section
        1.704-1(b)(2)(iv) of the Regulations. The foregoing provisions of this subsection are
        intended to comply with Section 1.704-1(b)(2)(iv) of the Regulations and shall be
        interpreted and applied in a manner consistent with such Regulations. If the
        Manager shall determine that it is prudent to modify the manner in which the Capital
        Accounts are computed in order to comply with such Regulations, the Manager may
        make such modification, provided that such modification is not likely to have a
        material adverse effect on the amounts distributable to any Member pursuant to this
        Agreement and the Manager notifies the Members in writing of such modification
        prior to its effective date. The Manager shall have no liability to any Member for any
        failure to exercise any such discretion to make any modifications permitted under
        this subsection.

       2.5    Company's Designated Tax Matters Member. To the extent the
designation of a Tax Matters Partner (TMP) or contact for the Company's affairs is
necessary, the then acting trustee of the JOHN DOE TRUST shall be the designated
Tax Matters Member for the purposes of IRC §6231(a)(7). “Tax Matters Member” will
have the meaning as ascribed to “tax matters partner’ in the IRC. The Tax Matters
Member is authorized to perform the duties required or appropriate under the applicable
provisions of the Internal Revenue Code or any applicable tax or related statute and the
Regulations issued pursuant to it, and is responsible for representing the Company and
each of the Members before the Internal Revenue and any state or local tax authority or
any other government agency with respect to any issue related to the Company’s tax
returns or tax obligations. The Tax Matters Member will be a Member (or have an
ownership interest in a Member). If a trust is a Member, the Tax Matters Member may
be a trustee of that trust. The Tax Matters Member will keep the other Members
reasonably informed of any Company dealings with any tax authorities or other
government agencies. If the Tax Matters Member is no longer a Member, the then
Manager will designate a successor Tax Matters Member. Each Member consents to
the designation and agrees to execute, certify, acknowledge, deliver, swear to, file and
record at the appropriate public offices such documents as may be necessary or
appropriate to evidence the consent and make the appointment effective. Each

Operating Agreement for
Sample Family, L.L.C.

                                              8
Member will be bound by actions of the Member acting as the Tax Matters Member.
The Tax Matters Member and the other Members shall use their reasonable efforts to
comply with the responsibilities outlined in Sections 6221 through 6233 of the Code
(including any Regulations promulgated thereunder), and in doing so shall incur no
liability to the Company or any other Member. All out-of-pocket expenses reasonably
incurred by the Tax Matters Member in its capacity as Tax Matters Member will be
considered expenses of the Company for which the Tax Matters Member will be entitled
to full reimbursement.



                          Article III - Capital Contributions

       3.1    Membership Interest.        Initially, the interest of each Member (the
"Membership Interest") shall be based on the proportion of Units owned by each Member
divided by the total of ten thousand (10,000) [i.e., two thousand (2,000) Class “A” Voting
and eight thousand (8,000) Class “B” Non-Voting] Membership Units issued.

          JOHN DOE TRUST                                   [CLASS "A"]             1,000 UNITS
          JANE DOE TRUST                                   [CLASS "A"]             1,000 UNITS
          ABD TRUST                                        [CLASS "B"]              XXX UNITS
          BCD TRUST                                        [CLASS "B"]              XXX UNITS
          CDE TRUST                                        [CLASS "B"]              XXX UNITS
          DEF TRUST                                        [CLASS "B"]              XXX UNITS
          EFG TRUST                                        [CLASS "B"]              XXX UNITS

        3.2      Initial Contribution. Each of the Members (both Class “A” and Class “B”)
shall initially contribute ____________ ($___) Dollars in cash (or property acceptable to the
Manager) for each Membership Unit being acquired. .

        3.3    Loans. The Members may, but shall not be required to, make loans to
Company reasonably necessary for Company activities. The amount of any such loan or
advance shall not be treated as a contribution to the capital of the Company but shall be a
debt due from the Company, payable in full, together with accrued interest, prior to any
distribution thereafter to any Member. All such loans or advances shall be repayable, pro
rata, from net cash flow available from time to time and shall bear interest, until fully repaid,
at a rate equal to one (1%) percent in excess of the Prime Rate as set by National City
Bank, as such may very from time to time and upon such other terms and conditions
which are consistent with those available from well recognized domestic commercial

Operating Agreement for
Sample Family, L.L.C.

                                               9
lending institutions or such other terms and conditions mutually acceptable to all
Members. In addition to the Member loans, the Company may borrow funds from
commercial lending institutions, individuals, private firms, corporations, or other entities
on commercially reasonable terms consistent with market terms and conditions then
generally available (unless a Majority in Interest of the Members agree otherwise), and
further provided that any such lenders are non-foreign entities, foreign entities properly
qualified to do business in the United States or United States citizens.

        3.4      Ownership of Company by Members. Each Member shall have and own
an undivided interest in the Company in accordance with the terms hereof; provided,
however, that no Member shall have a specific interest in any Company property or any
right of partition with respect to any property or assets of the Company. All property owned
by the Company shall be owned by the Company as an entity and, insofar as permitted by
applicable law, no Member shall have any ownership interest in any Company property in
its individual name or right. Each Member's Membership Interest shall be personal
property for all purposes.

        3.5    Interest on and Return of Capital Contribution. No Member shall be
entitled to interest on its Capital Contribution or to the return of its Capital Contribution,
except as otherwise provided herein.



                      Article IV - Allocations and Distributions

         4.1   Definition of Net Cash Flow. As used herein, the term "Net Cash Flow" of
the Company shall mean the taxable income of the Company for federal income tax
purposes as shown on the books of the Company (excluding therefrom any net proceeds
resulting from the refinancing, sale, condemnation or other disposition of all or substantially
all of the property of the Company), adjusted for the following additions to and deductions
from the taxable income:
               4.1.1. Additions to taxable income:
                       (a)   The amount of depreciation and/or amortization, other
non-cash charges, and all accrued expenses deducted in computing such taxable income;

                      (b)    All other receipts of the Company not included in taxable
income (exclusive of Capital Contributions, the proceeds of capital loans, net cash
proceeds and similar receipts);
                      (c)    Any other funds, including accrued interest, deemed available
for distribution and designated as Net Cash Flow by the Manager, including any amounts


Operating Agreement for
Sample Family, L.L.C.

                                              10
previously set aside as reserves by the Manager that the Manager deems no longer
necessary for the operation of the Company business.

            4.1.2. Deductions from taxable income:
                    (a)    The principal payments on all Company indebtedness;
                    (b)    Expenditures for the acquisition of property and for capital
improvements or replacements (except to the extent financed by contributions of capital to
the Company or by loans to the Company for such purposes);
                    (c)    Other non-tax deductible cash expenditures of the Company
and such reserves established by the Manager, in his discretion, for the operation of the
Company business.

        4.2     Allocation of Net Profits and Losses.

               4.2.1. Except as provided below, for the purposes of Sections 702 and 704
of the Code, or the corresponding sections of any future federal internal revenue law, the
distributive shares of the items of income, gain, loss, deduction or credit (the “Profits and
Losses”) of the Members with respect to each fiscal year shall be allocated to the Members
in accordance with their respective Membership Interests.

       Notwithstanding the foregoing, the allocation of income or gain with respect to the
sale or other disposition of any contributed property shall be allocated in accordance with
Section 704(c) of the Code so as to take into account the difference between the income
tax basis of the property contributed to the Company and its fair market value at the time of
contribution. All depreciation and amortization attributable to such contributed property or
properties shall be allocated among the Members pursuant to the “traditional” method as
provided in Section 1.704-3(b) of the Regulations. If the value of Company property is later
revalued by the Company pursuant to an election as provided in Section 1.704-
1(b)(2)(iv)(f), subsequent allocations of income, gain, loss, or deduction with respect to
such property shall be made in accordance with said "traditional" method.

              4.2.2. The allocation of the distributive shares of the items of Profits and
Losses of the Company with respect to each fiscal year of the Company shall be made on
the last day of such fiscal year. To the extent that the foregoing allocation date is
inconsistent with the Code or any other applicable law, the allocation of said items shall be
made so as to be consistent with all applicable laws.

               4.2.3 If any Member unexpectedly receives any adjustments, allocations, or
distributions described in subparagraphs (4), (5), or (6) of Section 1.704-1(b)(2)(ii)(d) of the
Regulations, then items of income and gain shall be specially allocated to the Member
("qualified income offset") in an amount and manner sufficient to eliminate as quickly as
possible, to the extent required by the Regulations, any deficit in a Member's capital

Operating Agreement for
Sample Family, L.L.C.

                                              11
account caused by the unexpected adjustment, allocation, or distribution, but only to the
extent that the Member does not otherwise have an obligation to restore the Member's
capital account deficit. This subsection is intended to satisfy the provisions of Section
1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith.

              4.2.4 In the event that there is a net decrease in the Company's "minimum
gain" for any taxable year of the Company, each Member with a deficit capital account
balance at the end of such year shall be allocated, before any other allocation is made
under Code Section 704(b), items of income and gain for such year (and, if necessary,
subsequent years), in the amount and in the proportions needed to eliminate such deficit
as quickly as possible, to the extent of such Member's share of the net decrease in the
minimum gain. In applying the provisions of this Section, a Member's capital account
balance shall be adjusted, and items of income and gain shall be allocated, and the
minimum gain and a Member's share thereof shall be calculated, in the manner provided in
subparagraphs (4)(iv)(e) and (f) of the Section 704(b) Regulations.

              4.2.5 To the extent and in the manner required by Section 1.704-2(i)(4) of
the Regulations, if there is a net decrease in Member Minimum Gain, each Member with
a share of Member Minimum Gain shall be allocated items of Company income and
gain for such fiscal year (and, if necessary, succeeding fiscal years) in an amount equal
to such Member's share of the net decrease in Member Minimum Gain. The items to be
allocated shall be determined in accordance with Section 1.704-2(f)(6) of the
Regulations. This Subsection 4.2.5 shall be interpreted and applied in a manner
consistent with the minimum-gain chargeback requirement of Section 1.704-2(i)(4) of
the Regulations.

            4.2.6 Any Company Nonrecourse Deductions shall be allocated among
the Members in accordance with Section 1.704-2(e) of the Regulations.

              4.2.7 Member Nonrecourse Deductions shall be allocated to the
Members who bear the economic risk of loss with respect to the Member Nonrecourse
Debt to which Member Nonrecourse Deductions are attributable. This Subsection 4.2.7
shall be interpreted and applied in a manner consistent with Section 1.704-2(i)(1) of the
Regulations.

              4.2.8 A new Member shall not be entitled to any retroactive allocation of
losses, income or expense deductions incurred by the Company. In accordance with
the provisions of Section 706(d) of the Code and the Regulations promulgated
thereunder, the Manager may, at its option, at the time a Member is admitted, close the
Company books (as though the Company's Fiscal Year had ended) or make pro rata
allocations of loss, income and expense deductions to a new Member for that portion of
the Company's Fiscal Year in which a Member actually owned its interest.

Operating Agreement for
Sample Family, L.L.C.

                                           12
        4.3     Distribution of Net Cash Proceeds. Distributions may be made only after
the Manager determines, in its reasonable judgment, that the Company has sufficient cash
on hand which exceeds the current and the anticipated needs of the Company to fill its
business purposes (including needs for operating expenses, debt service, acquisitions,
reserves and mandatory distributions, if any). Distributions shall be in cash or property or
partially in both. No distribution shall be declared or made if, after giving it effect, the
Company would not be able to pay its debts as they become due in the usual course of
business or the Company's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the Company were to be dissolved at the time of
the distribution, to satisfy the preferential rights of the Members upon dissolution that are
superior to the rights of the Members receiving the distribution. The Manager shall
distribute among the Members, in accordance with Section 4.1 above, the Net Cash Flow
resulting from the financing of any mortgage on, or the sale, exchange, condemnation (or
similar eminent domain taking), casualty or other disposition of all, or substantially all of the
property of the Company ("Net Cash Proceeds"), in the following order of priority (which
shall reflect the allocations in Section 4.2.1 above):

              4.3.1 First, to the payment of all debts and liabilities of the Company
(except the debts creating the proceeds resulting from financing);

               4.3.2 Second, to a reserve fund in an amount which the Manager deems
necessary to provide for any contingent or unforeseen liabilities of the Company; provided,
however, that at the expiration of such reasonable period of time as the Manager deems
advisable, the balance of such reserve fund established herein remaining after the
payment of any such contingency or liability shall be distributed in the manner provided in
Section 4.3.3.

             4.3.3 Third, to a reserve fund in an amount which the Manager deems
necessary to provide for future investment(s) by the Company.

                4.3.4 Fourth, the balance to the Members pursuant to their Membership
Interests.

       4.4    Allocation of Residual Profits and Losses. The profits and losses of the
Company arising from the sale or other disposition of assets of the Company ("Residual
Profits and Losses") shall be allocated to the Members pursuant to their respective
Membership Interests. Notwithstanding the foregoing, the allocation of income or profits
with respect to the sale or other disposition of any Contributed Property shall be allocated
in accordance with Section 704(c) of the Code so as to take into account the difference
between the income tax basis of the property contributed to the Company and its fair
market value at the time of contribution.

Operating Agreement for
Sample Family, L.L.C.

                                               13
        4.5    Interpretation.     The Members intend that the allocations of the
Company's Profits and Losses shall be applied in a manner consistent with IRC Section
704 and the Treasury Regulations promulgated thereunder. Furthermore, the provisions
of this Article IV shall be interpreted in a manner consistent with IRC Section 704 and
the Treasury Regulations promulgated thereunder.



                 Article V - Disposition of Membership Interests

        5.1    Restrictions on Transfer. Every sale, assignment, transfer, exchange,
mortgage, pledge, grant, encumbrance, hypothecation or other disposition ("Disposition")
of a Membership Interest shall be made only in accordance with this Article. Any
attempted Disposition of a Membership Interest in violation of this Article is void. The
above restrictions shall specifically not apply to any disposition of a Membership Interest to,
a shareholder or member of a Member, a member of the Family of a Member or such
shareholder, a limited liability company or similar entity controlled by a Member or a trust
for the benefit of Family member(s); provided, however, that the assignee of that transfer
shall be subject to the same restrictions as set forth in this Article. Neither the Company
nor any Member of the Company shall be obligated to acknowledge such attempted
Disposition or give any legal effect to the Disposition except that the attempted disposition
shall suspend the voting rights of the transferring Member (the "Assignor") unless the
Assignor is readmitted as a Member in accordance with this Article. The transferee (the
"Assignee") shall not have voting rights unless admitted as a Member by the Company.
No Disposition will be permitted unless prior written notice is provided to the Company.
Any Member who, voluntarily or involuntarily, transfers its entire membership interest or the
entire financial portion of its membership interest shall no longer be a Member (and shall
thereafter have no Member rights whatsoever). In order for Membership Interest to be
transferred, the Assignor must:

                (a)       Obtain an opinion from legal counsel for the Company stating (i) that
                          the Disposition will not cause a termination of the Company under the
                          Act and/or the Internal Revenue Code of 1986, as amended; and (ii)
                          the Disposition will not violate any applicable state and federal
                          securities laws and regulations;

                (b)       Require that the Assignee of the Membership Interest provide the
                          Company with all relevant information requested by the Company
                          and, if the Assignee is to be admitted as a Member, the Assignee
                          must agree to become a party to and execute this Operating

Operating Agreement for
Sample Family, L.L.C.

                                                14
                          Agreement and all other agreements as the Members may require in
                          connection with the transfer; and

                (c)       If the transfer is to a trust for the benefit of the transferring Member,
                          the trustee grants to the Member an irrevocable proxy coupled with an
                          interest to vote the transferred Member Interest on any matter
                          presented for vote or consent by the Company;

                (d)       If Member status has been requested, obtain the prior written consent
                          of a Super-Majority of the Members; and

                (e)       If Member status has been requested, pay or reimburse the Company
                          for the legal and other costs of effecting admission as a Member and
                          the Assignee shall provide a written agreement assuming all
                          obligations of the Assignor to make contributions and to return
                          distributions.

If each and every condition and requirement set forth in this Section is met, the Assignee
shall be admitted as a substitute Member in the Company and, as they relate to the
Membership Interest transferred, shall be entitled to all the rights and powers of the
Assignor at the time of transfer and shall be subject to all of the restrictions and liabilities of
the Assignor. Until all the terms and conditions set forth in this Section are met, the
Assignee shall not be a Member and shall instead remain an Assignee of the Membership
Interest with the right only to receive allocations and distributions to which the former
Member/Assignor would have been entitled. In any event, the Assignee's recourse is only
against the Assignor member, not the Company or the other Members. The Company
shall have no fiduciary duty to the Assignee unless and until the Assignee is admitted as a
Member.

        5.2     Rights of Assignee(s).

               a.    Voluntary Transfer.       Except as specifically provided for in this
Agreement, an Assignee who has not been admitted as a Member has no rights
whatsoever under this Agreement, except to the extent of the right to profits, losses and
distributions so assigned. However, the provisions of this Agreement with respect to the
interest acquired by the Assignee, including any remedies available to the Company or
the other Members by reason of any default by the Assignor in performing the
Assignor’s obligations under this Agreement, will continue to be effective despite the
Assignment. No Assignment of any interest in the Company will be effective in any
manner with respect to the Company until the Manager receives written notice of the
Assignment.



Operating Agreement for
Sample Family, L.L.C.

                                                  15
              b.      Death, Dissolution or Incompetency of Member. In the event of
the death, dissolution or incompetency of a Member, the receiver, other successor in
interest, personal representative or heirs of the Member, as the case may be, to the
extent of the deceased, dissolved, or incompetent Member’s interest, will have such
Member’s rights in the capital, profits, and losses, and such Member’s responsibilities
regarding all of the obligations and liabilities as a Member, subject to and in accordance
with the terms and conditions of this Agreement, and may be admitted to the Company
as a Member in accordance with the terms and conditions of this Agreement, unless
otherwise prohibited by its terms, upon the signing and delivery of transfer and
assignment documents in form and substance satisfactory to the Manager.

              c.    Transfer Resulting from Bankruptcy, Attachment or Judicial
Order. In the event of a transfer of a Membership Interest because of attachment,
bankruptcy or judicial order, the transferee with respect to that interest, regardless of
whether such interest had been a Member or Assignee interest, will have the status of
an Assignee. The Assignee will not succeed to any right to participate in the
management of the Company, to acquire any information regarding or accounting of
any Company transaction, to inspect the Company books or records, to share in the use
or occupancy of Company property or to vote on or consent to any of the matters on
which a Member would otherwise be entitled to vote or consent. The Assignee will be
entitled only to receive the share of profits, losses, and distributions to which the
predecessor in interest would otherwise have been entitled.

       5.3     Non-Registration. The Members acknowledge that their Membership
Interests have not been registered under any state or federal securities laws or regulations
and agree that such interests will not be transferred without registration under such laws or
regulations or exemption therefrom.

        5.4     Right of First Refusal.

              (a) If at any time a Member, or a shareholder, member or partner of a
Member, enters into an agreement with any person, pursuant to which any portion of such
Member's Membership Interest is to be assigned, and such proposed assignment would
result in the assigning Member, or a shareholder, member or partner of such Member,
assigning to any one or more parties any portion of such Member's interest in the
Company, the assigning Member shall send or cause such shareholder, member or
partner of a Member to send to the Manager and to each of the other Members a copy of
any such agreement (which shall include a statement of any and all consideration being
paid in connection with, and all other material terms of the proposed assignment) and the
Manager first and then the other Members (to the extent that the Manager does not so
elect) shall have the right, exercisable by written notice, to purchase the Membership
Interest to be assigned on the same terms and conditions set forth in said agreement;

Operating Agreement for
Sample Family, L.L.C.

                                             16
provided, however, (i) if such transfer is to (a) a member of a Member's Family, (b) a trust
for such individual(s) or the Member, (c) a Family entity controlled by such Member, or (d)
a Permitted Transferee, the provisions of this Section shall not be effective, (ii) if more than
one Member timely exercises such right of first refusal, the Members that have so
exercised such right shall be entitled to purchase the Membership Interest(s) to be
assigned in proportion to their Membership Interests as of the date of the proposed
assignment, and (iii) if there is any non-cash consideration to be given in connection with
the proposed assignment, the Member or Members that timely exercise such right of first
refusal shall pay the assigning Member, in lieu of such non-cash consideration, an amount
equal to the fair market value of such non-cash consideration. Any dispute as to such
value shall be determined by arbitration as set forth hereinafter. If the Company incurs any
costs or expenses including legal fees in assisting or opposing a contemplated transfer, the
Company must be paid expenses as a condition of the completion of the transfer.

              (b)     Each Member shall send all of the Members written notice of any
proposed assignment prior to the date the same is to consummate. In order to effectuate
any permitted assignment of a Membership Interest, the assigning Member shall require
any such assignee to accept and assume in writing all of the applicable terms of this
Agreement and the assigning Member shall send such acceptance and assumption,
together with a written notice of the assignment, promptly after consummation of the same.
 The remaining Members may, but shall not be obligated to, join with the assigning
Member and any such assignee in the execution of an amendment to this Agreement
admitting such assignee as a Member and, if only a portion of the assigning Member's
Membership Interest is being assigned, modifying such terms hereof as are reasonably
necessary to allocated, between the assigning Member and such assignee, such of the
assigning Member's rights and obligations hereunder as the assigning Member wishes to
allocate.

               (c)     The Manager shall have ten (10) business days after its actual receipt
of all of the above required documentation to make its election, in writing, to the selling
Member. In the event that the Manager either provides written notice that it declines to
exercise such election or does not timely exercise the election, then each of the Members
shall have ten (10) business days thereafter to provide written notice of his, her or its
election. However, in the event that the selling Member failed to provide all of the above
required documentation to any Member, that Member shall have a minimum of ten (10)
business days thereafter to provide written notice of his, her or its election. The election of
each Member shall expire if such right of first refusal is not timely exercised by a writing
delivered to the selling Member.

       5.5   Acquisition of Manager's Interest. Unless otherwise provided in writing
and signed by the Manager, any person who acquires the membership interest or a portion
of the membership interest of a Manager shall not become a Manager.

Operating Agreement for
Sample Family, L.L.C.

                                              17
        5.6    Limitation upon Withdrawal of a Member. A Member may withdraw as a
Member as permitted in MCL §450.4305. A withdrawing Member has no right to a
distribution for the fair value of the Member's interest in the Company at the date of
withdrawal unless the Members owning a Super-Majority of the Membership Interests
agree to make a distribution at any date or no date determined by such Super-Majority of
the Members in their sole and arbitrary discretion. Unless otherwise transferred by the
Member or former Member, a withdrawing Member shall continue to receive allocations
and distributions in the same proportion as if the withdrawing Member was still a Member.

               Following a withdrawal, the withdrawing Member shall have no voting rights
and no right to participate in the management of the Company as it relates to that portion of
the Membership Interest to which the Member has withdrawn.

                If it is agreed that the withdrawing Member shall receive a distribution, the
fair value of the Membership Interest shall be mutually agreed upon as of the date that the
withdrawal occurred. In the event the Company and the withdrawing Member cannot
agree upon the fair value of the withdrawing Member's interest at that date, the fair value
shall be determined as follows:

               Unless the Manager and the withdrawing Member agree on a sole appraiser,
both the Company and the withdrawing Member shall each appoint independent appraiser
of its/his own choosing, and those two appraisers shall then hire a third appraiser. If the
three appraisers are unable to agree on the value of the Company, the two closest
appraised values determined by the appraisers shall be averaged, and the value so
determined shall be binding and conclusive on the withdrawing Member, the Company and
all other third parties. The fair value of the withdrawing Member’s interest shall be the
value of the Company as multiplied by the Membership Interest of the withdrawing
Member. The cost of all appraisal work shall be borne by the respective parties. Each
appraiser shall be a Michigan licensed appraiser with the MAI designation and shall employ
the generally accepted methodology for determining the valuation of businesses of a
similar type to the Company.

       5.7     Transfer Election. In the case of the transfer of a Member's interest in the
Company to another individual or entity that becomes a Member pursuant to any of the
provisions hereof, the Company shall, if requested in writing by such transferee Member
within sixty (60) days of such transfer (provided such Member agrees in writing to pay all
present and future additional accounting expenses generated by such election), file the
election specified by Section 754 of the Code, as amended, or any corresponding section
of any future federal Internal Revenue law.




Operating Agreement for
Sample Family, L.L.C.

                                             18
        5.8    Price on Involuntary Sales. The price and payment provisions of this
Article shall also apply to any court ordered or other involuntary sale or transfer of Units
regardless of the reason for such order.

       5.9    Discounts. The purchase price for a sale pursuant to Section 5.8 above
shall be computed and include a valuation discount (e.g., minority interest, lack of
marketability and/or blockage) as determined by the appraiser(s)

       5.10 Interest. Interest shall accrue on the purchase price at six (6%) percent
per annum from the Valuation Date to closing. Interest accrued through the date of
closing shall be paid at closing.

       5.11 Time of Closing. The closing of a sale under this Article shall take place
at the principal office of the Company at a date and time designated by the Manager,
but such date shall be not later than one hundred twenty (120) days following the date
that the Manager or other Member(s) elect to acquire such Unit(s), unless all interested
persons otherwise agree. Notice of the date and time of the closing shall be given by
the Manager to all interested parties. If the Manager does not give such notice within
seven (7) days of a written request for such notice, the seller shall establish and give
notice of the date, time and place of closing. A failure to give prompt notice of closing
shall not affect the right of a party to require a sale within a reasonable time after notice
is given.



                             Article VI - Meetings of Members

       6.1    Voting. Each Voting Member shall be entitled to vote on any matter
submitted to a vote of the Members. Each Voting Unit shall have one vote. Notwithstand-
ing the foregoing, the Members shall have the right to vote on all of the following:

                (a)       The dissolution of the Company pursuant to Section 11.1(b) of this
                          Agreement;

                (b)       A transaction involving an actual or potential conflict of interest
                          between a Member and the Company;

                (c)       An amendment to the Articles of Organization and/or this Agreement;

                (d)       Admission of new Members;


Operating Agreement for
Sample Family, L.L.C.

                                                19
                (e)       Any other proposed Company activity outside of the ordinary course
                          of business, including merger or sale of substantially all the assets.

      6.2     No Required Meetings. The Members may, but shall not be required to
hold any annual, periodic or other formal meetings. However, meetings of the Members
may be called by the Manager or by any Member or Members holding at least ten (10%)
percent of the Voting Interests.

       6.3   Place of Meetings. The Member or Members calling the meeting may
designate any place within the State as the place of meeting for any meeting of the
Members. If no designation is made, or if a special meeting be otherwise called, the
place of meeting shall be the principal executive office of the Company in the State.

        6.4   Notice of Meetings. Except as provided in Sections 6.5 and 6.10, written
notice stating the place, day and hour of the meeting and the purpose or purposes for
which the meeting is called shall be delivered not less than ten (10) nor more than fifty
(50) days before the date of the meeting, either personally or by mail, by or at the
direction of the Manager or the Member or Members calling the meeting, to each
Member entitled to vote at such meeting.

       6.5    Meeting of all Members. If all of the Members shall meet at any time and
place, either within or outside of the State, and consent to the holding of a meeting at
such time and place, such meeting shall be valid without call or notice, and at such
meeting lawful action may be taken.

        6.6    Record Date. For the purpose of determining Members entitled to notice
of or to vote at any meeting of Members or any adjournment thereof, or Members
entitled to receive payment of any Distribution, or in order to make a determination of
Members for any other purpose, the date on which notice of the meeting is mailed or the
date on which the resolution declaring such Distribution is adopted, as the case may be,
shall be the record date for such determination of Members. When a determination of
Members entitled to vote at any meeting of Members has been made as provided in this
Section, such determination shall apply to any adjournment thereof.

       6.7     Quorum. Members holding at least a Super Majority Interest, represented
in person or by proxy, shall constitute a quorum at any meeting of Members. In the
absence of a quorum at any such meeting, a majority of the Voting Interests so
represented may adjourn the meeting from time to time for a period not to exceed sixty
(60) days without further notice. However, if the adjournment is for more than sixty (60)
days, or if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each Member of record entitled to vote
at the meeting. At such adjourned meeting at which a quorum shall be present or

Operating Agreement for
Sample Family, L.L.C.

                                                 20
represented, any business may be transacted which might have been transacted at the
meeting as originally noticed. The Members present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal during
such meeting of that number of Voting Interests whose absence would cause less than
a quorum.

       6.8     Manner of Acting. If a quorum is present, the affirmative vote of
Members holding a Majority Interest shall be the act of the Members, unless the vote of
a greater or lesser proportion or number is otherwise required by the Act, by the Articles
of Organization, or by this Agreement. Unless otherwise expressly provided herein,
Members who have an interest (economic or otherwise) in the outcome of any particular
matter upon which the Members vote or consent may vote or consent upon any such
matter and their Voting Interest, vote or consent, as the case may be, shall be counted
to determine whether the requisite matter is approved by the Members.

       6.9     Proxies. At all meetings of Members, a Member who is qualified to vote
may vote in person or by proxy executed in writing by the Member or by a duly
authorized attorney-in-fact. Such proxy shall be filed with the Manager before or at the
time of the meeting. No proxy shall be valid after eleven (11) months from the date of
its execution, unless otherwise provided in the proxy.

       6.10 Action by Members Without a Meeting. Action required or permitted to
be taken at a meeting of Members may be taken without a meeting if the action is
evidenced by one or more written consents or approvals describing the action taken and
signed by Members holding sufficient Voting Interests, as the case may be, to approve
such action had such action been properly voted on at a duly called meeting of the
Members. Action taken under this Section is effective when Members with the requisite
Interests or Voting Interests, as the case may be, have signed the consent or approval,
unless the consent specifies a different effective date. The record date for determining
Members entitled to take action without a meeting shall be the date the first Member
signs a written consent.

      6.11 Waiver of Notice. When any notice is required to be given to any
Member, a waiver thereof in writing signed by the person entitled to such notice,
whether before, at, or after the time stated therein, shall be equivalent to the giving of
such notice.




Operating Agreement for
Sample Family, L.L.C.

                                           21
                Article VII - Management and the Rights, Powers
                         and Obligations of the Manager

        7.1   Management Vested With the Manager.            The business and affairs
of the Company will be managed by a Manager. The term “Manager” means the person
or persons designated by the Members to manage the Company as provided in this
Agreement and the Articles of Organization. The Manager may be one or more than
one person or entity, and may be a Member or all the Members or one or more persons
who are not Members. A reference to “the” Manager in this Agreement refers to all of
the Managers if there is more than one manager. A reference to “a” manager if there is
more than one is a reference to any one manager. The initial Manager will be the JOHN
DOE TRUST. Subject to the Section next following, limiting authority, and any
provisions of the Act, the Manager has the full and exclusive power to manage, control,
administer and operate the business and affairs of the Company, to make all decisions
affecting the Company, to act for and bind the Company, and to take such actions as
the Manager, in the Manager’s sole discretion, determines are necessary, convenient,
or advisable to carry out the purposes of the Company in compliance with the
requirements of fiduciary duty in accordance with standards of applicable law. These
powers include but are not limited to the authority to:

              a.     purchase, lease, otherwise acquire any real or personal property or
services, including from a Manager or a person or entity associated or affiliated with a
Manager and including where the acquisition will substantially reduce the liquidity of the
Company’s assets or will not generate income;

              b.     sell, grant an option for the sale of, convey, mortgage, grant a
security interest in, grant an easement or license with respect to, pledge, lease,
exchange or otherwise dispose of or encumber any real or personal property on terms
and conditions the Manager deems appropriate at the time of each transaction;

              c.    convey, transfer and place record title and other evidence and
indicia of ownership of any of the Company’s property, or any portion of it, in the name
or names of a nominee or nominees for the purpose of financing or for any other
purpose of the Company, but only if all Members are given notice of the name and
address of the nominee and the description of the asset;

              d.    select and establish bank, depositary, or investment accounts and
deposit into and withdraw funds from them on the signature of any Manager or such
other person or persons as the Manager may designate and maintain, vote and
exercise all other governing or other rights of the Company with respect to such
accounts;


Operating Agreement for
Sample Family, L.L.C.

                                           22
              e.    lend money, invest and reinvest the Company’s funds, receive and
hold property as security for repayment, as limited by Section 7.2 and Article VIII below;

             f.     pursuant to Section 3.3 above, borrow money, including from a
Member or any person or entity associated or affiliated with a Member, obtain any
means of financing, incur liabilities and approve any loan agreements or documents
evidencing debt incurred by the Company.

              g.   pursuant to Section 3.3 above, negotiate, issue, and modify
promissory notes and other debt instruments, negotiable or nonnegotiable, and security
for the indebtedness by mortgage, pledge, assignment, letter of credit, reimbursement
agreement, guaranty, or other lien on any Company property;

               h.     enter into agreements of partnership, joint venture or other
association or alliance with any person or entity engaging in any business or activity in
which the Company may engage for the ownership and operation of any such business
or activity and sharing of profits and losses or other mutual benefit;

              i.     manage, administer, conserve, improve, develop, operate, lease,
utilize and defend the Company’s property, directly or through third parties;

                j.        manage the day-to-day business and affairs of the Company;

             k.      select and engage employees and agents, including a successor
Resident Agent, attorneys, accountants, brokers, and other professional, technical,
skilled and others, including persons who may be affiliated or associated with a
Manager, define their respective duties, and establish their compensation or
remuneration, all as further set forth in Section 7.7 below;

              l.          obtain insurance covering the business and affairs of the Company
and its property;

              m.     commence, prosecute or defend any proceeding in the Company’s
name and defend and hold harmless any Members against any claim in connection with
the Company business other than a claim by another Member for breach of an
obligation under this Agreement, as limited by Section 7.2 below;

             n.     file Articles of Organization in accordance with applicable law and
execute and file any amendments to it;

             o.   incur and pay any reasonable expense(s) for travel, telephone,
insurance, taxes and such other expenses as the Manager deems necessary or
appropriate;


Operating Agreement for
Sample Family, L.L.C.

                                               23
             p.     sign any agreements, contracts, documents, certifications,
instruments, notes, mortgages, assignments and security agreements necessary or
convenient in connection with the operation of the business of the Company; and

             q.     carry out and continue the business, affairs, and purposes of the
Company as described in this Agreement within and without the state of registration and
do such other acts as deemed appropriate to carry out other powers authorized.

        7.2     Limitations on Manager Authority. The prior written approval of a Majority
in Interest is required to:

                (a)       Dissolve or liquidate, in whole or in part;

                (b)       Consolidate or merge with or into any other entity;

                (c)       Sell, convey, transfer, assign or exchange all or substantially all of
                          the property and assets owned by the Company;

                (d)       Do any act in contravention of this Agreement which would make it
                          impossible to continue the ordinary business of the Company;

                (e)       Confess a judgment against the Company which materially impairs
                          the ability of the Company to conduct business; or

                (f)       Make any loan other in the ordinary course of the Company’s
                          business.

      7.3    Member Activities. No Member, except the Manager, shall take part in the
Management or control of the business of the Company except as provided herein. No
Member, except the Manager, shall transact any business for or in the name of the
Company or shall have the power or authority to sign for or bind the Company. Any
Member who commits an act in contravention of this section will be liable to and
indemnify the Company for and will be assessed for the costs and/or damages which
may result.

        7.4   Annual Operating Plan. At the written request of a Majority in Interest of
the Members, the Manager shall prepare, for the approval of the Members in each fiscal
year, a business plan ("Annual Operating Plan") for the next fiscal year, setting forth, at a
minimum, the estimated receipts (including capital calls) and the expenditures (capital,
operating and other) of the Company in sufficient detail to provide an estimate of cash flow,
capital proceeds and other financial requirements of the Company for such year. Any such
Annual Operating Plan shall also include such other information or other matters necessary


Operating Agreement for
Sample Family, L.L.C.

                                                  24
in order to inform the Members of the Company's business and to enable the Members to
make an informed decision with respect to their approval of such Annual Operating Plan.
The Members shall review the proposed Operating Plan and shall offer any revisions
thereto within fifteen (15) days. After the final Operating Plan has been approved by the
Members, the Manager shall implement the Annual Operating Plan and shall be authorized
to make only the expenditures and incur only the obligations provided for therein (subject to
Section 7.1). Notwithstanding the foregoing, the Manager may make any expenditure or
incur any obligation, whether or not such expenditure or obligation is set forth in an Annual
Operating Plan, which is the legal obligation of the Company and not within the reasonable
control of the Manager (e.g., payment of real or personal property taxes). If the Members
are not able to agree on an Annual Operating Plan for any year, each line item in the
Annual Operating Plan for the prior year shall be increased by the percentage increase in
the CPI Index from the first day for which the previous Annual Operating Plan was in effect
to the first day for which the new Annual Operating Plan is to be in effect. As used herein,
"CPI Index" shall mean the Consumer Price Index for All Items All Urban Consumers (CPI-
U) (1982-84 = 100) for Detroit, Michigan, as published by the United States Department of
Labor's Bureau of Labor Statistics (the "Bureau"). Should the Bureau discontinue the
publication of the above index, or publish the index less frequently, or alter the index in
some other manner, then the Manager shall, from time to time, adopt a substitute index or
substitute procedure which reasonably reflects and monitors consumer prices and the
resulting plan shall be the Annual Operating Plan for the current year.

        7.5    Reimbursement; Operating Expenses. The Company will reimburse
the Manager for all reasonable expenses incurred by the Manager in organizing,
managing and conducting the Company’s business, including but not limited to
overhead, legal and accounting fees and costs, expenses related to telephones, travel,
office equipment, miscellaneous office administration, and secretarial and other
personnel as may reasonably be attributable to the Company, repair, maintenance,
broker, other professional and technical expenses, and for defending the Company, its
assets or its Members from suit, audit, or other liability created by virtue of the Company
or its operations. The Company may also reimburse any Member who is not a Manager
for all similar necessary costs and expenses. All reimbursements will be expenses of
the Company and will not constitute distributions to any Member of profit, loss or capital
of the Company.

       7.6      Compensation. The Members shall not receive compensation for personal
services.

       7.7    Transactions with Affiliates. The Manager shall have the authority to enter
into any transaction with, or to hire, employ or contract with, any individual, partnership,
corporation, or entity that is an Affiliate of the Manager if the terms or conditions of any
agreement, contract, or understanding entered into between the Company and an Affiliate


Operating Agreement for
Sample Family, L.L.C.

                                             25
of the Manager are commercially reasonable at the time of execution of the agreement,
contract or understanding.

       7.8    Other Activities Permitted. The Manager shall devote to the Company's
business all time necessary for the proper performance of its duties as Manager. The
Manager and any Affiliates of the Manager may engage in any other business, investment,
or profession, including the investment in, ownership of, or operation of business activities,
whether or not in direct or indirect competition with the Company. The Company and the
Members shall have no rights in or to any of these businesses, professions, or
investments, or in or to any income or profit derived from them.

       7.9    Officers. Subject to the direction of and appointment by the Manager, the
day to day administration of the business of the Company shall be performed by
employees and/or agents who may be designated as officers, with titles including but
not limited to "Chairman", "President", "Vice President", "Treasurer", "Secretary",
"General Manager" "Managing Director", "Principal", or "Director". The officers of the
Company shall have such titles and powers and shall perform such duties as shall be
determined, from time to time, by such Members and otherwise, as shall customarily
pertain to such offices or be determined, from time to time. Any number of offices may
be held by the same person.

         7.10 Failure to Take Action. The Manager shall not be liable to the Members for
its failure to take any action on behalf of the Company, including, but not limited to, any
action that may prevent the foreclosure of all or any portion of the assets of the Company
due to the Company's lack of sufficient funds, provided the Manager gives the Members
prior notice that the Members may, but shall not be obligated to, contribute sufficient funds
if they then desire that the action be taken. Moreover, in the event that after the notice is
given, the funds are not contributed to the Company by the Members, the Manager shall
have the power, but shall not be obligated (a) to sell all or any portion of the assets of the
Company in order to raise the funds or (b) to cause the dissolution of the Company or the
abandonment of any of the assets of the Company.

        7.11 Standard of Care; Liability. The Manager shall discharge its duties in
managing the Company in good faith, with the care an ordinarily prudent person in a like
position would exercise under similar circumstances, and in a manner reasonably believed
to be in the best interests of the Company.

        7.12    Changes in Manager.

             (a)   If a Manager is removed as set forth in Section 7.13(a) below or if the
Manager is or becomes unwilling or unable to continue performing the duties of a Manager,
then the management of the Company shall be vested in the Members in proportion to the

Operating Agreement for
Sample Family, L.L.C.

                                             26
Membership Interest of the Members, with the decision of Members then owning a Majority
in Interest controlling. In the event the Company becomes managed by the Members, a
Majority in Interest may select a new Manager or Managers.

               (b)    A Manager may resign as Manager upon providing thirty (30) days
written notice to the Members of its intention to resign; provided, however, that if such
Manager is a Member, its resignation as a Manager shall not effect its status as a Member.
               (c)    If at any time there is more than one Manager, and there is a
withdrawal event with respect to any Manager, the remaining Manager(s) will continue to
manage the business and affairs of the Company in accordance with the provisions of this
Agreement and there shall be no need to fill the vacancy of said Manager.
               (d)    As soon as practicable following the termination of the Manager, the
Company shall arrange for the redemption and/or sale of the Manager’s Class “M” interests
to a new Manager and/or to the Company. The provisions of Section 5.6 shall apply to the
valuation of such interests.

        7.13    Removal of a Manager.

              (a)    A Manager may only be removed for cause (e.g., gross negligence or
willful misconduct) and then such removal shall require a vote of for such removal by
Members then holding a Super-Majority of the Membership Interests of the Company.

             (b)   The provisions of this Section shall not limit or impair the rights of any
Member to assert any remedy available at law or in equity to enforce the provisions of this
Agreement or the performance by any Member or Manager of his, her or its duties under
this Agreement.

         7.14 Limitations on Liability of Members and Managers. No Member or
Manager of the Company shall be personally liable to the Company or its other Members
for monetary damages for breach of the Member's or Manager's fiduciary duty in the
managing of the affairs of the Company. Provided, however, this Article does not eliminate
or limit the liability of a Member or Manager for any of the following:

                (a)       The receipt of a financial benefit to which the Member or Manager is
                          not entitled.

                (b)       Liability under Section 308(1) of the Limited Liability Company Act,
                          being MCL §450.4308(1).

                (c)       A knowing violation of the law.




Operating Agreement for
Sample Family, L.L.C.

                                                 27
                (d)       An act or omission occurring before the date of filing of the Articles of
                          Organization with the Department of Labor and Economic Growth.

The indemnification or advancement of expenses provided by law is not exclusive of other
rights to which a person seeking indemnification or advancement of expenses may be
entitled under the Articles of Organization of this limited liability company, this Operating
Agreement or a contractual agreement.



                  Article VIII - Separateness/Operations Matters

        The Company shall:

        (a)     maintain books and records, bank accounts and all its other assets separate
                from those of any other person or entity;

        (b)     hold regular meetings, in the sole discretion of the Manager, to conduct the
                business of the Company, and observe all customary organizational and
                operational formalities;

        (c)     hold itself out to creditors and the public as a legal entity separate and
                distinct from any other entity;

        (d)     prepare separate tax returns and financial statements, or if part of a
                consolidated group, then it will be shown as a separate member of such
                group;

        (e)     conduct business in its own name, and use separate stationery, invoices and
                checks;

        (f)     not commingle its assets or funds with those of any other person or entity;

        (g)     not assume, guarantee or pay the debts or obligations of any other person or
                entity;

        (h)     not hold out its credit as being available to satisfy the obligations of any other
                person or entity;

        (i)     not acquire the obligations or securities of its affiliates or owners, including
                members, partners or shareholders, as appropriate;

Operating Agreement for
Sample Family, L.L.C.

                                                  28
        (j)     not make loans to any other person or entity or to buy or hold evidence of
                indebtedness issued by any other person or entity (other than cash and
                investment grade securities);

        (k)     not pledge its assets for the benefit of any other person or entity other than
                the holder of the Mortgage;

        (l)     correct any known misunderstanding regarding its separate identity;

        (m)     not identify itself as a division of any other person or entity;

        (n)     maintain adequate capital in light of its contemplated business operations;
                and

        (o)     transact all business with affiliates on an arm's length basis and pursuant to
                enforceable agreements.



              Article IX - Exculpation of Liability: Indemnification

          9.1    Exculpation of Liability. Unless otherwise provided by law or expressly
assumed, a person who is a Member or Manager, or both, shall not be liable for the acts,
debts or liabilities of the Company. No Member or Manager shall be liable as such for the
liabilities of the Company. The failure of the Company, Member or Manager to observe
any formalities or requirements relating to the exercise of powers or management of the
Company's business or affairs under this Operating Agreement, the Act, or otherwise shall
not be grounds for imposing personal liability on the Members or Manager for liabilities of
the Company.

        9.2    Indemnification. Except as otherwise provided in this Article, the Company
shall indemnify the Manager or any Member and may indemnify any employee or agent of
the Company who was or is a party or is threatened to be made a party to a threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative, or
investigative, and whether formal or informal, by reason of the fact that such person is or
was a Manager, Member, employee or agent of the Company, against expenses, including
attorney fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with the action, suit or proceeding, if the
person or entity acted in good faith, with the care and ordinarily prudent person in a like
position would exercise under similar circumstances, and in a manner that such person

Operating Agreement for
Sample Family, L.L.C.

                                                 29
reasonably believed to be in the best interests of the Company and with respect to a
criminal action or proceeding, if such person had no reasonable cause to believe such
person's conduct was unlawful.




                      Article X: Effect of Bankruptcy, Death or
                             Incompetency of a Member

       The bankruptcy, death, dissolution, liquidation, termination or adjudication of
incompetency of a Member shall not cause the termination or dissolution of the Company
and the business of the Company shall continue. Upon any such occurrence, the trustee,
receiver, executor, administrator, committee, guardian or conservator of such Member
shall have all the rights of such Member for the purpose of settling or managing its estate
or property, subject to satisfying conditions precedent to the admission of such assignee as
a substitute Member. The transfer by such trustee, receiver, executor, administrator,
committee, guardian or conservator of any Membership Interest shall be subject to all of
the restrictions, hereunder to which such transfer would have been subject if such transfer
had been made by such bankrupt, deceased, dissolved, liquidated, terminated or
incompetent Member. The foregoing shall apply to the extent permitted by applicable law.



                          Article XI - Dissolution and Winding Up

      11.1 Dissolution. Upon the occurrence of any of the following events, the
Company shall be dissolved and the remaining Members or their representatives shall
wind-up the affairs of the Company. The Company shall dissolve and its affairs shall be
wound up on the first to occur of the following events:

                (a)       Upon the happening of any dissolution event specified in the Articles
                          or this Agreement;
                (b)       By the unanimous consent of the Members;
                (c)       At any time specified in the Articles or this Agreement;

        11.2 Winding Up. Upon dissolution, the Company shall cease carrying on its
business and affairs and shall commence the winding up of the Company's business and
affairs and complete the winding up as soon as practicable. Upon the winding up of the
Company, the assets of the Company shall be distributed first to creditors to the extent

Operating Agreement for
Sample Family, L.L.C.

                                                30
permitted by law, in satisfaction of Company's debts, liabilities and obligations and then to
Members and former Members, first in satisfaction of liabilities for distributions, and then
pro rata in accordance with the Members’ positive capital account balances. The proceeds
shall be paid to such Members within ninety (90) days after the date of winding up unless
otherwise provided herein.

       11.3 Return of Capital. Anything in this Agreement to the contrary notwith-
standing, no Member or Manager shall be personally liable for the return of the capital
contributions or the Capital Account of any other Member, or any portion thereof, it being
expressly understood that any such return shall be made from and solely to the extent of
the assets of the Company.



                          Article XII - Miscellaneous Provisions

        12.1 Representations and Warranties. Each Member, and in the case of an
organization, the person(s) executing the Operating Agreement on behalf of the
organization, hereby represents and warrants to the Company and each other Member
that: (a) if that Member is an organization, that it is duly organized, validly existing, and in
good standing under the law of its state of organization and that it has full power from such
organization and in its behalf to execute and agree to the Operating Agreement to perform
its obligations hereunder; (b) the Member is acquiring his or its Membership Interest in the
Company for the Member's own account as an investment and without an intent to
distribute the same or any part thereof; and (c) the Member acknowledges that the
Membership Interests have not been registered under the Securities Act of 1933 or any
state securities laws, and may not be resold or transferred by the Member without
appropriate registration or the availability of an exemption from such requirements, as
approved by the attorneys for the Company.

The undersigned Members understand (1) that the Ownership Interests evidenced by
this Agreement have not been registered under the Securities Act of 1933, the State
Securities Act or any other state securities laws (the "Securities Acts") because the
Company is issuing these Ownership Interests in reliance upon the exemptions from the
registration requirements of the Securities Acts providing for issuance of securities not
involving a public offering, (2) that the Company has relied upon the fact that the
Ownership Interests are to be held by each Member for investment, and (3) that
exemption from registrations under the Securities Acts would not be available if the
Ownership Interests were acquired by a Member with a view to Distribution.
Accordingly, each Member hereby confirms to the Company that such Member is
acquiring the Ownership Interests for such Member's own account, for investment and

Operating Agreement for
Sample Family, L.L.C.

                                              31
not with a view to the resale or distribution thereof. Each Member agrees not to transfer,
sell or offer for sale any portion of the Ownership Interests unless there is an effective
registration or other qualification relating thereto under the Securities Act of 1933 and
under any applicable state securities laws or unless the holder of Ownership Interests
delivers to the Company an opinion of counsel, satisfactory to the Company, that such
registration or other qualification under such Act and applicable state securities laws is
not required in connection with such transfer, offer or sale. Each Member understands
that the Company is under no obligation to register the Ownership Interests or to assist
such Member in complying with any exemption from registration under the Securities
Act if such Member should at a later date, wish to dispose of the Ownership Interest.
Furthermore, each Member realizes that the Ownership Interests are unlikely to qualify
for disposition under Rule 144 of the Securities and Exchange Commission unless such
Member is not an "affiliate" of the Company and the Ownership Interest has been
beneficially owned and fully paid for by such Member for at least three (3) years.

       Each Member, prior to acquiring an Ownership Interest, has made an
investigation of the Company and its business, and the Company has made available to
each Member, all information with respect to the Company which such Member needs
to make an informed decision to acquire the Ownership Interest. Each Member has
relied on its own tax and legal advisors in connection with such Member's decision to
acquire an Ownership Interest. Each Member considers himself, herself or itself to be a
person possessing experience and sophistication as an investor which are adequate for
the evaluation of the merits and risks of such Member's investment in the Ownership
Interest.

       12.2 Federal Income Tax Elections. The Company shall make all federal
income tax elections in such manner as the Manager determines to be in the best interest
of the Members upon the advice of the attorneys or accountants retained by the Company.

       12.3 Consent of Member. Various provisions of this Agreement require or permit
the consent, agreement, approval or disapproval, written or otherwise of the Members. In
any such case, the Manager may give each Member written notice of the action, event or
agreement, and if such notice expressly so states, then if a Member does not indicate his
disapproval by written notice to the Manager within the period of time [not less than fifteen
(15) days after mailing of the notice] specified in the notice, he shall be deemed to have
given his written consent, approval or agreement.

        12.4 Further Execution. Upon request of the Manager from time to time, the
Members shall execute and swear to or acknowledge any amended Articles and any other
writing which may be required by any rule or law or which may be appropriate to the
effecting of any action by or on behalf of the Company or Members which has been taken
in accordance with the provision of this Agreement.


Operating Agreement for
Sample Family, L.L.C.

                                             32
      12.5 Opportunity for Independent Representation, Separate Counsel and
Conflicts of Interest. EACH MEMBER ACKNOWLEDGES AND AGREES THAT, FOR
PURPOSES OF CONVENIENCE AND ECONOMY, THEY HAVE REQUESTED THE
LAW FIRM OF _______________. AND ONE OR MORE OF ITS ATTORNEYS TO
PREPARE THIS AGREEMENT. EACH MEMBER HAS BEEN ADVISED TO, AND
HAS HAD THE OPPORTUNITY TO, HAVE THIS AGREEMENT REVIEWED BY HIS
OWN LEGAL COUNSEL. EACH MEMBER ACKNOWLEDGES THAT COUNSEL
PREPARING THIS DOCUMENT WAS REPRESENTING THE COMPANY; THAT
SUCH COUNSEL DID NOT PROVIDE ANY TAX, BUSINESS, LEGAL OR OTHER
ADVICE TO HIM; AND THAT NO STATEMENTS BY SUCH COUNSEL WERE
RELIED ON BY THE MEMBERS. COUNSEL FOR THE COMPANY MAY HAVE
REPRESENTED ONE OR MORE OF THE MEMBERS IN THE PAST AND MAY
CONTINUE TO DO SO. THE PARTIES WAIVE ANY CONFLICTS OF INTEREST IN
SUCH REPRESENTATION. NO MEMBER SHALL RELY ON ANY STATEMENTS,
ACTIONS OR DUTIES OF COUNSEL PREPARING THIS AGREEMENT NOW OR IN
THE FUTURE UNLESS PURSUANT TO A WRITTEN AGREEMENT ESTABLISHING
AN ATTORNEY-CLIENT RELATIONSHIP. COUNSEL THAT PREPARED THIS
AGREEMENT IS NOT OBLIGATED TO DISCLOSE CONFIDENTIAL INFORMATION
TO ANY PARTY TO THIS AGREEMENT WHICH MAY HAVE BEEN OR MAY BE
FURNISHED TO IT BY A PARTY TO THIS AGREEMENT.

        12.6 Fees to Prevailing Parties. In the event the Company or any Member is
required to bring any legal proceeding, including arbitration, for the enforcement of this
Agreement, or because an alleged breach, default or misrepresentation in connection with
any provision of this Agreement, or because of a dispute concerning this Agreement, in the
event that a party substantially prevails, as determined by a judge or arbitrator, that
prevailing party shall be entitled to recover reasonable attorney fees and other costs
incurred in the proceeding whether or not the action proceeds to judgment, in addition to
any other relief which it may be entitled.

      12.7 Waiver of Partition. During the term of the Company, each Member
waives any rights the Member may otherwise have to maintain any action for partition of
the Company’s assets.

        12.8 Jurisdiction and Choice of Law. The laws of the State of Michigan shall
control the construction and interpretation of this Agreement. No change in residence or
domicile by either party shall affect this section. The parties consent and agree to the
jurisdiction of the courts of the State of Michigan for any action brought to enforce the
terms of this Agreement or recover damages for a breach hereof.




Operating Agreement for
Sample Family, L.L.C.

                                           33
       12.9 Notices. Any notice permitted or required under this Agreement shall be
conveyed to the party at the address set forth below and will be deemed to have been
given, when deposited in the United states mail, postage paid, or when delivered in person,
or by courier or by facsimile or electronic transmission. A listing of each Member’s name,
address, telephone number, e-mail address and tax identification or Social Security
number is included on the attached signature pages.

       12.10 Binding Effect. Subject to the provisions of this Agreement relating to
transferability, this Agreement will be binding upon and shall incur to the benefit of the
parties, and their respective distributee, heirs, successors and assigns.

        12.11 Alternate Dispute Resolution / Arbitration. The parties hereto will
submit any unresolved dispute, controversy or claim, including any disputes pertaining
to this Agreement, to consultation, mediation, facilitation or other mutually agreeable
alternate dispute resolution (ADR) forum within fourteen (14) days of a written
agreement for ADR. If the parties cannot agree on ADR or cannot resolve the dispute
by consultation, mediation, facilitation or other alternate dispute resolution forum, the
dispute shall be submitted to mandatory arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then obtaining, unless the
parties mutually agree otherwise, within seven (7) days after either party provides
written notice to the other that such agreement for ADR cannot be made. This
agreement to arbitrate shall be valid and enforceable under the then prevailing statutory
arbitration law and shall be irrevocable, save upon such grounds as exist at law or in
equity for the rescission or revocation of any contract. Inasmuch as time is of the
essence, upon the request of either party, the arbitrator shall handle the contested
matter on an expedited basis. The award rendered by the arbitrator shall be final, and a
judgment may be rendered and entered upon in accordance with the statutory law and
court rules then obtaining, and any process or notice in connection with arbitration may
be served by certified mail, return receipt requested, or by personal service, provided a
reasonable time for appearance is allowed. The arbitration proceeding shall afford the
parties with opportunities to present and rebut evidence relative to the applicable issues.
Nothing herein relative to arbitration, however, shall prevent any party from seeking and
obtaining equitable relief on a temporary or permanent basis from a court of competent
jurisdiction by instituting a legal action or other court proceeding in order to protect or
enforce the rights of such party and/or to prevent irreparable harm and injury. However,
the court's jurisdiction over any such matter shall be expressly limited only to the equitable
issues and relief sought, and all issues involving monetary damages shall be determined
through arbitration as described above. Unless determined by the arbitrator(s) to the
contrary, the party which substantially prevailed shall have its costs of arbitration paid by
the non-prevailing party. The parties further agree that failure to institute arbitration
proceedings within one year after the later of the date of the occurrence or the date when



Operating Agreement for
Sample Family, L.L.C.

                                             34
the damaged party became aware of the claimed breach shall constitute an absolute bar
to the institution of any proceedings and a waiver of all claims.

       12.12 Words - Gender and Number. All words herein shall be construed in the
singular or plural and in the masculine, feminine or neuter as required by the number
and sex of the individuals and entities referred to. Captions are for convenience and
shall have no effect on the substantive terms.

       12.13 Article Headings. The article headings contained in this Agreement have
been inserted only as a matter of convenience and for reference, and in no way shall be
construed to define, limit or describe the scope or intent of any provision of this Agreement.

        12.14 Severability. Wherever possible, each provision of this agreement shall be
interpreted in a manner that makes the provision effective and valid under applicable law. If
applicable law prohibits or invalidates any provision of this Agreement, the provision shall
be ineffective only to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement, unless the
removal or alteration of that provision substantially defeats the basic intent of this
Agreement.

      12.15 Counterparts. This Agreement may be executed in several counterparts,
each of which will be deemed an original but all of which will constitute one and the same
agreement.

         12.16 Confidentiality. Except as contemplated hereby or required by law, a
court of competent authority or is in the public domain, during the term of this
Agreement and thereafter, each Member shall keep confidential and shall not disclose
to others and shall use its reasonable efforts to prevent its Affiliates and any of its, or its
Affiliates' present or former employees, agents, and representatives from disclosing to
others without the prior written consent of the Manager any information which: (1)
pertains to this Agreement, any negotiations pertaining thereto, any of the transactions
contemplated hereby, or the business of the Company; or (2) pertains to confidential or
proprietary information of any Member or the Company or which any Member has
labeled in writing as confidential or proprietary; provided that any Member may disclose
to its Affiliates' employees, agents, and representatives any information made available
to such Member. No Member shall use, and each Member shall use its best efforts to
prevent any Affiliate of such Member from using, any information which:
         (1) pertains to this Agreement, any negotiations pertaining hereto, any of the
transactions contemplated hereby, or the business of the Company; or
         (2) pertains to the confidential or proprietary information of any Member or the
Company or which any Member has labeled in writing as confidential or proprietary,
except in connection with the transactions contemplated hereby.

Operating Agreement for
Sample Family, L.L.C.

                                              35
        12.17 Power of Attorney. Each Member hereby irrevocably makes, constitutes
and appoints the Manager, with full power of substitution, so long as such Manager is
acting in such a capacity (and any successor Manager thereof so long as such Manager
is acting in such capacity), its true and lawful attorney, in such Member's name, place
and stead (it is expressly understood and intended that the grant of such power of
attorney is coupled with an interest) to make, execute, sign, acknowledge, swear and
file with respect to the Company:
               (a)     all amendments of this Agreement adopted in accordance with the
terms hereof;
               (b)     all documents which the Manager deems necessary or desirable to
affect the dissolution and termination of the Company;
               (c)     all such other instruments, documents and certificates which may
from time to time be required by the laws of the State or any other jurisdiction in which
the Company shall determine to do business, or any political subdivision or agency
thereof, to effectuate, implement, continue and defend the valid existence of the
Company; and
               (d)     all instruments, documents and certificates which the Manager
deems necessary or desirable in connection with a reorganization which has been
authorized in accordance with the terms of this Agreement.

       This power of attorney shall not be affected by and shall survive the bankruptcy,
insolvency, death, incompetency, or dissolution of a Member and shall survive the
delivery of any assignment by the Member of the whole or any portion of its
Membership Interest. Each Member hereby releases each Manager from any liability or
claim in connection with the exercise of the authority granted pursuant to this power of
attorney, and in connection with any other action taken by such Manager pursuant to
which such Manager purports to act as the attorney-in-fact for one or more Members, if
the Manager believed in good faith that such action taken was consistent with the
authority granted to it pursuant to this Section.

        12.18 Estoppel Certificate.        Each Member shall, within ten (10) days after
written request by the Manager, deliver to the Manger a certificate stating, to the
Member’s knowledge, that: (i) this Agreement is in full force in effect; (ii) this Agreement
has not been modified except by any document or documents identified in the
certificate; and (iii) there is no known default under this Agreement by the Manager or
any other Member, or if there is a default, the nature and extent of it. If the certificate is
not received within that ten (10) day period, the Manager will execute and deliver the
certificate without qualification on behalf of the requested Member, pursuant to the
power of attorney granted in Section 12.17 above except that if the Manager signing the
certificate has actual personal knowledge of any qualification, the qualification will be
included in the certificate.


Operating Agreement for
Sample Family, L.L.C.

                                             36
       12.19 No Third Party Rights. The obligations undertaken by the Members in
this Agreement, including, but not limited to, their obligation to make capital
contributions and reimbursements, are for the sole benefit of the Members and are not
for the benefit of any creditor of the Company, of a Member or any other third party.
These obligations may not be enforced by any person other than the Company or a
Member.

        12.20 Rule Against Perpetuities. The parties hereto intend that the Rule
Against Perpetuities (and any similar rule of law) not be applicable to any provisions of
this Agreement. However, notwithstanding anything to the contrary in this Agreement, if
any provision in this Agreement would be invalid or unenforceable because of the Rule
Against Perpetuities or any similar rule of law but for this Section, the parties hereto
hereby agree that any future interest which is created pursuant to said provision shall
cease if it is not vested within twenty-one (21) years after the death of the survivor of the
group composed of the undersigned individuals and their lineal descendants who are
living on the effective date of this Agreement.

        12.21 Waivers, Defaults and Exercise of Rights. A failure to insist upon
performance does not waive the right to insist on performance in the future, or even as
to past breaches unless the defaulting party has been prejudiced by an unreasonable
delay in asserting the right. A defaulting party shall be given a thirty (30) day notice to
correct all defaults before any remedies are invoked. A default by one party does not
justify rescission or default by another unless all other non-defaulting Members agree.

      12.22 Amendments. This Agreement may be amended or revoked at any time
by a written agreement executed by the owners of a Majority in Interest of the
Membership Interests; provided, however, that no change or modification to this
Agreement shall be valid which is materially detrimental to the interest of any Member
unless such Member has consented to such change or modification, which such
consent shall not be unreasonably denied, delayed or conditioned.

       12.23 Entire Agreement. This Agreement supersedes any and all negotiations,
representations, or agreements of the Members and the Company with respect to the
purchase and sale of the Company's Units and other matters covered by this
Agreement. In addition, there are no expectations of the parties relating to participation
in the affairs and fortunes of the Company or its business which are enforceable in law,
equity or otherwise, which are not contained in this Agreement or other written
agreement signed by the parties. The parties further acknowledge that a course of
dealing between the parties relating to such participation, unless part of a written
contract made after the date of this Agreement enforceable at law, shall not constitute a
binding obligation.



Operating Agreement for
Sample Family, L.L.C.

                                             37
      IN WITNESS WHEREOF, the parties hereto make and execute this Operating
Agreement, to be effective from and after October __, 2005.

                                         SAMPLE FAMILY, L.L.C.,
                                         a Michigan limited liability company


                                                Member:

                                         __________________ TRUST
                                         UAD ___________


                                         By:

                                         Its:   Trustee




Address:


Telephone:

E-Mail Address:

Tax Identification Number:
      IN WITNESS WHEREOF, the parties hereto make and execute this Operating
Agreement, to be effective from and after October ___, 2005.

                                         SAMPLE FAMILY, L.L.C.,
                                         a Michigan limited liability company


                                                Manager:

                                                JOHN DOE TRUST



                                         By:
                                                John Q. Doe
                                         Its:   Trustee




Address:


Telephone:

E-Mail Address:

Tax Identification Number:
          LIKE-KIND TAX DEFERRED EXCHANGES:
                    SELECTED TOPICS


                      By: William B. Acker and Dean A. Rocheleau*



I.         Reverse Like-Kind Tax Deferred Exchanges.
           Internal Revenue Code (“IRC”) Section 1031(a)(1) provides that “No gain
or loss shall be recognized on the exchange of property held for productive use in
a trade or business or for investment if such property is exchanged solely for
property of like kind which is to be held either for productive use in a trade or
business or for investment.”1
           Most like-kind exchanges are not simultaneous swaps between two
parties; a common exception would be the trade-in of assets such as automobiles.
In order to qualify a non-simultaneous exchange as a tax deferred like-kind
exchange, the replacement property must be identified within 45 days after the
taxpayer transfers the relinquished property. The replacement property must also
be received by the earlier of 180 days after the date on which the taxpayer



1
    IRC Section 1031(a)(1).

* William B. Acker, JD is a shareholder and director of the Kemp, Klein Law Firm. He
is a member of the Council of the Real Property Law Section, and the Chairperson of the
Section’s Federal Tax Aspects of Real Estate Transactions Committee. He concentrates
on business and estate planning, tax dispute administrative appeals and tax litigation,
including planning for real property transactions. He has authored articles for the Journal
of Taxation, State Bar Journal, the Section’s Real Property Review, the Tax Section’s
“Michigan Tax Lawyer,” and other professional publications. He has often lectured in
the Real Property Law Section’s Homeward Bound series, the Tax Section’s After Hours
Tax Seminars, and has lectured for the Real Property Section of the ABA and ICLE. Mr.
Acker is a member of the ICLE Real Property Advisory Board.

Dean A. Rocheleau, JD, CPA is a partner in the Tax Group of the largest Michigan-
based CPA and professional services firm, Plante & Moran, PLLC. He specializes in the
income tax aspects of real estate and construction activities and frequently consults with
attorneys regarding real estate transactions, including Section 1031 like-kind exchanges,
and choice of entity issues. He is an active member of the State Bar of Michigan
Taxation and Real Property Law Sections.
transfers the relinquished property or the due date of the tax return (including
extensions) for the year in which the transfer of the relinquished property occurs.2


A.      Forward Like-Kind Exchanges.
        The sequence described above is the traditional form of a non-
simultaneous tax deferred like-kind exchange where the relinquished property is
transferred first and then a qualifying replacement property is acquired within the
applicable time frames (“Forward Like-Kind Exchange”). The Internal Revenue
Service ("IRS") has strictly adhered to the rule that the time for acquiring the
replacement property commences when the taxpayer surrenders the relinquished
property.       Forward Like-Kind Exchanges proliferated after legislative
amendments and well-conceived Treasury regulations offered relatively clear safe
harbor protection for deferred exchanges.3 It is critical to structure deferred
exchange like-kind exchanges by following the extensive safe harbor regulations,
and to consider designing the transaction to also have a fighting change of
qualifying under Code §1031(a)(1) for income tax deferral outside the safe harbor
provided by the regulations.


B.      Reverse Like-Kind Tax Deferred Exchanges.
        1.       Regulation Safe Harbor Not Applicable to Reverse Like-Kind
                 Exchanges

        The preamble to those regulations specifically states that the deferred
exchange rules under Section 1031(a)(3) do not apply to "reverse exchanges" (i.e.,
exchanges where the replacement property is acquired before the relinquished
property is transferred, “Reverse Like-Kind Exchanges”). However, the preamble
also indicates that the Treasury would continue to review the non-recognition
status of Reverse Like-Kind Exchanges.



2
  IRC Section 1031(a)(3).
3
  Code §1031(a)(3). On April 25, 1991, the U.S. Department of Treasury ("Treasury") issued final
regulations providing rules for deferred like kind exchanges under Section 1031(a)(3). Treas. Reg.
Section 1.1031(k)-1. Delayed exchanges are commonly referred to as deferred exchanges.


                                                2
         2.      Practical Reasons for Reverse Like-Kind Exchanges.
         Despite uncertainty concerning the Treasury's position and the lack of
guidance on Reverse Like-Kind Exchanges, a taxpayer may encounter numerous
situations where he/she must or is strongly motivated to acquire the replacement
property before being able to dispose of the relinquished property. For example, a
taxpayer desires to purchase a parcel of real property pursuant to a purchase
agreement under which the seller will not extend the closing date; however, the
taxpayer does not have a buyer yet for the property that he/she wishes to
relinquish.     In many instances, planning techniques designed to avoid pure
Reverse Like-Kind Exchanges and to delay the acquisition of the replacement
property until the time of disposition of the relinquished property are not practical
solutions.4 For instance, a possible alternative in some circumstances is for the
taxpayer to lease the replacement property and to give the seller a put option that
is exercisable after the relinquished property is sold. However, the seller of the
replacement property may not be willing or able to accommodate the short term
lease alternative. Additionally, practical strategies to avoid a Reverse Like-Kind
Exchange may not be available in the case of an improvement exchange. The
seller of replacement property will not, in many instances, be willing to own the
replacement property during construction for the taxpayer, and the taxpayer may
not be best advised to arrange for seller, or even taxpayer’s general contractor, to
do so.
         Additional reasons for Reverse Like-Kind Exchanges include: (i)
taxpayer’s favorable financing commitment for the acquisition of the replacement
property will expire before closing of the transfer of the relinquished property; (ii)
sale of the relinquished property is delayed (e.g., due to contingencies to which
sale of the relinquished property is subject which have not been removed), or the
sale transaction has fallen through and a new transfer arrangement can be
negotiated but not before taxpayer is pressured to acquire the replacement


4
  For example, the taxpayer could seek to negotiate an option to acquire the replacement property,
but the seller of the replacement property wishes the transaction to occur promptly so he/she can
receive all of the consideration from the sale.



                                                3
property or lose earnest money deposited to secure performance of the agreement
to acquire the replacement property; and (iii) improvements to the replacement
property may need to be built and financed by a lender requiring that the taxpayer
own the replacement property during construction and/or more than one hundred
eight (180) days are needed to complete construction of improvements on the
replacement property.
       3.      Reverse Like-Kind Exchanges Prior to September 15, 2000.
       For the above-mentioned and numerous other reasons, taxpayers have for
years engaged in Reverse Like-Kind Exchanges in reliance upon interpretations of
the statute and planning by tax practitioners without safe harbor protection, and
with greater risk than would be the case if a safe harbor was available. Planning
to reduce the risk of these transactions necessitates careful structuring to avoid:
(i) constructive receipt of the disposition proceeds by the taxpayer, and (ii)
treatment of the accommodation party as the equivalent of the taxpayer under a
principal-agency theory. If the accommodation party is treated as the taxpayer’s
agent, receipt of the replacement property by the accommodation party, and thus
by the taxpayer for tax purposes, before the sale of the relinquished property
would not be within the parameters of a form of like-kind exchange protected
under the statute and deferred Forward Like-Kind Exchange regulations.
       If the taxpayer actually has the “benefits and burdens” of ownership of the
replacement property, the accommodation party might be treated as a mere agent
of the taxpayer. In such a case, beneficial ownership by the agent might be
treated as beneficial ownership by the taxpayer. Shifting actual benefits and
burdens of ownership to the accommodation party would help to avoid treatment
of the accommodation as taxpayer’s agent, but typically increases the costs of
such a transaction.     The cost of financing may be increased because the
accommodation party would have to borrow the funds based upon the taxpayer’s
guarantee, possibly incurring a guarantee fee, and the taxpayer would typically
have to compensate the accommodation party for advancing some of its owns
funds and/or bearing some risk until the disposition of the relinquished property.




                                         4
       Addressing additional planning concerns is usually not without cost. If the
replacement property might increase in value or decrease in value, both the
taxpayer and accommodation party may be interested in obtaining protection to be
sure the transactions are carried through. Often the accommodation party is given
a right to put the replacement property to the taxpayer and the taxpayer is given a
call right at a different time for a different price to require that the accommodation
party transfer the replacement property to the taxpayer.         If the replacement
property was “parked” (as explained below), the taxpayer might seek to use the
replacement property before acquiring legal or equitable title. Although a lease
giving the taxpayer use of the property can be structured to avoid giving the
taxpayer the benefits and burdens of ownership, the lease would have to contain
arms-length terms. This requires paying fair market rent and that at least part of
the profit and other economic benefit of leasing the property would have to be
shifted to the accommodation party.
       4.      Parking Transactions.
       Despite the costs and planning hurdles described above, in order to acquire
the replacement property now and still qualify for tax deferred like-kind exchange
treatment, many taxpayers have engaged in Reverse Like-Kind Exchanges
through what are referred to as "parking" transactions. Parking transactions are
typically designed to temporarily "park" either the desired replacement property
or the relinquished property with an accommodation party until the taxpayer
arranges for the transfer of the relinquished property to the ultimate transferee in a
deferred but simultaneous exchange. This is done to meet the IRS requirement
that the taxpayer must dispose of one property before acquiring the qualifying
replacement property.
       The Reverse Like-Kind Exchange can be structured in at least two
different ways. Using the "exchange first" method, the accommodation party
could acquire the desired replacement property on behalf of the taxpayer and
immediately exchange such property with the taxpayer for the relinquished
property. The accommodation party then holds the relinquished property until the
taxpayer finds a buyer for the relinquished property and arranges for its transfer.



                                          5
        Alternatively, using the "exchange last" method, the taxpayer could
arrange for the purchase of the replacement property and park it with an
accommodation party who holds it until the taxpayer identifies someone who will
purchase the property that the taxpayer desires to relinquish. Once the ultimate
acquiring party is identified, the taxpayer exchanges the relinquished property for
the replacement property that was parked with the accommodation party, who
subsequently transfers the relinquished property to the third party.
        In both instances, the taxpayer must arrange the transactions so that the
accommodation party has sufficient "benefits and burdens of ownership" to be
treated as the owner of the parked property for federal income tax purposes and
the taxpayer is viewed as transferring the relinquished property before acquiring
the replacement property. As discussed above, if the accommodation party is
treated as the taxpayer’s agent for Federal tax purposes, the acts of the agent
would be attributed to the taxpayer-principal and the like-kind exchange would
fail.
        The “parking” transactions explained above have differing advantages and
disadvantages as shown by the following examples:
        a.     Financing the Replacement Property.           The “exchange first”
version offers the benefit of giving the taxpayer title to the replacement property
to enable the taxpayer to finance its acquisition, which is often required by a
lender, and is preferable to a loan from the taxpayer to the accommodation party
to acquire the replacement property because this sort of loan is not covered by a
Treasury regulation safe harbor. However, the taxpayer would have to finance
any amount needed to, in effect, temporarily take the place of the taxpayer’s
equity in the relinquished property, which under the exchange first method would
remain “parked” with the accommodation party until it can be transferred. Use of
the relinquished property as collateral would likely present difficulties as an
existing senior lender may refuse to permit a subordinate lien.
        b.     Improvement       Exchanges.        The    exchange     last   method
contemplates parking the replacement property with an accommodation party
until the relinquished property could be transferred.       This may be the most



                                         6
practical way to effectuate improvements made to the replacement property
before acquisition by an exchange. If the “parking” arrangement works, the
property should be able to be held by the accommodation party (not as taxpayer’s
agent) and improved for a longer period of time than the 180 days contemplated
by the statute and regulations for a forward deferred exchange. However, the
taxpayer’s use of the parked replacement property may be more cumbersome and
costly, as explained above.
        5.       Taxable Reverse Like-Kind Exchanges.
        The difficulties of dealing outside the safe harbor and implementing a
successful Reverse Like-Kind Exchange were highlighted in an IRS Technical
Advice Memorandum when a planned Forward Like-Kind Exchange floundered.
The sale of the relinquished property failed, and the qualified intermediary
accepted the replacement property before transfer of the relinquished property to
avoid default under the purchase agreement assigned to it for acquisition of the
replacement property. The IRS treated the resultant transaction as a taxable
Reverse Like-Kind Exchange.5 In this instance, the taxpayer was treated as
having received the replacement property before the relinquished property was
transferred, which was outside the normal safe harbor of the regulations.
        6.       Revenue Procedure 2000-37 Safe Harbor.
        On September 15, 2000, the IRS issued Revenue Procedure 2000-376
which permits Reverse Like-Kind Exchanges using an accommodation party to
qualify as tax-deferred under Section 1031 provided certain safe harbor rules are
met. In order for the transaction to qualify as a tax-free exchange, the taxpayer
must agree to treat the accommodation party as the owner for federal income tax
purposes. This safe harbor treats the accommodation party as the owner of the

5
  TAM 200039005.
6
  2000-4 IRB 308. It has been informally suggested that Rev. Proc. 2000-37 may have, in part,
been a response to TAM 200039005, and was specifically intended to (i) afford taxpayers seeking
to accommodate delays in disposition of the relinquished property in forward exchanges which are
within the deferral exchange time parameters originally set by the legislation for forward
exchanges, and (ii) cover only certain reverse exchanges, where taxpayers intend to exchange
properties at the time of each transfer and accomplish the exchange within the 180 day time frame.
Note: Rev. Proc. 2000-37 is an IRS guideline and a question exists as to whether it is substantive
law. State taxation authorities may not follow it. Query: Will courts applying federal laws apply
Rev. Proc. 2000-37?


                                                7
parked property, thereby allowing the taxpayer to relinquish and then acquire
replacement property in the order required by the Treasury regulations. The
accommodation party is not treated as the taxpayer's agent for Federal income tax
purposes if this safe harbor is met. As a result, under Rev. Proc. 2000-37, the
taxpayer does not need to prove that the accommodation party bears the economic
benefits and burdens of ownership.
           The safe harbor provided in the Revenue Procedure requires all of the
following:
           •        The exchange accommodation titleholder ("EAT") must hold legal
           title to the property or other indicia of ownership of the property that are
           recognized under “commercial law,” such as a land contract, a contract for
           deed, or all of the ownership interests of a disregarded entity for tax
           purposes (e.g., a single member limited liability company ("SMLLC") or
           qualified Subchapter S subsidiary) that holds either legal title to the
           property or such other indicia of ownership;

           •      The EAT must be subject to taxation and not be the taxpayer or a
           "disqualified person" (which includes certain agents and related parties as
           defined by IRS regulations).7 If the titleholder is a partnership or S
           corporation, 90% of its interests must be held by taxable owners;

           •      When ownership of the property is transferred to the EAT, the
           taxpayer must have a bona fide intent to engage in a tax-free exchange
           involving that property;

           •      Within 45 days after the acquisition of the replacement property by
           the EAT, the taxpayer must properly identify the relinquished property to
           be surrendered. The taxpayer may identify alternative and multiple
           properties as is permitted in other exchange transactions;8

           •      Within 180 days after the transfer of property to the EAT, this
           property must be transferred either to the taxpayer as the replacement
           property or to the ultimate recipient as the relinquished property to
           complete the tax-free exchange; and

           •       Within five business days after the property is transferred to the
           EAT, the taxpayer and the titleholder must enter into a written agreement
           called the Qualified Exchange Accommodation Agreement ("QEAA").


7
    See Treas. Reg. Section 1.1031(k)-1(k) for the definition of a "disqualified person".
8
    See Treas. Reg. Section 1.1031(k)-1(c)(4) for the identification rules.


                                                    8
The QEAA must contain the following representations:
           •        The EAT is holding the property for the taxpayer in order to
           facilitate a like-kind exchange under Section 1031 and Revenue Procedure
           2000-37;

           •       The parties agree to report the acquisition, holding, and disposition
           of the property in the manner required by Revenue Procedure 2000-37;

           •       The EAT is treated as the beneficial owner of the property for all
           federal income tax purposes; and

           •     The parties agree to report any tax attributes of the property
           ownership in a manner consistent with the QEAA.

The Revenue Procedure also addresses "permissible agreements" between the
taxpayer engaging in the Reverse Like-Kind Exchange and the EAT.                               The
Treasury is very liberal when permitting the taxpayer to enter into these
agreements, which are not required to contain arms-length terms, without risk that
the EAT will be treated as the taxpayer's agent for federal income tax purposes.
A taxpayer cannot use these permissible agreements without risk outside of this
safe harbor. The Revenue Procedure provides that:
           •      The taxpayer may lease, manage, act as contractor, otherwise
           provide services to the EAT, or improve the property while it is being held
           by the EAT;

           •      An EAT that satisfies the requirements for the qualified
           intermediary safe harbor under the Regulations may also enter into an
           exchange agreement with the taxpayer to serve as the qualified
           intermediary;9

           •       The taxpayer or a “disqualified person” may guarantee some or all
           of the obligations of the EAT, including secured or unsecured debt
           incurred to acquire the replacement property, and may indemnify the EAT
           against costs or expenses related to the property;

           •      The taxpayer or a “disqualified person” may advance funds to the
           EAT or guarantee a loan or advance to the EAT;

           •      The taxpayer and the EAT may enter into agreements for the
           purchase or sale of the property, including puts and calls at fixed or

9
    See Treas. Reg. Section 1.1031(k)-1(g)(4) for the "qualified intermediary" requirements.


                                                   9
           formula prices effective for a period not in excess of 185 days from the
           date the property is acquired by the EAT; and

           •       The taxpayer and the EAT may enter into an agreement providing
           that any variation in the value of the relinquished property from the time
           the EAT receives it until the time it is ultimately sold will inure to the
           benefit or detriment of the taxpayer.

           7.       Effective Date.
           This Revenue Procedure applies to all QEAA's entered into with respect to
an EAT that acquires legal title to or qualified indicia of ownership of property on
or after September 15, 2000.10 The IRS also states that other parking transactions
that were established prior to the effective date, or that do not comply with this
safe harbor, may qualify as a Reverse Like-Kind Exchanges but are not protected
by the safe harbor provided by Revenue Procedure 2000-37.11
           8.       Observations Regarding Reverse Exchange Safe Harbor.
           Revenue Procedure 2000-37 provides a safe harbor for parking
transactions, however, neither the IRS nor Treasury have blessed "pure" reverse
exchanges. Thus, the taxpayer may not acquire and own the replacement property
before surrendering the relinquished property. The IRS has informally indicated
that it will treat pure reverse exchanges as taxable exchanges. It is the Treasury's
position that pure reverse exchanges are not sanctioned by Congress and,
therefore, are taxable as evidenced by the timetable for acquiring the replacement
property provided in IRC Section 1031(a)(3) (i.e., the replacement period does not
commence until the relinquished property is transferred by the taxpayer).
           Although the Revenue Procedure recognizes that reverse like kind
exchanges involving parking a property may occur outside of this new safe
harbor, it may be generally advisable not to structure reverse exchanges that do
not comply with the safe harbor without special care, planning and attention to
inherent risks. The primary concern with the parking transaction is whether the
accommodation titleholder would be deemed to be the taxpayer's agent, thereby
attributing the titleholder's acquisition of the replacement property to the taxpayer

10
     Rev. Proc. 2000-37, Section 5.
11
     Rev. Proc. 2000-37, Section 3.02.


                                           10
prior to the disposition of the property to be relinquished. This could occur
outside of the safe harbor if many of the permissible agreements allowed under
the safe harbor were used to limit the titleholder's economic risk and reward for
holding the property. Also, many of the permissible agreements could prevent the
titleholder from having the benefits and burdens of ownership over the property
outside of the safe harbor.
        The EAT is required to hold legal title to the property or other indicia of
ownership of the property. Taxpayers are forming SMLLCs to hold the property
being transferred to the EAT. This entity provides liability protection for the EAT
who is reluctant to be directly in the chain of title. In Michigan, the transfer of
SMLLC membership interest avoids the real estate transfer tax and, in parking
transactions, at least one property will be transferred twice so this reduces the cost
of a reverse exchange. SMLLCs are disregarded entities for all Federal income
tax purposes; the taxpayer is deemed to own an interest in the underlying asset
which is required to meet the like-kind exchange requirements.12                 Finally, the
IRS has approved the direct deeding of property to and from the taxpayer at the
qualified intermediary's direction; this can be used for the exchange property not
being parked with the EAT.13
        Taxpayers will still find it easier to structure deferred like-kind exchanges
in accordance with Treasury Regulation Section 1.1031(k) than to use the reverse
like-kind exchange safe harbor provided by Revenue Procedure 2000-37. The
cost for using a qualified intermediary to assist with a deferred Forward Like-
Kind Exchange is, and is anticipated to remain, substantially less than for using an
EAT to facilitate a Reverse Like Kind Exchange. This is primarily due to the
additional legal risk assumed by the EAT to hold title or indicia of ownership of
the property, the income tax reporting responsibilities required of the EAT, and
the customization of the EAT's role in each reverse exchange.




12
   See Private Letter Rulings 9807013 and 9751012; see also Rev. Proc. 2000-37, Section 4.02(1)
and Rev. Rul. 99-6, IRB 1999-5.
13
   Rev. Rul. 90-34, 1990-1 CB 154.


                                              11
C.     Exchanges Outside the Safe Harbors.
       It may still be necessary or preferable to structure a tax deferred exchange
not solely relying on the Forward Like-Kind Exchange safe harbor or the Reverse
Like-Kind Exchange safe harbor. A back up plan may be preferable in the event
that the exchange fails to qualify for a safe harbor for whatever reason, including
because the taxpayer is unable to effectuate the acquisition of the replacement
property or disposition of the relinquished property within permitted time frames.
       For Reverse Like-Kind Exchanges, if liberal provisions of the safe harbors
are indulged in and the “benefits and burdens of ownership” are not shifted to the
qualified intermediary or the EAT so that the taxpayer is deemed to be the owner,
or the qualified intermediary or the EAT is treated as an agent of the taxpayer, the
transaction will not have a chance to qualify under the statute. In such a case, the
receipt of cash by qualified intermediary or the EAT will constitute constructive
receipt by the taxpayer and/or the receipt of title by the taxpayer’s agent may
constitute receipt by the taxpayer.
       There has been nonprecedential guidance issued by the Internal Revenue
Service addressing reverse like-kind exchanges that have not complied with the
safe harbor provisions of Revenue Procedure 2000-37.          In PLR 200111025,
released two months after Revenue Procedure 2000-37 was issued, the IRS
approved a non-safe harbor parking transaction. The IRS focused on whether the
exchange accommodator was the agent of the taxpayer in the exchange and
concluded that it was not. Based on the facts presented in this private letter
ruling, the IRS concluded that the reverse like-kind exchange where the
replacement property was parked with the accommodator complied with the
Section 1031 like-kind exchange rules.
       In a more recent field service advise, FSA 20050203F, the IRS
acknowledged that a reverse like-kind exchange using an accommodator to park
the replacement property could meet the like-kind exchange requirements outside
of the safe harbor provided by Revenue Procedure 2000-37. In this FSA, the IRS
focused on the benefits and burdens of ownership of the replacement property that
was parked with the accommodator, and not on whether the accommodator was



                                         12
the taxpayer’s agent. Based on the facts in this taxpayer situation, the IRS
National Office advised the examining agent that the accommodator did not
possess the benefits and burdens of ownership over the replacement property.
Because the IRS determined that the taxpayer was the beneficial owner of the
replacement property, he was precluded from exchanging the relinquished
property for the replacement property that he was already treated as owning.
Therefore, the attempted Section 1031 exchange failed.
          If a planned forward exchange structured solely under the forward
exchange regulation safe harbor fails to meet the regulation safe harbor time
limits, or a planned reverse exchange structured solely under the Revenue
Procedure 2000-37 safe harbor fails to meet the requirement of the reverse
exchange safe harbor, the result may be a taxable exchange. As discussed above,
planning outside the safe harbor requires care in assessing the “benefits and
burdens of ownership” and attention to case law to avoid criteria set forth in a
established line of cases for determining that an entity acts as an agent of the
taxpayer.14
D.        Construction Exchanges.
          A common problem in implementing construction exchanges is
uncertainty as to whether the contractor can build enough value into the property
within the 180 day limit normally allowed for a deferred forward exchange. A
deferred reverse exchange under the safe harbor allows no greater time than does
a deferred forward exchange. In either case, the last transfer of property must be
made no more than 180 days after the first transfer. In both instances, structuring
the exchange to only satisfy either the forward safe harbor or the reverse safe
harbor alone may be dangerous and a recipe for a loss of at least a partial deferral
of tax.
          Planning to qualify the exchange outside of the safe harbor will require
that an accommodate party has at least most, if not all, the “benefits and burdens
of ownership” so that the parked property is deemed to be owned by the

14
   Rev. Rul. 82-144. See National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949); Moline Properties,
Inc. v. Commissioner, 319 U.S. 436 (1943), and their extensive progeny; and also see Commissioner v.
Bolinger, 485 U.S. 340 (1988).


                                                  13
accommodation party and the accommodation party is not treated as an agent of
the taxpayer. In addition, the list of Reverse Like-Kind Exchange Safe Harbor
“permissible agreements” stated above must be carefully avoided.
       Further, traditional problems in dealing with reverse exchanges will arise.
The accommodation party will typically be required to make an equity
contribution to acquire the property and will require economic gain from this
equity investment. Most accommodation parties will also want to enter into so-
called “stop loss” arrangements. This is commonly handled through giving the
accommodation party a “put” right to sell the property to the taxpayer at a price
that insures the accommodation party of a profit on its equity investment.
Conversely, the taxpayer is often interested in being assured that, if the property
appreciates in value it can acquire the property from the accommodation party and
may want a “call” arrangement. Tax concerns with respect to this cross put and
call, and their relative economics, places pressure on the exchange and increases
the risk that: (i) the accommodation party will not realize adequate benefits and
burdens of ownership; (ii) and that the taxpayer would be treated as having the
sufficient level of benefits and burdens of ownership and be treated as a principal
and the accommodation party as its agent. As a result, if the put and call are not
simultaneous and are at different prices, there is economic risk, additional costs
result for the taxpayer. Additionally, leases and loans at arms-length rents and
interest rates, respectively, will be necessary. Taxpayers may be required to
guarantee loans obtained by the accommodation party to acquire either the
replacement property or the relinquished property as the case may be. In such
cases, fees for the taxpayer’s guarantee may be required.
       Due to the nature of common qualified intermediary exchange agreements
under the forward exchange regulations, and the liberal provisions permitted in
QEAA agreements, it may be dangerous for the accommodation party to serve as
the qualified intermediary in connection with a transaction designed to qualify
outside the new safe harbor. The protected acts of a qualified intermediary under
the deferred exchange regulation do not specifically include many of the
“permissible agreements” allowed under Revenue Procedure 2000-37. Otherwise,



                                        14
if the exchange was designed merely to qualify under the new reverse like-kind
exchange safe harbor, there would be no problem in having the EAT act as the
qualified intermediary.15
E.       Depreciation Issues.
         How could allowable depreciation be determined if the taxpayer owns
both the relinquished property and the replacement property at the same time?
This dilemma is another reason given by Treasury officials as to why “pure”
Reverse Like-Kind Exchanges are not sanctioned by the Treasury. In a tax
deferred like-kind exchange, the lower tax basis of the relinquished property, not
the purchase price, is the starting point for determining the tax basis of the
replacement property.16 This is why a like-kind exchange is a tax deferral, not a
tax free, transaction. In addition, the depreciation period and method used for the
relinquished property also carries over to the replacement property to the extent
that the tax basis of the relinquished property that is transferred over to the
replacement property.17
         The Reverse Like-Kind Exchange safe harbor requires that the EAT be
subject to taxation separately from the taxpayer. As a result, the taxpayer would
not be able to claim depreciation on the parked property. Is the property subject
to depreciation for the benefit of the EAT? To be depreciable, property must be
held for investment or use in a trade or business. The EAT acquires the property
for the short term with an intent to transfer it (to the taxpayer in the case of
replacement property in an exchange last plan, or to a third party buyer in the case
of the relinquished property in an exchange first plan). As a result, the EAT
would probably not be entitled to depreciation.
         This lost opportunity is significant in that it is, to the taxpayer, effectively
a deferral of the 39 year depreciation period for commercial real property. The
EAT must seek any third party financing without a depreciation deduction which
might otherwise cover any amortization of loan principal during the parking


15
   Rev. Proc. 2000-37, Section 4.03(1).
16
   IRC Section 1031(d).
17
   Temporary Reg. § 1.168 (i)-6T.



                                           15
arrangement. As a result, it may be advantageous to arrange any bank financing
so that principal payments are deferred until the end of the period during which
the EAT will hold the property. Failing to negotiate this deferral of principal
payments could be “covered” by the taxpayer grossing up any rent payments to
compensate the EAT for additional tax liability. However, this is a less cost
effective solution.18
F.     Incidental Observations.
       If an EAT holds parked relinquished property and the planned transaction
is understood by others, will the 180 day limit cause a potential buyer who learns
such information to believe that the taxpayer may be eventually forced to reduce
the price of the relinquished property to effectuate its sale within the time frame?
       As with any buyer of the relinquished property in a forward exchange, in a
Reverse Like-Kind Exchange, some minimal care must be taken to be sensitive to
the implications of being a third party buyer. It would be prudent for the buyer to
carefully define forfeiture of all or a portion of the earnest money deposit upon
default as liquidated damages and a limit of its liability, so as to restrict under
state law any claim by the taxpayer for damages for failure to meet the Reverse
Like-Kind Exchange safe harbor. This prudence would appear to be important
because the taxpayer may claim that the buyer of the relinquished property was
aware that the taxpayer sought to complete a tax deferred exchange. Buyers
would be advised to seek indemnification, covenants not to sue, or liability
limitation agreements.
G.     Limitation for Previously-Owned Replacement Property.
       Rev. Proc. 2004-51 has modified Rev. Proc. 2000-37 to require that the
replacement property held by and EAT under a QEAA must not have been owned
by the taxpayer within one hundred eight (180) days prior to the date of transfer
of qualified indicia of ownership of the replacement property to the EAT. This
change effectively permits a taxpayer from exchanging two of the taxpayer’s
properties by transferring one to an EAT and parking it, for improvement

18
 See Lipton, “New Revenue Procedure on Reverse Like-Kind Exchanges Replaces Tax Risk
With Tax Certainty,” 93 Journal of Taxation, No. 6, December 2000.



                                         16
construction or otherwise, and then treating it as replacement property and
exchanging it for other property relinquished by the taxpayer. Rev. Proc. 2004-51
is effective for transfers after July 19, 2004.
           The    U.S.    Tax   Court   had    previously   denied   in   DeCleene   v.
Commissioner,19 Code §1031 tax deferred like-kind exchange treatment to a
taxpayer who transferred property he owned to a planned exchange party, to hold
under agreement and contract to construct improvements on the property for the
taxpayer, including borrowing on a non-recourse basis to finance the construction,
which was guaranteed by the taxpayer. The agreement required the exchange
party to complete the improvements by a certain time and then transfer the
improved property back to taxpayer as replacement property sought by the
exchange party.
           However, Rev. Proc. 2004-51 does not appear to apply to property owned
by an affiliate of the taxpayer. Consequently, it may be possible for an affiliate of
the taxpayer to lease for a sufficiently long term (for more than 30 years)
property to be improved to an EAT, have the EAT improve it during the permitted
one hundred eighty (180) days, and then have the EAT exchange it with the
taxpayer for property owned by the taxpayer. See PLR 200251008.


II.        Combinations of Tax Deferred Exchanges and Certain Tax Free
           Contributions of Replacement Property to an Entity

A.         General Rule.
           Internal Revenue Code (“Code”) Section 1031 requires that the
exchanging taxpayer, at the time of the exchange, hold the relinquished property
and the replacement property “... for productive or use in a trade or business or for
investment.”
           1.      Hold for Investment (or Use in Trade or Business) Requirement.
           Does a taxpayer who individually owns and transfers the relinquished
property, and who intends at the time of the exchange to contribute replacement

19
     115 TC 457 (2000).




                                              17
property to an entity, hold the replacement property for “investment”? Or for
disposition? A similar question may be posed concerning the taxpayer’s holding
of the relinquished property if it has been acquired shortly prior to the exchange.
       2.       Exchange Followed by Contribution to Corporation.
       A prearranged contribution of replacement property to a closely held
corporation for stock (a tax free Code Section 351 contribution) was held to fail
the investment (“held for investment”) requirement of Code Section 1031. Rev.
Rul. 75-292.
       3.       Exchange Preceded by Distribution from Corporation.
       Receipt of property (the relinquished property) in a liquidating distribution
from a corporation, and then immediately exchanging it for replacement property
violates the “held for investment” requirement according to Rev. Rul. 77-337,
because the productive use of the property by the corporation prior to the
liquidation distribution cannot be attributed to the taxpayer. However, in Bolker
v. Comm’r, 81 TC 782 (1983), aff’d 760 F.2d 1039 (CA 9 1985), the court
permitted an exchange contracted immediately after receipt of the relinquished
property, distinguishing and disregarding Rev. Rul. 77-337. The tax court relied
on the taxpayers “...continuing economic interest in essentially the same
investment ... (although changed in form).” The Ninth Circuit viewed the transfer
as a mere change in form of ownership rather than as a relinquishment of
ownership.     In Bolker, but not in Rev. Rul. 77-337, the taxpayer presented
evidence that the liquidation was planned before the exchange.            The court
distinguished an intent to contribute to an entity from an intent to liquidate the
property, and also justified allowing the transaction to qualify because the
property was held for three months before the exchange.
       4.       Intention of Exchanging Taxpayer: Early Case Law.
       Cases have held that an exchanging taxpayer’s intent to dispose of the
replacement property will cause a transaction to fail to qualify as a tax deferred
exchange and result in recognition of income or loss on the disposition of the
replacement property. For example: Intent to sell: Regals Realty Co. v. Comm’r,
127 F.2d. 931, 933-34 (2nd Cir. 1942); Intent to Give as Gift: Click v. Comm’r,



                                         18
78 TC 225, 233-4 (1982); Intent to Sell: Land Dynamics v. Comm’r, PH TC
Memo ¶ 78,259, 37 TCM (CCH) 119 (1978).
       5.      Intent at Time of Exchange Not Necessarily Tainted by Desire to
               Give Later to Children.

       At least one case ruled that an exchanging taxpayer’s intent to currently
hold for investment use accompanied by a general plan to later give the
replacement property as a gift to children was permitted. Wagensen v. Comm’r,
74 TC 653, 658-9 (1980).
       6.      Exchange Followed by Contribution to Pass Through Entity.
       A taxpayer contributing replacement property for a general partnership
interest in a limited partnership, hard on the heels of an exchange, was ruled to be
in compliance with the held for investment requirement. Magneson v. Comm’r,
753 F.2d 1490 (9th Cir. 1985), aff’g 81 TC 767 (1983).
       The court focused on the exchanging taxpayer’s intent to make a post
exchange contribution to a partnership for a general partnership interest.
However, it examined the held for investment issue by analyzing comparisons
between the taxpayer’s pre-contribution ownership as a joint tenant under state
law with the taxpayer’s “ownership rights,” right to possess and right to control
the replacement property through its general partnership interest after contribution
to the partnership. The court’s analysis is questionable in various respects. The
court stated that the general partner had a right to possess and use the property for
partnership purposes and roughly analogized this to the taxpayer’s unfettered joint
ownership rights.     It seemed to require that the purpose of the recipient
partnership must be to hold the property for investment, and that the assets of the
partnership must be predominantly of “like kind” to the taxpayer’s original
investment. Is this a second, albeit modified, “like kind” test for exchanges
followed by contributions to a partnership? If so, no guidance was given for
determining how similar the purposes must be. However, partnerships with other
types of assets may present different considerations because it may appear that the
general partner’s interest is no longer purely, or even predominantly, in a like




                                         19
kind investment. In Magneson the partnership was formed to hold only the
replacement property for investment purposes.
       7.      Exchange Followed by Contribution for Limited Partnership
               Interest.

       Magneson may not apply because a limited partner has no right to possess
the property and little, if any, management rights and control over the property.
       8.      Exchange Followed by Contribution to LLC.
       Magneson did not consider the right and attributes of an owner of a
member’s interest in an LLC. Receipt of a non-managing interest, like a limited
partnership interest, may be less likely to qualify. Receipt of a managing interest
may have a better chance, if strong management rights exist, but this analysis
remains highly uncertain.
       9.      “Continuity of Investment.”
       The tax court has supported a post exchange liquidating distribution to the
taxpayer corporation’s controlling shareholders. Citing Bolker and Magneson, the
court relied on a “continuity of investment” finding even though a change of
ownership form occurred. Maloney v. Comm’r, 93 TC 89 (1989). However, the
Bolker court did not base its ruling on continuity of investment, but rather relied
on its conclusion that the change in form of ownership was insufficient to violate
the held for investment requirement of the Code. Note that because IRS has
opposed the Bolker rationale, there is uncertainty regarding the length of time
property must be held directly by an exchanging taxpayer to avoid invalidating
the non-recognition treatment of an exchange under Code Section 1031. The
House explanation to the Code Section 1031(f) related party amendment made by
OBRA '89 states that the taxpayer must directly hold both the property exchanged
and the property received for a significant period of time to evidence the requisite
continuity of investment purpose.
       10.     Related Party.
       Involvement of a related party in an exchange may undermine the
transaction if the replacement property is disposed of by the taxpayer within two
years, or an unrelated party disposes of the relinquished property within two



                                        20
years. See TAM 9748006. The IRS may attack such a transaction under Code
Section 1031(f). Dispositions tainted may include indirect transfers of interests in
the property. It remains unclear whether a contribution would be implicated.


III.    Partnership Split-Ups and Tax Deferred Exchanges.
A.      Generally.
        1.       Tax deferral exchanges of partnership interests are not possible
under Code Section 1031.20 When partners in a partnership or members in an
LLC wish to exchange their real estate, they must either make the exchange
through the entity (i.e., by having the entity exchange real property with other real
property owners), or structure the transaction in some other way. This structuring
challenge may be presented when one or more of the partners or members does
not wish to become an owner of the replacement property. Typically this occurs
when one partner or member, wishes to have his or her interest(s) cashed out, or
alternatively, when in the course of considering the transaction it becomes
apparent that the entity’s owners choose to entirely split up (that is, to have all the
partners go their separate ways), or to have the entity splinter and cash out certain
owners while other owners continue. Partners of the partnership, or members of
the LLC, which owns the property to be disposed, might consider the following:
                 (a) Prorata distribution of property of the entity. A pro rata
distribution of the property typically results in the individual owners holding the
distributed property as co-tenants.21 This is typically structured as a “drop and
swap” transaction where the partnership or LLC transfers its property to its
partners or members who acquire direct fractional ownership interests in the
distributed property, typically as tenants in common. Each former partner or
member is then able to exchange or sell his or her tenant-in-common interest and
either engage in a Section 1031 like-kind exchange or cash out and pay tax on the
recognized taxable gain. Alternatively, the partnership can engage in a “swap and

20
 IRC §1031(a)(2)(D).
21
 Generally, a prorata distribution is tax free. Code Section 731. However, contributed property
must clear the hurdles of Code Sections 704(c), 737, and 707(a).




                                              21
drop” transaction where the existing partnership or LLC disposes of its
relinquished property and acquires multiple qualifying replacement properties.
After a short period of time, the partnership or LLC distributes each replacement
property to a specific partner or partners (or LLC members). This alternative
requires that all of the partners or members work together to assure that the
exchanges qualify for the tax treatment the partners or members desire. This
includes complying with the statutory requirement that the partnership or LLC,
and not the partners or members individually, hold the replacement properties for
use in a trade or business or investment activity.
        An attempt to structure a tax deferred exchange as an exchange of a co-
tenancy interest rather than a partnership interest must overcome the IRS’s
argument that, even after the distribution, the interest being exchanged is actually
a partnership ownership interest. Anything more than a relatively modest level of
management activity such as mere co-ownership and rental of property that is
maintained and kept in regular repair, might constitute a partnership for federal
tax purposes, thus preventing the tax-free exchange of the interest. Reg. §1.761-
1(a). Thus, the co-ownership of unimproved land or net leased property should in
most circumstances not constitute a partnership, but owner participation might be
difficult to sustain at such a subdued level. For example, if services are provided
to the occupant of a rental building directly or through an agent, a partnership
could exist.     If any additional profit making activity is engaged in beyond
“customary tenant services,”22 or, in addition, any agreement, written or oral,
addresses the sharing of losses, control over income and capital, or the right to
make withdrawals from any common account might present difficulties. See
Luna v. Comm’r, 42 TC 1067 (1964).
        If some, but not all, of the co-tenants acquire replacement property in a
subsequent exchange, the activities of the arrangement may lead to conclusion
that a partnership existed and proceeds paid in the cash out of the non-exchanging



22
  Rev. Rul. 75-374, 1975-2 CB 261, dealing with the undivided co-ownership of an apartment
building, and Revenue Procedure 2002-22, 2002-1 CB 733, providing a safe harbor from
partnership tax status for undivided tenants-in-common or other fractional ownership interests.


                                              22
co-tenant may be subject all of the co-tenants to tax based on the amount of gain
recognized due to the receipt of cash by the co-tenant being cashed out..23 It is
also possible that the IRS would recast the proposed transaction under the step
transaction doctrine. See Crenshaw v. Comm’r, 450 F2d 472 (5th Cir. 1971). This
could result in recharacterizating any cash received as a distribution to the partner
or member attempting to leave, and recharacterizing the transaction as an
exchange of the land or building by the entity for like-kind replacement property
and cash, which would render partially taxable the receipt and distribution of cash
proceeds to the partner or member attempting to depart the entity. A portion of
this taxable gain would most probably be allocated to the partners who received
only qualifying replacement real property even though they did not receive any of
the cash.
                      (b)   Election Out of Partnership Treatment. Alternatively,
the co-tenants might elect to not be treated as a partnership under Code §761(a).
This election out choice is not available to partnerships that are engaged in more
than investment activities, such as those engaged in the active conduct of a trade
or business, or engaged in selling of services or property. However, difficulties
exist with respect to this election not only in complying with the requirements of
regulations24 but also in avoiding having the entity’s activity constitute the
conduct of a trade of business. The law casts aside the concern that, even if a
valid election has been made, legal title to the property is actually held
individually by the co-tenants rather than by the partnership (now simply an entity
still owning title to the property, which has elected to be taxed other than as a
partnership), because this is deemed not to be a problem under Code Section
1031(a)(2).
                      (c) Special Allocation of Taxable Gain. An attempt to make a
special allocation of all of the boot gain to a particular partner who wishes to
eliminate his or her interest and cash out will not likely pass the “economic effect



23
     TAM 9907029.
24
     Reg. §1.761-2.


                                            23
test”25 or the “substantial” test.26 The first is likely because the partner attempting
to be cashed out will not receive a distribution equal to the final balance in his or
her capital account and the later results because it is not likely that the liquidation
of the departing partner or member’s interest would have any effect on their dollar
amounts to be received under any alternative redemption scenario. However, the
use of an installment note received on the sale of the relinquished property to
redeem a partner or member desiring to cash out should work to accomplish this
objective. This alternative is discussed below.
           2.       Entity Split Off.
           If some of the members or partners wish to stay together in an entity
treated as a partnership for federal tax purposes and reinvest their equity in a
replacement property, while others want to liquidate, the problems stated in the
preceding sections are present. The partners or members may be best advised to
simply negotiate with the reluctant partner or member to accept cash and any tax
that would result. It may be to the advantage of the partners or members for the
entity to accomplish this by a complete liquidation of the departing partner’s
interest, although if depreciation recapture, inventory or other “hot assets” under
Code §751 are involved, the departing partner may be required to report ordinary
income in addition to the gain which would result from any cash distributed
which exceeds his or her basis in his or her ownership interest.
           3.       Fragmented Exchange Followed by the Liquidation of a
Partnership Interest.
           An entity taxed as a partnership could retire the withdrawing partner’s or
member’s interest with an installment note received from the purchaser of the
relinquished property that would be treated as taxable boot by the partnership.
That is, the entity could enter into an exchange of a fragmented share (equal to the
proportionate ownership shares of the continuing owners) and cause the proceeds
from the disposition of the relinquished property to be transferred to a qualified
intermediary with the remaining proportion of proceeds (relating to the partner or


25
     Reg. §1.704-1(b)(2)(ii).
26
     Reg. §1.704-1(b)(2)(iii).


                                           24
member seeking to be cashed out) paid not in cash, but in the form of a negotiable
purchase money note.            The note would be received by the partnership and
ultimately distributed to the withdrawing partner in liquidation of his or her
partnership interest. The transfer of the remaining portion of the property to the
purchaser of the relinquished property equal to the proportionate interest of the
continuing partner would be for cash that is conveyed directly to the qualified
intermediary by the purchaser of the relinquished property. An exchange is
accomplished with these cash proceeds.
           As stated above, the partnership conveys the remaining portion of the
ownership interest in the real property in exchange for the purchaser’s installment
note. In order to qualify for installment reporting of the taxable gain attributable
to the receipt of the note, it is required that one payment be made after the
partnership’s tax year in which the closing took place. Code §453(b)(1). The
note could be guaranteed by the purchaser or adequately secured by a standby
letter of credit. Reg. § 15a.453-1(b)(3)(i). Receipt of this note does not result in
immediate taxable gain recognition.27 On distribution of the note, no gain is
recognized by the entity or by the partner whose interest is being completely
liquidated. See Reg. §1.453-9(c)(2) and Code §731. Further, the withdrawing
partner or member receives a tax basis in the note equal to the tax basis that he or
she previously had in his or her partnership or LLC interest. Code §732(b). Gain
is then recognized under the installment method as the former partner or member
receives principal payments on this promissory note, and no taxable gain is
allocated to the continuing partners or members if the exchange is otherwise tax-
free under Section 1031.
           4.       Prior Liquidation of a Partner’s Interest.
           The partner’s interests in the entity could be legally eliminated through a
redemption prior to the exchange and the future payment for this interest secured
by a mortgage on the relinquished property, which could be paid off as a liability
as part of the exchange. However, there is a risk that the transaction could be
collapsed by the IRS as a step transaction if the complete liquidation of the

27
     Reg. §1.1031(k)-1(j)(2).


                                             25
partners’ interests occurs immediately prior to or, is somehow connected with, the
actual like-kind exchange. In addition, the remaining partners or members will be
required to incur more debt or infuse additional capital in the acquisition of the
replacement property to offset the liabilities (including this new liability owed to
the withdrawing partner) satisfied on the disposition of the relinquished property.


#483504




                                        26
            CONSERVATION EASEMENTS:
           INCOME TAX DEDUCTIONS FOR
        CHARITABLE CONTRIBUTIONS SERVING
             CONSERVATION PURPOSES
                                By: William B. Acker*


I.      Conservation Easements.
A.      Establishment and Contribution.
        Developers and other owners (“Owners”) of real property with attributes
worthy of conservation (“Property”) may make a charitable contribution of either
their fee interest in the Property or a portion of the interest in the Property to
assure preservation of the conservation attributes.
        The Owner may choose to retain the fee, and the donee may be fully
satisfied to obtain rights to enforce conservation restrictions on all or a portion of
the Property. As a result, Owners often establish and transfer a partial interest in
the Property in the nature of a restriction, such as an easement in gross, qualifying
under federal or state law as a conservation easement. Michigan’s Conservation
and Historic Preservation Easement Act, MCL §399.251, et seq. (“Act”), defines
conservation easements and assures that they are enforceable under state law.
        The Act defines “conservation easement”: MCL §324.2140. “Definitions.
Sec. 2140. As used in this subpart: (a) “Conservation easement” means an interest
in land that provides limitation on the use of land or a body of water or requires or
prohibits certain acts on or with respect to the land or body of water, whether or
not the interest is stated in the form of a restriction, easement, covenant, or
condition in a deed, will, or other instrument executed by or on behalf of the
owner of the land or body of water or in an order of taking, which interest is
* William B. Acker is a shareholder and director of the Kemp Klein Law Firm. He is a
member of the Council of the Real Property Law Section, and the Chairperson of the
Section’s Federal Tax Aspects of Real Estate Transactions Committee. He concentrates
on business and estate planning, tax dispute administrative appeals and tax litigation,
including planning for real property transactions. He has authored articles for the Journal
of Taxation, State Bar Journal, the Section’s Real Property Review, the Tax Section’s
“Michigan Tax Lawyer,” and other professional publications. He has often lectured in
the Real Property Law Section’s Homeward Bound series, the Tax Section’s After Hours
Tax Seminars, and has lectured for the Real Property Section of the ABA and ICLE. Mr.
Acker is a member of the ICLE Real Property Advisory Board.
appropriate to retaining or maintaining the land or body of water, including
improvements on the land or body of water, predominantly in its natural, scenic,
or open condition, or in an agricultural, farming, open space, or forest use, or
similar use or condition.”
        The Act also provides that conservation easements meeting the Act’s
requirements are enforceable and recordable. MCL §324.2141. “Conservation
easement; enforcement; recordation.             Sec. 2141.      A conservation easement
granted to a governmental entity or to a charitable or educational association,
corporation, trust, or other legal entity is enforceable against the owner of the land
or body of water subject to the easement despite a lack of privity of estate or
contract, a lack of benefit running to particular land or a body of water, or the fact
that the benefit may be assigned to another governmental entity or legal entity,
including a conservation easement executed before March 31, 1981.                          The
easement shall be recorded with the register of deeds in the county in which the
land is located to be effective against a bona fide purchaser for value without
actual notice.”


B.       Income Tax Charitable Deduction for Contribution of Conservation
         Easement.

        The tax benefits which may be available as a result of charitable
contribution of a conservation easement are subject to complex statutory and
regulatory rules.1 Recently, renewed emphasis on abuse of conservation easement
charitable contributions has emerged in recent communications and initiatives by
members of Congress and the Department of Treasury to attack perceived abuses
in the present climate of governmental activism against a renewal of sophisticated
tax shelter abuses.2



1
  See charitable contribution reform revisions in the Tax Reform Act of 1969, comprehensive
appraisal requirements for contributions of non-cash property under the Deficit Reduction Act of
1984, expansion of penalties under the Revenue Reconciliation Budget Act of 1989 and the
strengthening of substantiation requirements in the Omnibus Budget Reconciliation Act of 1993.
2
  See Congressional Joint Committee on Taxation Report, January 27, 2005, and various related
statements of Congressional leaders addressing abuse of conservation easement contributions.


                                               2
         1.        General Statutory and Regulatory Requirements for Contributions
                   of Conservation Easements.

                  a.       General Limitations and Restrictions.                Generally, cash
contributions and contributions of real property are subject to separate rules which
provide limitations on, and reduction of, deductions for contributions of
appreciated property.3 Reductions are imposed on contributions of real property
to the extent that appreciation would be taxed as ordinary income.4 To the extent
that contributed appreciated property would be taxed at capital gains rates, the
donor’s deduction may be limited to the donor’s basis in the property,5 if the
donee organization’s use of donated property is not related to its charitable
function or the donation is made to a private foundation.6
                  b.       Only     Conservation        Easements       that    are    “Qualified
Conservation Contributions” Are Deductible. Beyond these generally applicable
limits and regulations, easements, are caught by an exception to the general rule
of deductibility of contributions of property7 that prohibits a deduction for a
contribution of less than the donor’s entire interest in property,8 unless certain
exceptions apply, most prominently, unless the particular easement qualifies as a
“qualified conservation contribution.”9
         Generally, a “qualified conservation contribution” is a contribution of: (i)
a “qualified real property interest,” to a (ii) “qualified organization;” (iii)
“exclusively for conservation purposes.”10




3
   See Section 170(b)(1) of the Internal Revenue Code of 1986, as amended (“Code”) for
limitations applicable to contributions of appreciated real property to a public charity, and to a
private foundation, respectively.
4
  See Code §170(e)(1)(A).
5
  Code §170(e)(1)(B)(i).
6
  Code §170(e)(1)(B)(i).
7
  Code §170(a).
8
  Code §170(f)(3).
9
  Code §170(f)(3)(B)(iii), as a result a “qualified conservation contribution” donation is deductible
under Code §170(a)(1), et seq., if it complies with the specific detailed requirements of Code
§170(h) and additional applicable statutory and regulatory rules. As discussed, contributions of an
entire interest the Property (other than a qualified “mineral interest”), Code §170(h)(6), may
qualify as may a remainder interest in real property.
10
   Code §170(h).


                                                 3
        These three primary requirements, lead the taxpayer Owner and the
Owner’s tax advisor through a labyrinth of federal statutory and regulatory
requirements, and may trigger other state law implications or requirements. The
Owner and the Owner’s real property and tax advisor should carefully plan in
advance to also pay close attention to fundamental zoning and development
related real property issues involved in establishing and defining the nature and
scope of the conservation easement, the restrictions and their relationship to the
permitted uses of the Property. A conservation easement covering a portion of an
Owner’s Property requires additional careful determination of the relationship of
any restricted portion of the Property to the remainder of the Property, both
regarding the effect of the restrictions on the remaining Property’s development
potential, and on the valuation of both the restricted and unrestricted portions of
the Property.
        Other substantial requirements for valuing and reporting the appraiser’s
opinion of the donated conservation easement are encountered.
        2.       “Qualified Real Property Interest.”
        The conservation easement’s restrictions must be enforceable in
perpetuity.11      The conservation easement restrictions must be adequately
formulated and legally enforceable to limit uses of the Property that would be
inconsistent with the “conservation purpose,” and in any event, be recorded in the
land title records of the jurisdiction in which the Property is located.12 The
donee’s holding of the easement must be related to the conservation purpose or
function for the donee’s charitable exemption.               As a result of the foregoing
requirement, a mortgage or indebtedness on the Property must be subordinated to
the rights of the donee organization, and the taxpayer must prove such
subordination.13 A qualifying easement must be specific in granting rights to the
donee organization to enforce the conservation easement’s restrictions.14 Also, as

11
   Reg. §1.170A-14(g)(2). Code §170(h)(2)(C).
12
   Reg. §1.170A-14(g)(1).
13
   Reg. §1.170A-14(g)(2). See Satuloo v. Commissioner, 66 TCM 1697 (1993), aff’d 67 F.2d 314
(11th Cir. 1995).
14
   The donee must be committed to protecting the conservation purpose of the contribution, and
have resources necessary to enforce the restrictions granted in perpetuity. Reg. §1.170A-14(c)(1).


                                                4
part of the “exclusivity” requirement, the donee must agree to enforce15 the
restrictions and to only transfer the easement to a qualified conservation
organization which agrees to the same and otherwise qualifies.16
         3.       “Qualified Organization.”
         The charitable donee must be qualified to receive deductible charitable
contributions under the Code,17 and must have a commitment to preserve, and
protect the restricted property for conservation purpose of the contribution.18
Additionally, the charity’s financial condition at the time of the donation must be
evidenced and support the premise that the charity will be able to enforce the
restrictions, as a practical matter.19
         4.       “Conservation Purposes.”
         The four separate permitted “conservation purposes” are:                        (1) the
preservation of land for outdoor recreation by, or the education of the general
public, (2) the protection of a relatively natural habitat of fish, wildlife or plants,
or other similar ecosystem, (3) the preservation of open space (including farmland
and forest land) for the scenic enjoyment of the general public or pursuant to
federal, state or local government conservation policy and this preservation will
yield a significant public benefit, or (4) the preservation of a historically
important land area or a certified historic structure.                   Each of these four
conservation purposes are independently sufficient.20
         The regulations provide extensive detail concerning requirements for
satisfying the four “conservation purpose” tests, yet in key respects, significant
ambiguity and a variety of unanswered questions remain.
                  a.       Habitat Preservation Conservation Purpose: Recent Case
Law.     The U.S. Tax Court in its opinion issued in May 2005 in Glass v.

15
   Code §170h(3).
16
   Code §170(h)(3).
17
   A “qualified organization” must be one of certain governmental units or charitable organizations
described in Reg. §1.170A-14(c)(1)(i)-(iv), including a “charitable organization described in
…(code) … (s)ection 501(c)(3) that meets the public support test of (s)ectin 509(a)(2).”
18
   Reg. §1.170A-14(c)(1).
19
   The donee must be committed to protecting the conservation purpose of the contribution, and
have resources necessary to enforce the restrictions granted in perpetuity. Reg. §1.170A-14(c)(1).




                                                5
Commissioner, 124 TC No. 16 (2005); see also Section 1.170A-14(d)(1),
discussed the fundamental “conservation purpose” issue required to qualify the
contributed charitable contribution easements for deduction under the “habitat”
“conservation purpose” test.
        In Glass, the U.S. Tax Court held that taxpayer petitioners’ contributions
of two lakeside conservation easements satisfied the “conservation purpose” test
by protecting a relatively natural habitat for wildlife and plants. The restricted
areas constituted habitats for rare, endangered or threatened species of animal,
fish or plants in an area where the coastal system ecosystem was relatively
intact.21 The court concluded specifically that the restricted areas constituted a
“relatively natural habitat” for a community of resident Lake Huron Tansy,
resident pitchers thistle and visiting communities of bald eagles, among other
species of plants and wildlife,22 thus satisfying the “conservation purpose”
requirement.23 Additionally, the Tax Court held that the donee’s holding of the
conservation easements was exclusively for the “conservation purpose” of
protecting in perpetuity a relatively “natural habitat” for the endangered species.
The court focused on the direct relationship between the donee LTC’s tax exempt
purpose and the stated restrictions and purpose of the conservation easements,
coupled with the donee’s commitment and practical ability to enforce the
restrictions.
        5.      Open Space Conservation Purposes.
        The “open space” “conservation purpose” test actually encompasses two
open space conservation purposes, first, to preserve the scenic enjoyment of the
general public and the second, to preserve open space pursuant to a state or local
government conservation policy. In either case, the preservation must pose a
“significant public benefit.”24



20
   Code §170(h)(4)(a), Glass v. Commissioner, 124 TC No. 16 (2005). See also Section 1.170A-
14(d)(1).
21
   Reg. §1.170A-14(d)(3)(ii).
22
   Glass v. Commissioner, supra.
23
   Code §170(h)(4)(A)(ii).
24
   See Reg. §1.170A-14(e)(3).


                                             6
        Preserving the scenic enjoyment of the “general public” is accomplished if
“development of the property” would impair the scenic character of the local rural
or urban landscape or would interfere with the scenic panorama that can be
enjoyed from a park, nature preserve, road, water body, trail or historic structure
or land area, and such area or transportation way is open to or utilized by the
public.25 The primary element necessary is that the view be “scenic,” which may
be established by facts and circumstances analyzed by a eight factor test.26
        Establishment of preservation of open space scenic enjoyment pursuant to
a clearly delineated Federal, state or local governmental policy requires
identifying any of a variety of potential candidate stated legislative policies, rules,
regulations, policy pronouncements and other types of programs.27
        The existence of “sufficient public benefit” may depend, in part, on
“access” by the public. Generally, a limitation on public access for an open space
scenic enjoyment easement pursuant to governmental conservation policy does
not preclude finding of a conservation purpose, whereas an open space scenic
enjoyment easement requires greater public access, and may be viewed as
insufficient to qualify the easement for a deduction if only a small portion of the
property is visible to the public.28
        The “significance” of “public benefit” is also determined under a multi-
factor test used to analyze the facts and circumstances.29


C.      Valuation.
        Congress has imposed and is currently considering supplementing
requirements concerning the valuation of contributions of appreciated property.
        The general standard for valuation begins with the Internal Revenue
Service requirements for determining the fair market value of the Property.30 In
dealing with residential and non-income producing and non-commercial

25
   Reg. §1.170A-14(d)(A)(ii).
26
   Reg. §1.170A-14(d)(A)(ii).
27
   Reg. §1.170A-14(d)(4)(iii).
28
   Reg. §1.170A-14(d)(4)(ii)(B).
29
   Reg. §1.170A-14(d)(4)(iv).
30
   See Reg. §1.170A-14(h)(3), Reg. §170A-7(c), and Reg. §20.2031-7 (estate tax regulations).


                                               7
properties, despite that the comparative sales method is the best of the three
primary appraisal methods, difficulties in determining comparable sales for
conservation easements often leave the appraisers with little choice but to resort
to the so-called “before and after method” allowed by the Internal Revenue
Service regulations.31 Under this method the value of an easement is equal to the
difference between “… fair market value of the property it encumbers before the
granting of the restriction and the fair market value of the encumbered property
after the granting of the restriction.”32 This difference determines the amount of
the charitable deduction. The method requires taking into account not only the
current use of the Property, but also an objective assessment of the likelihood that
the Property would in fact be developed and requires, in effect, a development
analysis of the property employing fundamental aspects of real estate law,
including zoning and other development restrictions, made both before and after
imposition of the restriction. The legal standard required for determining the
development potential of the Property before and after the restriction vitally
hinges on the “highest and best use” of the Property before and after the
imposition of the restriction.33

#483527




31
   Reg. §1.170A-14(h)(3).
32
   Reg. §1.170A-14(h)(3).
33
   Reg. §1.170A-14(h)(3)(ii).


                                         8

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:27
posted:7/22/2010
language:English
pages:134
Description: Do Llcs Have by-Laws or Operating Agreements document sample