The document discusses various aspects of debt forgiveness income under U.S. tax law, including what constitutes debt forgiveness income, exceptions to debt forgiveness income, and to which taxpayers the exceptions apply. It provides examples and discusses issues related to insolvency, bankruptcy, qualified farm/real property indebtedness, principal residence indebtedness, and deferral of income from certain debt restructurings. It also briefly discusses passive activity loss rules and how the rules apply differently to real estate professionals.

1. “ Three Things All Practitioners Should Understand” Cary Rodin John “Trey” Webb Timothy J. Watt Presented by: Real Estate and Tax Law Joint Section Breakfast Thursday, November 5, 2009

2. Debt Forgiveness Income

23. Passive Activities and Real Estate Professionals

44. Business Formation Choice of Business Entity

48. PAGE Shopping Center Direct Ownership Profit/Loss Cash Flow No Legal Entity Sole Proprietorship Mr. & Mrs. Jones Taxed Entity

50. PAGE Limited Liability Company Mr. Jones Mrs. Jones Shopping Center Profit/Loss Cash Flow Profit/Loss Cash Flow 80% 20% Taxed Entity

54. PAGE C Corporation Mr. Jones Mrs. Jones Dividends Cash Flow Dividends Cash Flow 80% 20% Shopping Center $10 Million Tax Level Up to 34% + state tax (C Corporation) Taxed on Dividends

60. PAGE S Corporation 100% Hybrid Entities U.S. Individuals Management Company Owner Keep Salaries Low Reduce payroll taxes Shopping Center 75% Corporate Investors 25% LLC

62. Characteristics of Entity Types PAGE Characteristic Sole Proprietorship Single Member LLC LLC Partnership Limited Partnership Limited Liability NO YES YES ( unless provided otherwise) NO (General partners: unlimited liability) YES/NO (General partners: unlimited liability, Ltd Partners: no liability) Levels of Taxation One (Sch. C on 1040) (Sch. E on 1040) One (Sch. C on 1040) (Sch. E on 1040) One (flow thru) (Sch. E on 1040) One (flow thru) (Sch. E on 1040) One (flow thru) (Sch. E on 1040) Certainty of Tax Status Yes Yes (Check the Box) Disregarded entity Yes (Check the Box) Like a partnership Yes (Check the Box) Partnership Yes (Check the Box) Partnership State Taxation One Depends (Some follow Federal, others treat as separate Corp) Depends (Some tax as Corp., some impose fees) Few / None (may withhold for non-residents) Few / None (may withhold for non-residents)

63. Characteristics of Entity Types, Cont’d PAGE Characteristic Sole Proprietorship Single Member LLC LLC Partnership Limited Partnership Self-Employment Tax Yes Yes Depends (active members, yes) Yes Yes / No (General partners: yes, Ltd Partners: no) Participation No Restrictions No Restrictions No Restrictions No Restrictions State Dependent (General partners: no restrictions, Ltd Partners: restricted) Continuity of Life N/A Yes Yes No (Partner withdraws, it’s dissolved – Vote of partners keep it) No (Partner withdraws, it’s dissolved – Vote of partners keep it) Deduct Fringe Benefits Health - Yes Other - No Health - Yes Other - No Health - Yes Other - No Health - Yes Other - No Health - Yes Other - No

64. Characteristics of Entity Types, Cont’d PAGE Characteristic Ltd Liability Ptnship Ltd Liability Limited Ptnship S -Corporation Professional Corporation C- Corporation Limited Liability State Specific State Specific YES ( unless provided otherwise) YES YES ( unless provided otherwise) Levels of Taxation One (Sch. E on 1040) One (Sch. E on 1040) One (generally) (flow thru) (Sch. E on 1040) Two Two Certainty of Tax Status Yes Yes (Check the Box) Partnership Yes (Timely filing of election) Yes Yes State Taxation Few / None (may withhold for non-residents) Few / None (may withhold for non-residents) Depends (may withhold for non-residents) Yes Yes

65. Characteristics of Entity Types, Cont’d PAGE Characteristic Ltd Liability Ptnship Ltd Liability Limited Ptnship S -Corporation Professional Corporation C- Corporation Self-Employment Tax Not Clear (probably Yes) Not Clear (probably Yes, General Ptnrs, No Limited Ptnrs) No No No Participation No Restrictions State Dependent (General partners: no restrictions, Ltd Partners: restricted) No Restrictions No Restrictions No Restrictions Continuity of Life No (Partner withdraws, it’s dissolved – Vote of partners keep it) No (Partner withdraws, it’s dissolved – Vote of partners keep it) Yes Yes Yes Deduct Fringe Benefits Health - Yes Other - No Health - Yes Other - No Health – Yes Other – No (if >2% owner) Health - Yes Other - Yes Health - Yes Other – Yes