The Cummings & Cummings Law Journal

Understanding What “Material Participation” Means in the Private Equity Context In federal tax parlance, “material participation” is a term of art grounded in section 469 and its regulations, not a casual descriptor of involvement. In the private equity context, it ties directly to whether income and losses from the fund and certain portfolio company investments

Understand the Two Governing Regimes: Economic Benefit Versus Loan Every split-dollar life insurance arrangement must be structured within one of two tax regimes: the economic benefit regime under Treasury Regulation section 1.61-22 or the loan regime under section 7872 and its related regulations. Selecting the appropriate regime is the foundational decision that drives ownership, cash

Understanding the Reverse Morris Trust Structure A Reverse Morris Trust is a tax-sensitive divestiture technique that allows a parent corporation to separate a business on a tax-free basis, followed by a merger of that business with a strategic buyer. In very general terms, the parent first conducts a tax-free separation of the business under Section

What Is a “Deemed Distribution” From a CFC and Why It Surprises U.S. Shareholders A deemed distribution from a Controlled Foreign Corporation (CFC) is an inclusion of income to a U.S. shareholder without the receipt of actual cash. The most common sources are Subpart F inclusions, Global Intangible Low-Taxed Income (GILTI), and certain investments in

Understand What a Forced Liquidation Provision Actually Does A forced liquidation provision in an operating agreement is more than a simple instruction to sell assets. Properly implemented, it reallocates authority, establishes a process, and compels the manager or members to convert company property into cash and wind down obligations. It is a governance trigger with

Understand Who May Claim the Foreign Income Tax Credit as a Corporate Shareholder For U.S. corporate shareholders, the foreign income tax credit is a cornerstone mechanism to mitigate double taxation of foreign-source income. Corporations that directly earn income abroad or that are U.S. shareholders of controlled foreign corporations often face foreign tax assessments that may

Overview: Why the Distinction Between a Merger of Equals and a Traditional Merger Matters A merger of equals and a traditional merger may look similar to the uninitiated, but they entail materially different legal, tax, governance, and integration consequences. The language used in press releases often obscures these differences, and the market’s shorthand can mislead

Establishing a Bona Fide Business Purpose To legally deduct travel expenses, the journey must be undertaken primarily for a bona fide business purpose. The Internal Revenue Service evaluates objective facts such as meeting agendas, customer appointments, trade show schedules, and the substance of your itinerary. Simply bringing business cards or taking a single client call

Why Board Observer Rights Create Unique Legal Exposure Board observer rights seem innocuous at first glance: a non-voting attendee sits in the boardroom to monitor governance and protect an investor’s interests. In practice, overbroad observer rights routinely open a company and its investors to legal exposure that can exceed the risks associated with a voting

Understanding Non-Grantor Irrevocable Trusts for Legacy Assets A non-grantor irrevocable trust is a distinct legal and tax entity designed to hold and steward assets for beneficiaries over multiple generations. Unlike a grantor trust, the non-grantor structure generally causes the trust itself—or in some cases its beneficiaries—to bear the income tax burden on trust earnings rather

Understanding Earn-Outs Tied to Performance Milestones Earn-out provisions tie a portion of the purchase price to the acquired business’s post-closing performance, typically measured by revenue, EBITDA, customer retention, or product launch milestones. While earn-outs can bridge valuation gaps and align incentives, they also create significant tax complexity. The tax character, timing, and reporting of each

Understanding Pre-Contribution Gain in Partnerships and Why “Withdrawing It” Is Not Straightforward Pre-contribution gain arises when a partner contributes property to a partnership with a fair market value that exceeds its tax basis. The built-in appreciation does not vanish at contribution. Instead, under Section 704(c), the pre-contribution gain must be specially allocated to the contributing

Property Damage Proceeds Are Usually Taxable, But Basis and Timing Drive the Result When a business receives an insurance payout for damaged or destroyed property—machinery, inventory, buildings, or tenant improvements—the instinct is to treat the funds as non-taxable “reimbursements.” That is a common misconception. In general, property insurance proceeds are taxable to the extent they

Why Non-Compete Enforcement in Franchise Systems Is Uniquely Complex Non-compete provisions in franchise systems are not generic boilerplate. They are carefully engineered restraints intended to protect a franchisor’s brand goodwill, trade secrets, and system know-how after a franchisee exits the network or breaches. Unlike employment non-competes, franchise non-competes often arise in the context of the

Understanding What a PPM Really Does in an Angel Round A Private Placement Memorandum is not a pitch deck dressed in formal language. It is a legally significant disclosure document designed to mitigate anti-fraud risk under federal and state securities laws, to frame the terms of an exempt securities offering, and to present investors with

Understanding the Irrevocable Life Insurance Trust Structure An irrevocable life insurance trust (ILIT) is a specialized estate planning vehicle designed to own and control life insurance outside the insured’s taxable estate. When drafted and administered properly, the ILIT can remove the death benefit from the insured’s gross estate under Internal Revenue Code sections affecting incidents

Defining Domestic Partnerships for Benefits Purposes Domestic partner benefits sit at the intersection of tax law, employment law, and employee benefits administration. Contrary to common assumptions, there is no single, universal definition of a “domestic partner” for all purposes. Employers, insurers, and state laws may each apply different criteria to determine eligibility. As a result,

Understanding “Re-Domestication” from a Foreign Jurisdiction to the United States “Re-domestication” is commonly used to describe relocating a legal entity’s jurisdiction of formation from a foreign country to a U.S. state. In U.S. legal parlance, the most comparable mechanisms are domestication, conversion, or continuance under state statutes, or, in the absence of those options, cross-border

Understanding UCC Article 6 Bulk Sales and Modern Successor Liability When parties contemplate a sale of substantially all assets of a business, they often underestimate the legacy concept of UCC Article 6 bulk sales and the modern web of successor liability regimes that have evolved as Article 6 has been revised, limited, or repealed in

Understanding the Two Federal Partnership Audit Regimes The Tax Equity and Fiscal Responsibility Act (TEFRA) and the Bipartisan Budget Act (BBA) represent two distinct federal partnership audit regimes that determine who the Internal Revenue Service examines, how adjustments are computed, and who ultimately bears the economic burden of tax. Under TEFRA, the audit centered on