[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Notices]
[Pages 5808-5811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2640]


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FEDERAL TRADE COMMISSION


Premerger Notification: Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Notice of adoption of formal interpretation.

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SUMMARY: The Premerger Notification Office (``PNO'') of the Federal 
Trade Commission (``FTC''), with the concurrence of the Assistant 
Attorney General in charge of the Antitrust Division of the Department 
of Justice (``DOJ''), is adopting a Formal Interpretation of the Hart-
Scott-Rodino Act, which requires persons planning certain mergers, 
consolidations, or other acquisitions to report information about the 
proposed transactions to the FTC and DOJ. The Interpretation concerns 
the reportability of certain transactions involving the formation of a 
Limited Liability Company (``LLC''), a relatively new form of entity 
authorized by state statutes, resulting in the combination of business 
into the new LLC.
    This Formal Interpretation was first published on October 13, 1998, 
together with a request for comments, to become effective on December 
14, 1998. 63 FR 54713 (October 13, 1998). The PNO received six comments 
which were placed on the public record. On December 2, 1998, the 
effective date of this Interpretation was postponed until February 1, 
1999, to give the PNO staff more time to analyze and respond to the 
comments. 63 FR 66546 (December 2, 1998).
    Formal Interpretation 15 as republished here has been modified in 
response to the comments. Under the revised Interpretation, the 
formation of an LLC which combines under common control in the LLC two 
or more pre-existing businesses will be treated as subject to the 
requirements of the HSR act under Sec. 801.2(d) of the HSR rules, 16 
CFR Sec. 801.2(d), which governs mergers and consolidations. Because 
Formal Interpretation 15 has been modified substantially, the effective 
date of the Interpretation is postponed until March 1, 1999.

DATES: The effective date is March 1, 1999.

FOR FURTHER INFORMATION CONTACT: Richard B. Smith, Deputy Assistant 
Director, Premerger Notification Office, Bureau of Competition, Room 
301, Federal Trade Commission, Washington, DC 20580. Telephone: (202) 
326-2850. Thomas F. Hancock, Attorney, Premerger Notification Office, 
Bureau of Competition, Room 301, Federal Trade Commission, Washington, 
DC 20580. Telephone: (202) 326-2946.

SUPPLEMENTARY INFORMATION: The text of Formal Interpretation Number 15 
is set out below.

Formal Interpretation Number 15

    Formal Interpretation Pursuant to Sec. 803.30 of the Premerger 
Notification Rules, 16 CFR Sec. 803.30, Concerning the Reporting 
Requirements for the Formation of Certain Limited Liability Companies 
(``LLCs'').
    This is a Formal Interpretation pursuant Sec. 803.30 of the 
Premerger Notification Rules (``the rules''), 16 CFR Sec. 803.30. The 
rules implement Section 7A of the Clayton Act, 15 U.S.C. Sec. 18a, 
which was added by sections 201 and 202 of the Hart-Scott-Rodino 
Antitrust Improvements Act of 1976 (``the act''). This Formal 
Interpretation and a request for comments were originally published on 
October 13, 1998, to become effective on December 14, 1998. See 63 FR 
54713 (October 13, 1998). The PNO staff received six comments. The 
staff postponed the effective date until February 1, 1999, in order to 
have more time to analyze these comments. 63 FR 66546 (December 2, 
1998). Formal Interpretation 15, published here, has been modified 
substantially in response to the comments received and postpones the 
effective date until March 1, 1999.
    The act requires the parties to certain acquisitions of voting 
securities or assets to notify the FTC and the DOJ and to wait a 
specified period of time before consummating the transaction. The 
purpose of the act and the rules is to ensure that such transactions 
receive meaningful scrutiny under the antitrust laws, with the 
possibility of an effective remedy for violations, prior to 
consummation. Under the rules, certain types of transactions, such as 
mergers, consolidations, and the formation of corporate joint ventures, 
are treated as acquisitions of voting securities potentially subject to 
the act, while other transactions, such as the formation of 
partnerships, are deemed non-reportable. See Secs. 801.2(d) and 801.40 
of the rules, 16 CFR Secs. 801.2(d) and 801.40.
    The LLC \1\ is a relatively new form of business organization that 
is neither a partnership nor a corporation but a hybrid legal entity 
that combines certain desirable features of both partnerships and 
corporations. Specifically, an LLC is taxed as a partnership but 
shields its members from liability as a corporation shields its 
shareholders. The first LLC statute was passed in 1977 by Wyoming \2\ 
and a trickle of other states followed. The use of LLCs expanded 
significantly after 1988 when the Internal Revenue Service (``IRS'') 
concluded that an LLC organized under the Wyoming statute was taxable 
as a partnership.\3\ By 1993 all 51

[[Page 5809]]

jurisdictions had LLC laws of one form or another.
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    \1\ This Formal Interpretation applies only to the reportability 
of the formation of certain LLCs. The position of the FTC staff on 
the status and treatment under the act of other non-corporate 
entities such as partnerships remains unchanged.
    \2\ Wyo. Stat. Secs. 17-15-101 to -135 (Supp. 1989).
    \3\ Rev. Rul. 88-76, 1988-2 C. B. 360, 361.
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    When it first encountered these types of organizational structures, 
the PNO concluded that as ``companies'' LLCs are ``entities'' within 
the meaning of Sec. 801.1(a)(2), 16 CFR Sec. 801.1(a)(2), and that, 
until it had more experience with them, the PNO would treat LLCs like 
corporations. Initially, therefore, Sec. 801.40 of the rules, 16 CFR 
Sec. 801.40, ``Formation of joint venture or other corporations,'' 
governed the formation of LLCs and an interest in an LLC was treated as 
a voting security for HSR purposes.
    On further analysis, the PNO concluded that this initial approach 
was too inclusive. LLCs at the time were primarily used as vehicles for 
the creation of start-up businesses. The PNO's treatment of LLCs 
resulted in requiring HSR filings in a large number of transactions 
that did not raise antitrust concerns. Furthermore, the PNO believed 
that in most LLCs the interest held by the members of the LLC was more 
like a partnership interest than a voting security interest. 
Consequently, in 1994, the PNO began to informally advise parties that 
the treatment of LLCs for reporting purposes would depend on a 
determination of whether the interest acquired in the LLC was more like 
a voting security interest or more like a partnership interest.\4\
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    \4\ Specifically, the formation of an LLC was treated as 
potentially reportable only if the LLC had a group that functioned 
like a board of directors and the LLC ownership interest resulted in 
the holders appointing person(s) other than their employees, 
officers, or directors (or those of entities controlled by such 
holder or its ultimate parent entity) to that group. In such cases, 
the LLC interest was treated as a voting security interest. In all 
other instances, LLC interests were treated as partnership interests 
and the acquisition of these interests was not reportable (unless 
the acquiring person would hold 100 percent of the interests as a 
result of the acquisition).
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    This treatment of LLCs has not been completely satisfactory. The 
use of LLCs has evolved, and while LLCs continue to be used as vehicles 
for start-up enterprises, they are now often used to combine competing 
businesses under common control. Indeed, the Commission's litigation 
staff has investigated several transactions raising potential antitrust 
concerns involving the formation of LLCs. In these transactions, 
previously separate businesses were combined under common control when 
they were both contributed to a single, newly-formed LLC. Nevertheless, 
the creation of the LLC to combine competing businesses under common 
control was typically not treated as reportable under the PNO's then-
current treatment. However, the union of competing businesses under 
common control is of obvious potential antitrust concern. Since the 
past treatments of LLCs have not been satisfactory at singling out 
those transactions that were the most likely to have anticompetitive 
effects, the PNO staff has decided to revise its approach to LLCs in 
order to better carry out the purposes of the act.
    The formation of an LLC into which two or more businesses are 
contributed, like other unions of businesses under common control, is a 
kind of merger or consolidation.\5\ Section 801.2(d)(1)(i) of the 
rules, 16 CFR Sec. 801.2(d)(1)(i), states that ``[m]ergers and 
consolidations are transactions subject to the act * * *.'' \6\ A 
filing requirement for those LLC formations that involve the 
combination of businesses is appropriate and advances the purposes of 
the act and the rules, namely, to ensure that the antitrust enforcement 
agencies have advance notice of, and a timely opportunity to challenge, 
transactions which may violate the antitrust laws.
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    \5\ While combining businesses in an LLC may not be a ``merger'' 
or ``consolidation'' in the strictest sense because they do not 
involve corporations, the rationale of this interpretation is 
similar to that used by the PNO under Sec. 801.2(d) to require 
filing for acquisitions of non-profit corporations which, like LLCs, 
typically do not issue voting securities. (See ABA, The Premerger 
Notification Practice Manual, 1991 ed., Interp. #109.)
    \6\ In fact, as it was originally promulgated in 1978, 
Sec. 801.2(d)(1)(i), 16 CFR Sec. 801.2(d)(1)(i) stated that ``[a] 
merger, consolidation, or other transaction combining all or any 
part of the business of two or more persons shall be an acquisition 
subject to the act * * *.'' (emphasis added) 43 Fed Reg 33539, July 
31, 1978. In 1983, this section was changed to clarify the treatment 
of mergers and consolidations under the rules, and the italicized 
wording was eliminated. However, there is no indication that this 
change was intended to narrow the scope of Sec. 801.2(d). Rather, 
according to the Statement of Basis and Purpose to the 1983 changes, 
48 Fed Reg 34430, July 29, 1983, the Commission simply sought to 
make clear that mergers and consolidations are treated as 
acquisitions of voting securities and to aid the parties to a merger 
in determining which is the acquiring person and which is the 
acquired person.
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    This Formal Interpretation, therefore, changes the PNO's treatment 
of LLC's as follows: The PNO will henceforth treat as reportable the 
formation of an LLC if (1) two or more preexisting, separately 
controlled businesses will be contributed, and (2) at least one of the 
members will control the LLC (i.e., have an interest entitling it to 50 
percent of the profits of the LLC or 50 percent of the assets of the 
LLC upon dissolution).\7\ The formation of all other LLCs will be 
treated similar to the formation of a partnership which, under the 
PNO's longstanding position on partnership formations, will not be 
reportable.
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    \7\ Of course, as with all transactions, the HSR size of person 
and size of transaction requirements need to be met as well, and 
exemptions may apply.
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    Post-formation acquisitions of membership interests in LLCs will 
not be reportable except in two situations: (1) when the acquisition of 
the membership interest results in the acquiring person, who had not 
previously filed for and consummated the acquisition of control of that 
LLC, holding 100 percent of the membership interests of the LLC 
(similar to the PNO's treatment of the acquisition of a partnership 
interest), and (2) when the acquiring person contributes a business to 
the LLC in exchange for the LLC membership interest. The PNO will treat 
this contribution of an additional business to the business(es) already 
in the LLC as a formation of a new LLC under this Interpretation.
    In determining what is a ``business'' for purposes of this 
Interpretation, the PNO will look to the definition of ``operating 
unit'' for purposes of Sec. 802.1(a) of the rules, 16 CFR 
Sec. 802.1(a), namely, ``* * * assets that are operated * * * as a 
business undertaking in a particular location or for particular 
products or services, even though those assets may not be organized as 
a separate legal entity.'' In addition, for purposes of this Formal 
Interpretation, the contribution to an LLC of an interest in 
intellectual property, such as a patent, a patent license, know-how, 
and so forth, which is exclusive against all parties including the 
grantor, is the contribution of a business, whether or not the 
intellectual property has generated any revenues.
    Under this Interpretation, the approach of Sec. 801.2(d) will be 
used to determine the acquiring person(s) and acquired person(s) for 
potentially reportable LLC formations.\8\ Section 801.2(d)(2)(i) states 
that ``[a]ny person party to a merger or consolidation is an acquiring 
person if as a result of the transaction such person will hold any 
assets or voting securities which it did not hold prior to the 
transaction'' (emphasis added). In the context of the formation of a 
new LLC, this means that any person that will control an LLC in which 
two or more previously separate businesses will be combined will be an 
acquiring person. Thus, if ``A'' and ``B''

[[Page 5810]]

form a 60-40 LLC, the 60 percent member, ``A'' will be an acquiring 
person with respect to the contributions of ``B.'' Section 
801.2(d)(2)(ii) states that ``[a]ny person party to a merger or 
consolidation is an acquired person if as a result of the transaction 
the assets or voting securities of any entity included within such 
person will be held by any other person'' (emphasis added). In the 
above example of the formation of a 60-40 LLC, ``B'' would therefore be 
an acquired person.
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    \8\ The Formal Interpretation as published in October described 
a method to determine reportability that was based on concepts found 
in Sec. 801.40 of the HSR rules, 16 CFR Sec. 801.40. Certain 
comments suggested that such an approach was confusing and would 
increase the likelihood that parties would make erroneous 
conclusions on their reporting obligations. In light of those 
comments, and the change in approach this Formal Interpretation 
adopts, there will no longer be any need to look to Sec. 801.40 to 
determine reporting obligations.
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    If ``A'' and ``B'' were to form a 50-50 LLC to which both were to 
contribute businesses, both would be both acquiring and acquired 
persons because both would control the LLC and thus hold assets or 
voting securities it did not hold prior to the transaction. ``A'' and 
``B'' would file in both capacities, assuming the relevant size 
criteria were met. Thus, both the acquiring and acquired persons will 
be required to file notification and, in accordance with Sec. 803.10 of 
the rules, the 30-day waiting period will begin when both persons have 
substantially complied with the notification requirements.
    Under this Interpretation, the nature of the acquisition(s) taking 
place when an LLC is formed, that is, whether it is an acquisition of 
assets or of voting securities, depends on what is being contributed by 
the other member(s) of the LLC.\9\ In the 50-50 LLC described above, 
suppose that ``A'' contributes a group of assets constituting a 
business and ``B'' contributes 50 or more percent of the voting 
securities of a corporate subsidiary, S. Under this Interpretation, 
``B'' will have made an acquisition of assets and ``A'' will have made 
an acquisition of voting securities.
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    \9\ In this respect, the Interpretation necessarily departs from 
the text of Sec. 801.2(d)(1)(i), which provides that all mergers and 
consolidations shall be treated as acquisitions of voting 
securities.
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    In addition, any exemption in the act or rules that would make any 
other acquisition non-reportable may make the acquisition by one or 
more of the contributors to an LLC non-reportable. If, for example, 
``A's'' asset contribution consists of hotel properties the acquisition 
of which would be exempt under Sec. 802.2(e), ``B's'' acquisition in 
the formation of this LLC would not be reportable. Similarly, if S has 
sales and assets of less than $25 million and the value of the S stock 
that will be held by ``A'' as a result of the acquisition is $15 
million or less, then ``A's'' acquisition in the formation would be 
exempted by Sec. 802.20(b).
    To determine whether a filing is required, the parties to 
potentially reportable formation transactions also must determine the 
size-of-person and size-of-transaction, which should be done just as in 
any other asset or voting securities acquisition in accordance with 
Secs. 801.10 and 801.11 of the HSR rules. Since these transactions are 
similar to asset exchanges, for most such transactions there will not 
be a determined acquisition price for the acquired assets or voting 
securities to use in applying the size-of-transaction test. For such 
transactions, parties should use the market price or fair market value 
where another contributor contributes 50 or more percent of the voting 
securities of an issuer (see Sec. 801.10(a)), or the fair market value 
where another contributor puts assets constituting a business into the 
LLC (see Sec. 801.10(b)).
    This Formal Interpretation will not require reporting regarding 
some LLC formations and some acquisitions of existing LLC interests 
that would have required reporting under the Interpretation announced 
by the PNO in October of 1998. Unlike the October version, this Formal 
Interpretation requires reporting of the formation of an LLC only if 
the formation brings together within the LLC two formerly separately 
controlled businesses. Comments received suggested that the treatment 
announced in the October version would have covered a substantial 
number of LLCs that are not likely to raise competitive concerns. For 
example, the October Formal Interpretation would have viewed LLCs that 
are created solely as financing vehicles as reportable. In these 
transactions, a financial institution (or other party providing 
financing) in the ordinary course of its business contributes only cash 
or other financial assets and one other party contributes one or more 
operating units to a new LLC that the financial institution may control 
for HSR purposes, at least for a period of time. Under this revised 
Interpretation, so long as such financing transactions do not result in 
the contribution of a business to the LLC by two or more members, it 
will not be treated as reportable.\10\
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    \10\ There is no evidence to suggest now that LLC formations 
where only one business is contributed are being used to accomplish 
a merger or consolidation of two businesses. However, the PNO will 
look carefully at these transactions in the future and, if they 
begin to be used to accomplish a merger or consolidation, will re-
visit this issue.
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    As described above, except for situations where a new business is 
contributed in exchange for an interest in existing LLC or where, as a 
result of an acquisition, the acquiring person would hold 100 percent 
of the interests in an existing LLC, no acquisition of an interest in 
an existing LLC is reportable under this Interpretation. Several 
comments indicated that LLC agreements are sometimes entered into in 
which the right to receive more than 50 percent of the LLC's profits 
shifts from one member to another upon the happening of some event 
outside the control--or even the knowledge--of the members. Under the 
definition of control applicable to LLCs (i.e. Sec. 801.1(b)(ii)), 
under the October Interpretation, such a shift in the right to receive 
profits might have created a reporting obligation. The commenters 
argued that it would be unduly burdensome to require the beneficiaries 
of such shifts to file and that no substantive law enforcement interest 
would be served. The PNO does not intend that such shifts be reportable 
under this Formal Interpretation. Since such a shift would be the post-
formation acquisition of an interest in an existing LLC without the 
contribution of another business, it will not be treated as subject to 
the reporting requirements of the act.
    Some of the reasons for concluding that the formation of certain 
LLCs should be treated as reportable may apply equally well to 
partnerships. The position of the PNO, however, is that the formation 
of a partnership is not reportable and acquisitions of partnership 
interests that do not result in one person's holding 100 percent of the 
interests in a partnership are non-reportable. Several comments 
received on the Formal Interpretation published in October suggested 
that no change to the treatment of partnerships was necessary at this 
time. The treatment of partnerships was originally adopted, in part, 
because of the difficulty of monitoring compliance with HSR reporting 
obligations since many partnerships can be formed informally or by 
implication in many typical business arrangements. Furthermore, there 
has been no suggestion in any of the comments that partnerships are 
being used with any greater frequency now to combine competing 
businesses. Consequently, the PNO has decided not to change its 
treatment of partnerships at this time, but it may re-visit this issue 
in the future as developments require.
    The following examples are an integral part of this Formal 
Interpretation:
    1. ``A'' and ``B'' both plan to contribute businesses to a new LLC 
in which each will acquire a 50 percent interest. This LLC formation 
would involve both ``A'' and ``B'' making reportable acquisitions if 
the size-of-person and size-of-transaction tests are met. Each 
acquisition would be reportable unless exempted by Section

[[Page 5811]]

7A(c) of the act or Part 802 of the HSR rules. ``A'' would file as an 
acquiring person and ``B'' as an acquired person for ``A's'' 
acquisition of the assets being contributed by ``B,'' and ``B'' would 
file as an acquiring person and ``A'' as an acquired person for ``B's'' 
acquisition of the assets contributed by ``A.'' If ``A'' or ``B'' (or 
both) contributed 50 percent or more of the voting securities of a 
corporation, the acquisition(s) would be treated as an acquisition of 
voting securities of the issuer whose shares are contributed.
    2. ``A,'' ``B,'' and ``C'' form an LLC in year 1 in which each 
receives a one-third interest and to which each contributes a business 
valued at approximately $20 million. ``A,'' ``B,'' and ``C'' are $100 
million persons. This formation would not be reportable because no 
member controls the LLC. In year 2, ``X,'' also a $100 million person, 
acquires the membership interests of ``A'' and ``B'' for cash. This 
would not be reportable because two or more separate businesses are not 
being united in the LLC even though ``X'' is gaining control of it. 
Note, however, that the result would be different if ``X'' also 
contributed a business to the LLC in exchange for the LLC membership 
interests it receives. In the latter case, the transaction will be 
treated as the formation of a new LLC. Note also that in the example 
where ``X'' contributed only cash and did not file under HSR, if ``X'' 
were subsequently also to acquire ``C's'' membership interest it would 
then hold 100 percent of the interests in this LLC and would therefore 
have to file for the acquisition of all of the assets of the LLC.
    3. ``A'' and ``B'' form a new LLC, to which ``A'' will contribute 
its widget business and ``B'' will contribute cash for operating 
capital. This formation would not be reportable because two previously 
separate businesses are not being contributed to the LLC.
    4. ``A,'' ``B,'' and ``C'' form a 60-20-20 LLC to which ``A'' 
contributes cash and receives a 60 percent membership interest and 
``B'' and ``C'' each contribute an operating unit for a 20 percent 
interest. This is a kind of consolidation of ``B's'' and ``C's'' 
operating units into the new LLC and ``A'' will control the LLC. There 
are two reportable transactions (assuming the size criteria are met and 
no exemption applies): ``A'' acquiring the operating unit contributed 
by ``B,'' and ``A''' acquiring the operating unit contributed by ``C''.
    5. ``A'' proposes to consolidate its weighted business, which it 
has conducted in two subsidiaries and a division, into a newly-formed 
LLC in which it will hold a 60 percent membership interest. This would 
not be reportable because, although separate businesses are being 
combined, they were not under separate control prior to the 
transaction.
    6. ``A,'' ``B,'' and ``C'' form a new LLC in which ``A'' will have 
a 60 percent interest and ``B'' and ``C'' each will have 20 percent 
interests. ``A,'' a large, international pharmaceutical company, 
contributes $100 million in cash and the assets of a pharmaceutical 
product which is currently on the market. This pharmaceutical product 
lines constitutes a business. ``B'' contributes licenses to several 
patents which it will also continue to use to manufacture various 
drugs. ``C'' will contribute licenses which are exclusive even against 
itself for several drugs which are still at the testing stage and which 
have never been marketed. With a 60 percent interest, ``A'' will 
control the LLC. Since the licenses ``B'' will contribute are not 
exclusive as against it, they do not constitute a business. However, 
the licenses being contributed by ``C'' do constitute a business, even 
though they have not generated any revenue. ``A'' has a potential 
reporting obligation for the formation of this LLC for acquiring assets 
from ``C.'' This formation combines two pre-existing, separately 
controlled businesses in an LLC which ``A'' will control.
    7. ``A'' and ``B'' are both regional grocery store chains which do 
their data processing in-house. ``A's'' data processing unit does work 
only for ``A'' and ``B's'' only for ``B.'' ``A'' and ``B'' decide to 
contribute the assets used in their data processing operations to a new 
jointly-controlled LLC which will provide data processing services to 
``A'' and ``B.'' Assume the size tests are met. This would not be 
reportable because the assets used to provide such management and 
administrative support services do not constitute businesses. Cf 
Sec. 802.1(d)(4) of the rules and Examples 10 and 11, 16 CFR 
Sec. 802.1(d)(4). This would be the case even if the new LLC intends to 
begin offering data processing services to third parties, since this 
would be beginning a new business rather than uniting existing 
businesses. Note, however, that the result would be different if ``A'' 
and ``B'' had used their equipment to provide any data processing 
services to others prior to contributing it to the new LLC, for then 
each would be contributing an existing business.
    8. In year 1, ``A,'' ``B,'' and ``C'' form a new LLC to which each 
contributes a business in exchange for a one-third interest. This 
formation is not reportable because no member controls the LLC. Suppose 
that in year 2 ``A'' sells additional assets to the LLC for cash. This 
transaction is not covered by this Formal Interpretation. However, the 
LLC has a potential filing obligation as the acquiring person of those 
assets and ``A'' as the acquired person. Note that it is irrelevant 
whether the assets sold by ``A'' in year 2 constitute a business.
Donald S. Clark,
Secretary.
[FR Doc. 99-2640 Filed 2-4-99; 8:45 am]
BILLING CODE 6750-01-M