TN 5 (11-09)
PS 01810.047 Tennessee
A. PS 10-018 Resource Determination Regarding Spouse’s Interest in a Limited Liability Company – Tennessee Applicant – Stephen W~
DATE: October 30, 2009
This opinion examines whether or not a parent deemor’s interest in a limited liability company (LLC) is a countable resource for Supplemental Security Income (SSI) purposes. The property held within the LLC does not meet the criteria for exclusion from resources per Section 1613 of the Social Security Act. Under the terms of the Operating Agreement for the LLC, the parent deemor may sell his financial interest. Therefore, the parent deemor’s interest in the LLC is a countable resource for SSI purposes and deemed to the child to the extent that the amount exceeds the applicable resource limits.
You asked whether a 1% interest in a limited liability company (LLC) is considered a countable resource for the purposes of determining eligibility for Supplemental Security (SSI) payments.
We believe the Social Security Administration (SSA) should consider the interest in the LLC as a countable resource.
Stephen W~ (Applicant) applied for SSI on August 30, 2002, and his application was approved on November 23, 2003. Applicant’s spouse, Deloise W~, owns a 1% interest in Drennan Family Farm, LLC. After conducting a redetermination in March 2009, SSA learned of the interest Applicant’s spouse had in the LLC. SSA issued an initial resource notice on April 4, 2009, notifying Applicant that his spouse’s property interest in the LLC was a countable resource for the purposes of determining Applicant’s eligibility for SSI payments and that his resources, therefore, exceeded the resource limit of $3,000.00. Applicant has requested reconsideration of SSA’s initial determination.
The operating agreement of the LLC, dated June 21, 2006 (Operating Agreement), shows Applicant’s spouse has a 1% undivided membership interest as a Class B member in a tract of land, held by the LLC. The assets of the LLC consist of 163 acres of rental farm land. The operating agreement also shows the parents of Applicant’s spouse hold a 94% membership interest and are Class A members and managers of the LLC. Other family members hold the remaining 5% membership interest as Class B members.
Under the terms of the Operating Agreement, a member may assign his or her financial rights to a member or any immediate family member without restriction. Each member may also assign his or her financial rights to a third party with certain restrictions: (1) if a member desires to transfer or assign his financial rights, he must give the LLC the right of first refusal; (2) if the LLC does not exercise its option to purchase within thirty days, the other members shall have the option to purchase the financial rights; (3) if the other members do not exercise their option within thirty days, the member may consummate the sale to the third party; (4) the third party must pay a transfer fee to cover all reasonable expenses connected with the his substitution as a member of the LLC. See Operating Agreement, Article X, pp. 17-19.
Under the Social Security Act (Act), a disabled individual may receive SSI payments if his or her income and resources do not exceed certain annual limits. See Act § 1611(a). The Act does not define “resources” and provides only a list of certain items excluded in determining the resources of an individual. See Act § 1613(a). However, Congress empowered the Commissioner to promulgate rules and regulations on the nature and extent of proofs and evidence on such matters. See Act §§ 205(a), 1631(d)(1). Pursuant to that authority, the Commissioner has clarified that resources include “any real or personal property interest that an individual (or spouse, if any) owns and could convert to cash to be used for his or her support and maintenance.” 20 C.F.R. § 416.1201(a) (2009); see Program Operations Manual System (POMS) SI 01120.010(B). “If the individual has the right, authority or power to liquidate the property, or his or her share of the property, it is considered a resource. If a property right cannot be liquidated, the property will not be considered a resource of the individual (or spouse).” 20 C.F.R. § 416.1201(a)(1); see POMS) SI 01110.100(B). Where a disabled individual is married and his or her spouse lives in the same household and is not aged, blind, or disabled individual, SSA deems the disabled individual’s income and resources to include a portion of income and resources of the ineligible spouse. See Act § 1614(f)(1); 20 C.F.R. § 416.1202(a), (c); POMS SI 01310.160(A). Deemed income and resources are attributed to the disabled individual whether or not they are actually available to him or her. See Act § 1614(f)(1); POMS SI 01310.001(C)(1). Because Applicant’s spouse is an ineligible spouse, her income and resources (after any appropriate exclusions) would be attributable to Applicant.
We refer to state corporate law to determine whether the 1% interest in the LLC owned by Applicant’s spouse should be counted as a resource. See Cannuni v. Schweiker, 740 F.2d 260, 263 (3d Cir. 1984); POMS SI 01110.500(C) (noting an ownership interest may vary depending on State law). The LLC at issue was incorporated in Tennessee. Therefore, we look to Tennessee law to determine whether Applicant’s spouse can sell her interest in the LLC. The LLC was formed on June 21, 2006. The Tennessee Revised Limited Liability Company Act (Tennessee LLC Act), Tenn. Code Ann. §§ 48-249-101-1133 (2009), applies to all LLCs formed after January 1, 2006, and provides for the formation of a business entity that offers all its members limited liability as if they were shareholders of a corporation but treats the entity as a partnership for tax purposes. See Collier v. Greenbrier Developers, LLC, No. E2008-01601-COA-R3-CV, 2009 WL 1026025, at *4 (Tenn. Ct. App. Apr. 16, 2009); Anderson v. Wilder, No. E2003-00460-COA-R3-CV, 2003 WL 22768666, at *3 (Tenn. Ct. App. Nov. 21, 2003); In re Service Merchandise Co., Inc., 297 B.R. 675, 683 n.2 (Bankr. M.D. Tenn. 2002).
Generally, the financial rights of a member of the LLC are transferable in whole or in part; however, a restriction on the transfer of financial rights may be imposed in the LLC documents or by written agreement among the members. See Tenn. Code Ann. § 48-249-507 (2005). The Operating Agreement provides that in the event any member desires to transfer or assign his financial rights to a non-member, he must first give the LLC and the other members the option to purchase the financial rights at the price and terms offered by the prospective purchaser (right of first refusal). See id. at Article X, § 10.3.1. If the Class A members allow the transfer of financial rights to a non-member, this individual or entity must pay a fee to cover all reasonable expenses connected with the transfer. See id. at Article X, § 10.4. Tennessee courts have recognized that a membership interest in an LLC, even where a member cannot sell his interest without the approval of the remaining members, is an asset with value. See Inzer v. Inzer, No. M2008-00222-COA-R3-CV, 2009 WL 2263818 (Tenn. Ct. App. July 28, 2009) (valuing husband’s membership interest in an LLC in a divorce proceeding).
Applicant asserts his spouse’s 1% interest in the LLC should not be considered a resource because all income and expenses related to the LLC are currently allocated to Applicant’s spouse’s parents, and she receives no current income from the farm. As previously noted, however, the relevant inquiry in a resource determination is whether the individual could convert the property to cash rather than whether the property is currently generating income. See 20 C.F.R. § 416.1201(a) (2009); Program Operations Manual System (POMS) SI 01120.010(B). Although Applicant’s spouse acknowledges that her 1% interest in the LLC can be sold, she maintains the legal fees involved in any such sale would be greater than the value of the interest. The Act and regulations do not provide for consideration of the fees or costs associated with liquidating a resource in determining whether it is countable.
We conclude, based on the language of the Operating Agreement, that Applicant’s spouse had the right to sell her financial interest (share) in the LLC during the period at issue. Because she had the right, authority or power to liquidate her share of the property, her share would be considered a resource of Applicant under 20 C.F.R. § 416.1201(a)(1).
For the foregoing reasons, we conclude SSA could find that the interest Applicant’s spouse held in the LLC is a countable resource in determining Applicant’s eligibility for SSI payments.
Mary A. S~ Regional Chief Counsel
By: __ ___________
Joseph P. P~, III
Assistant Regional Counsel