Gift of LLC interest when capital account is negative

[kthurman]

Father has negative LLC capital account. He wants to gift his son 20% of his membership units. Does 20% of the negative capital account also transfer to the son? I cannot find any guidance in the Regs. I would really appreciate some guidance on where to look.

[Bees Knees]

The capital account represents the partner’s share of the equity in a partnership. Selling or gifting a partnership interest between partners outside of the partnership does not change the equity of the partnership. Thus, the new partner’s share of equity in a partnership (the capital account) should be the same as the old partner’s share prior to the transfer.

This illustrates one reason why a partner’s capital account does not necessarily have anything to do with the partner’s basis in the partnership. The capital account is tied to the inside activities of the partnership. The partner’s basis is outside the partnership.

[ChEAr$]

Father has negative LLC capital account. He wants to gift his son 20% of his membership units. Does 20% of the negative capital account also transfer to the son? I cannot find any guidance in the Regs. I would really appreciate some guidance on where to look.

Is/was this formerly a single owner LLC? If so, father has been filing a schedule c.

Consult with learned counsel in this case so that transfer can be made in compliance with
state laws relative to LLC's.

[JON]

As far

as the IRS is intially concerned for gifting the only value that matters is fair market value - all assets and liabilities are adjusted to FMV for that for gifting. If Schedule C - just keep it going (I think) if it is a going concern there will be future profits the son will pick up without any operating cash to wipe out the deficit. He does know that?..!!

[kthurman]

re SMLLC

Is/was this formerly a single owner LLC? If so, father has been filing a schedule c.

Consult with learned counsel in this case so that transfer can be made in compliance with
state laws relative to LLC's.

The son already owned 4% so it was not a SMLLC.

[kthurman]

The capital account represents the partner’s share of the equity in a partnership. Selling or gifting a partnership interest between partners outside of the partnership does not change the equity of the partnership. Thus, the new partner’s share of equity in a partnership (the capital account) should be the same as the old partner’s share prior to the transfer.

This illustrates one reason why a partner’s capital account does not necessarily have anything to do with the partner’s basis in the partnership. The capital account is tied to the inside activities of the partnership. The partner’s basis is outside the partnership.

Thanks for confirming!

[kthurman]

Is/was this formerly a single owner LLC? If so, father has been filing a schedule c.

Consult with learned counsel in this case so that transfer can be made in compliance with
state laws relative to LLC's.

The son already owned 4% so it was not a SMLLC.

[kthurman]

Thanks for the responses!

I appreciate your time spent answering my post.