LLC - Conversion of Single to Multi Member / Interest Exchange

[bbrownatl]

I have a client with a single member LLC (Co.A) who is now converting to a multi member LLC. Basically, he is initially giving up 5% of his company in exchange for a LLC interest of a different non related LLC (Co.B). I’ve looked at Rev Ruling 99-5 which discussed such transactions but it refers to the contribution of cash or assets. The issue I have is essentially a stock swap BUT, I’m thinking it is potentially a taxable event in that the client, as an individual, is getting stock in Co. B and is giving a portion of his LLC interest with the difference being a gain to the client. The other issue is determining the basis.

For Co. A, his basis is very small as it is a consulting business with minimal assets. For Co. B, he is getting stock that he deems has a value of $125K. The reason he thinks so is that he is getting 5% of Co. B and recently, an investor put $50K into Co. B for a 2% interest. So, any insight appreciated as to the gain calc.

Just much easier when it is cold hard cash!!

[Nashville]

Basis is Limited

Mr. Brown I don't believe he is forced to report a gain on a swap stock period. (Except to the extent of cash) Indeed, tax avoidance is one reason for stock swaps.

The trade-off is that his basis going forward is limited to his basis in the original company. The situation may continue to bear confusion because on the books of the LLC, his equity position will be stated much higher. See TTB for discussion of "inside" vs. "outside" basis.