Sale Of Partnerhsip Interest (llc)

[Unregistered]

FACTS:
Partner A owns 49%
Partner B owns 49%
Partner C owns 2% (Partner A and B's jointly owned C-Corp)

Partner A is buying out partner B for $60,000.

Assets: Cash $ 80,000
A/R 155,000
Inventory 324,000
Fixed assets 3,000
(110,000
Accum depr
$107,000)
Total: $562,000

Liabilities: $610,000

Partner B has a negative capital account at year-end or $18,000.


Question: How should the purchase/sale be reported for both partners?

Question: Am I correct in that Partner B will have to claim the negative $18,000 capital account as income? Is this reported as a capital gain? Or does it get reported on the K-1? If so, how?

Any other information would be helpful. Thank you very much.

[veritas]

Here is a link which should help some.

http://www.irs.gov/businesses/partnerships/article/0,,id=134696,00.html#1

[Bees Knees]

Is this a real life client situation, or are you posting test questions for us to answer?

[Unregistered]

It's a real situation.

[Unregistered]

Actual situation

This is not a test. This is an actual situation that needs to be resolved quickly. PLEASE HELP!

[Bees Knees]

You said partner A is buying out partner B for $60,000. I assume you mean that this is between partner A and partner B. It is not a transaction that is being run through the partnership.

When somebody sells their interest in a capital asset (such as a partnership interest), gain or loss is the difference between cash or property received and their basis in the asset.

So we can’t answer you question without know what Partner B’s basis is in the partnership. The negative capital account is not the same as basis. The capital account does not take into consideration liabilities. It does not take into consideration the basis of property that Partner B may have contributed years ago for his or her partnership interest, or if Partner B acquired his or her interest from a third party.

Without knowing basis, we cannot tell you what gain or loss is.

A hint that might help answer your question: If Partner B is being relieved of partnership liabilities, liability relief increases the amount realized on the transaction.

For example, if Partner B’s basis in the partnership is $10,000, and he or she is being relieved of $10,000 worth of partnership liabilities, the $60,000 total cash received would represent a gain on the transaction. However, if this is an LLC and Partner B is not liable for any LLC liabilities, then there is no relief of liabilities.

[Unregistered]

Bees Knees,

Thank you for your response. Yes, this is an LLC. My fault for not using correct terminology (i.e., Member A, Member B). Member A is personally buying Member B's interest. Member B has no basis.

If it is better for member A, we could structure it to have the LLC purchase B's interest.

[Bees Knees]

Member B has gain on total cash received, regardless of how the interest is sold.

Assuming your LLC is being taxed as a partnership, member A could benefit from a Section 754 election to adjust basis of partnership property to FMV for depreciation purposes. TTB, page 20-8 talks about that plus gives an example of how it works. I don't believe it has to be sold through the partnership to get that treatment. I think Section 743 applies even if the sale is between the two members.

[veritas]

What about "hot assets" in the partnership. Most likely the seller will have some ordinary income on the sale?

[Bees Knees]

I was very careful not to say "capital gain" in any of my posts.

Yes, the selling partner must determine the amount that represents ordinary gain from the sale of unrealized receivables. (TTB page 20-10)

[dsi]

So, by the time the sun sets at the end of the day, Partner A will be a 98% partner while Partner C will continue to be a 2% partner. This is assuming Partner A acquires Partner B's interest directly from Partner B.