LLC units sold to single member-how to report

[LMathey]

I have an LLC with two members that filed as a partnership on Form 1065. During 2007 all members sold their units to an outside party. The new single member owner is a corporation. Since the LLC now has only a single member, the new owner elected to file as a corporation. The new owner of the LLC will file a short period return from date of sale to end of year as an 1120. Wouldn't their opening balance sheet be the same as the closing balance sheet of the 1065?

We will file a short period 1065 marking it as final using date of sale as our end of year. Since they sold their units and not the assets wouldn't our (1065) final balance sheet be the balance sheet on the date of sale and the ownership % on the K-1 would go to zero? Does this sound correct?

I have never had this situation where the sale of LLC units also forced a change of entity. I am trying to determine if this is all we have to do to report the sale of units on the 1065?? I know the gain will go on their 1040's Sch D.

Any comments are welcome.

[Bees Knees]

For federal tax purposes, the LLC was taxed as a partnership. So partnership rules are used. TTB, page 20-12 says when at least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner, the partnership is considered terminated.

Reg. §1.708-1(b)(4) says:

If a partnership is terminated by a sale or exchange of an
interest, the following is deemed to occur: The partnership contributes
all of its assets and liabilities to a new partnership in exchange for
an interest in the new partnership; and, immediately thereafter, the
terminated partnership distributes interests in the new partnership to
the purchasing partner and the other remaining partners in proportion to
their respective interests in the terminated partnership in liquidation
of the terminated partnership, either for the continuation of the
business by the new partnership or for its dissolution and winding up.

So if the old partnership is considered to have contributed all of its assets to a new partnership, the old partnership balance sheet should show zero for all entries on its final return as of the end of its short tax year. This is confirmed by the fact that the 1065 instructions mention that for page 1 under Item F, if there are no assets at the end of the tax year, enter zero for Item F. The only way you would have zero assets at the end of the year is when the partnership liquidates or distributes all of its assets to a new partnership under a termination.

As to the new corporation that purchased all of the assets, the opening balance sheet of the corporation depends upon what the new owner paid for all of the assets. So no, the balance sheet from the 1065 does not carry over to the opening balance sheet for the 1120. This is not a tax free exchange.

[LMathey]

Answer provokes more questions

Thanks for your response. I will continue to do more research. I do not do many LLC's and this one has many issues that are confusing to me.

If I understand correctly, the old partnership is considered to have contributed all of its asets to a new partnership in exchange for 100% of the units in the new partnership. These units are then distibuted 100% to the purchaser since there are no remaining partners from the terminated partnership. It looks like I have to file Form 8308 since there were unrealized receivables and inventory.

Since the balance sheet of old LLC will be zero is it proper to reflect the recourse debt that still exists on the final k-1 for old ptr #1? If not, I assume that since the recourse debt still exists he has basis? The purchaser was to pay the debt off at time of purchase but due to favorable interest rates they continue to make payments and old ptr #1 is still personally responsible. I understand that as debt is paid down old ptr #1 will continue to have income.

When I show all assets as zero and tax program computes COGS, COGS is higher since inventory is now zero. This does not sound right. Any suggestions on how to correct this?

To further complicate matters, the purchaser paid off $85,000 of the debt and $29,600 of outstanding invoices for inventory to keep the company solvent while the attorneys battled out the final purchase agreement and spent 6 months doing it. Not being sure how to handle this infusion of cash, the company accountant recorded this as increase to capital and removed the A/P and debt from books. How should I handle this? If I remove from capital and re-institute debt the balance sheet still shows $124,00 of assets and liabilities.

One final question...(I hope!) the $85,000 should add to the purchase price of the units for ptr #1 who was personally liable for the debt, is that correct? What about the $29,600 of A/P that was paid prior to closing? It was for the inventory items still on the books. Is that payment also part of the purchase price? If yes, it should add to both sellers proceeds based on their % of ownership?

Sorry to ask so many questions but I want to get it right. Maybe I am overthinking this whole thing.