LLC stock distributions at termination

[fcp3]

My wife and I are 50/50 members of an LLC that holds only a brokerage account.  We pay taxes yearly on the dividends, interest and capital gains via a K--1.

We will probably terminate it this year, and want to move the stocks and bonds out into our regular joint account.  We would not be selling anything.

Is this type of a distribution tax free?

The only thing happening is changing the ownership from our LLC to our joint account?  The current basis would remain unchanged.

Where does this appear on the 1065 and K-1?

[tagteam]

I'm going to page @Rick19744 for this but, generally, distributions not in excess of your basis are not taxable to you as a member. 

You clearly need to file a final 1065, regardless.

[fcp3]

Thanks

Yes I know of need for final 1065, but if we transfer stock with capital gain, do we have to pay capital gains tax, if we do not sell the stock.

From what I can find, stock is considered "money" but "investment partnerships" are exempt from the requirement that the "gain shall not be recognized to such partner, except to the extent that any money exceeds the adjusted basis of partner's interest immediately before the distribution"

Is the "Adjusted basis" here the cost basis of stock we bought decades ago or is it the value of the stock before distribution

OR since we are not selling stock there is no gain and no tax

BTW Anyone who can force TT Business in producing an accurate tax form with these issues is a genius. I certainly can't but will have to find a new CPA as my previous one passed away. 

I am trying to figure this out so I can move stuff before the end of the year

[tagteam]

Not in this instance; you will not recognize gain until you sell the shares.

Essentially, you have a carryover basis from the LLC.

[fcp3]

Thanks.

Who is @Rick19744 and will he likely have another idea?

Why is it so hard to find on answer to this question on the web?

I would think this applies to every investment club in existence.

[tagteam]

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@fcp3 wrote:

Why is it so hard to find on answer to this question on the web?

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There is actually a lot of information on the internet but a lot of that information is bad. 

Here is some decent information you can peruse.

https://www.thetaxadviser.com/issues/2023/oct/llc-distributions-that-liquidate-a-members-interest.ht...

@Rick19744 is an expert in the area of partnership taxation (which is applicable by default to your LLC). I was thinking he might have something to add.

[Mike9241]

the issue at first glance is IRC 731 which says IN GENERAL a partner recognizes gain to the extent that cash (which includes marketable securities at fair market value) exceeds the partner's tax basis in the partnership

however, there is an exception (gain is not recognized)  under iRC 731(c)(3)(A)(iii):

such partnership is an investment partnership and such partner is an eligible partner thereof.

(i)Investment partnership   (clause i)
The term “investment partnership” means any partnership which has never been engaged in a trade or business and substantially all of the assets (by value) of which have always consisted of—
(I)money,
(II)stock in a corporation,
(III)notes, bonds, debentures, or other evidences of indebtedness,
(IV)interest rate, currency, or equity notional principal contracts,
(V)foreign currencies,
(VI)interests in or derivative financial instruments (including options, forward or futures contracts, short positions, and similar financial instruments) in any asset described in any other subclause of this clause or in any commodity traded on or subject to the rules of a board of trade or commodity exchange,
(VII)other assets specified in regulations prescribed by the Secretary, or
(VIII)any combination of the foregoing.
(ii)Exception for certain activities
A partnership shall not be treated as engaged in a trade or business by reason of—
(I)any activity undertaken as an investor, trader, or dealer in any asset described in clause (i), or
(II)any other activity specified in regulations prescribed by the Secretary.
(iii)Eligible partner
(I)In general
The term “eligible partner” means any partner who, before the date of the distribution, did not contribute to the partnership any property other than assets described in clause (i).

thus i agree with @tagteam you recognize no gain or loss and assume the partnership's tax basis in the securities. 

[Rick19744]

A few comments regarding your situation:

• As noted, if you are wanting to have the LLC terminated at the end of the year, you will have a final form 1065.  
• As a member in an LLC taxed as a partnership, each member is required to maintain their tax basis in this investment (ownership in the LLC).  Maintaining your tax basis is critical in being able to determine annual tax impact of income, losses, gains and in your specific case, the tax impact of the liquidating distribution.
• In most cases, when property is distributed (in an ordinary distribution) from the LLC taxed as a partnership it has a carryover basis to the distributee.  However, in a liquidating distribution, property distributed to a member gets a substituted basis.
• Determining a substituted basis requires following the rules in the regulations as to how the basis of the property distributed is determined (IRC 732(c)(2) and 732(c)(3)):
  • First you will need to adjust your tax basis for the applicable items on the final K-1
  • Next you will reduce your tax basis by the amount of cash received in the liquidating distribution
  • Next you will need to review the basis of the property being distributed and compare it to the remaining tax basis determined after sub bullet two; just discussed.
  • If there is a difference between the two values (tax basis and property basis), then this difference needs to be allocated amongst the property being distributed in accordance with the rules in the regulations.  
  • In general, based on the limited facts, you should not have any gain or loss, but the basis of the property being distributed may not be the same as it is at the LLC level.
• At this point, I would just recommend you take care of the administrative issues to document the LLC is being terminated; mainly with the Secretary of State.
• Then meet with a tax professional who can provide assistance in determining your substituted tax basis post liquidating distribution.

[Mike9241]

the simple answer is that the distribution is shown as such on the 1065 and line 19A of the k-1 (assuming the forms do not change in 2024). note that the actual due date of the 1065 is the 15 day of the 3rd month following the month when the assets are distributed. 

so technically if you terminate in November the return is due 2/15/2025

[fcp3]

@tagteam  @Mike9241 @Rick19744

Thank you all  so very much.  I found a lot of the links myself, but had to actually read the Code to find the Investment Partnership exemption.

I had not found the deadline either

Will try to find another CPA to help