LLC Member Death, Buyout by Another Member

[lzedatTT]

I have numerous questions - even insight into a single question would be useful. I am filing a 1065 for a 4 member LLC (equal ownership %'s). One member (#1) died and another member (#2) bought out the dead member's share at FMV price. The FMV price was higher for both the rental house and gas/oil producing assets.

(1) How do I properly account 'buyout of the dead member' - [handle 'internally' within LLC] was this a contribution (from #2) to the LLC with a balancing distribution (to #1) from the LLC  or  was this a sale (by #1, with associatedCapital Gain) and then re-purchase (by #2, with associated increase in Capital Account Tax Basis) of the assets.

(2) How do I recognize the increase in FMV on the Assets balance sheet - are 100% of the LLC assets re-valued  or  do 75% stay the same value and only 25% (#1's share) get increased to FMV. But any re-valuation for the Assets throw the Partners Capital Accounts out-of-balance with Assets.

(3) I assume that the IRC Section 754 election [under 743(b) IRC Section] I report/file with the IRS will also contain related info regarding the re-valuation of assets.

(4) How do I handle the House depreciation - is 75% of the House following the old depreciation schedule and 25% (#1's share) following a new schedule [i.e. old value House depreciation for the first few months and then FMV House depreciation for the remainder of the year]. But this seems to entail Form 4797 and recognizing the Capital Gain for #1's share.

(5) The individual member K-1's numbers are no longer in sync with the default of 'member ownership % * # of days / 365' - so I need to override the default. Will this trigger Errors that will dis-allow e-filing of the return?

Any help or direction would be greatly appreciated.

[Rick19744]

Before we can provide some assistance, clarification is needed.

• Hopefully member #2 paid the estate of member #1 the $$ when acquiring the interest.  Please confirm.
• When did member #2 acquire member #1 interest?
  • At date of death (DOD)
  • Or did member #1 interest go into an estate for a period of time?
• Only member #1 proportional assets get the step-up.  This will be handled with a Section 754 election made at the entity level.  Both the entity and member #2 will need to provide documentation with the respective tax return for the information related to Section 743.
• These type of transactions get complicated.  
• Member #2 will just step into the shoes of member #1 internal capital.
• The Section 743 adjustment will be allocated to the assets to step up to FMV at DOD.  Any depreciation associated with this step up is specially allocated to member #2 on their K-1.
• The value of the assets doesn't change internally.  The only "addition" is the Section 743 adjustment noted previously.
• No gain is recognized on this step up.  This should be handled by the appropriate tax return for member #1; most likely the estate return.
• You shouldn't need to override any ownership percentages.  These should be changed in the member information section; and will be adjusted based on the response to bullet #1.

[lzedatTT]

Thanks for your quick/thoughtful reply - obviously I've more research to do.

Responses:

 - Yes, member #2 paid Estate of member #1 the $$ when acquiring interest

 - Member #1's interest went into his Estate for a period of time

 - Suspected that only Member #1's share got a step-up in basis as it was transferred to his Estate. I need to become more familiar with working/needs of 754 Election under Section 743(b).

 - tell me about it (Re get complicated)

 - Spreadsheet configured, post buyout, to add member #1's internal Capital Account to member #2's Capital Account

 - see above about familiarity with 743(b) and it's affect on member #2's  K-1

 - I couldn't reconcile the 1065 Balance sheet if I changed the Assets value - wondered if I missed something

 - (unless I've mis-interpreted) about the Capital Gain, I was only thinking about member #1 and fully expected the Estate tax return to reflect the step-up in asset value to FMV

 - Seems inconsistent with what I've experienced, not all entries fit the default of '% own * # days / 365' times annual value (e.g. depreciation certainly doesn't, but admittedly my experience with depreciation and the 743(b) adjustment needs improvement - see 3 and 6 above)

[Rick19744 · Accepted solution]

Some follow-up comments:

• You will need to prepare a K-1 for member #1 from the beginning of the tax year to their DOD.  This K-1 will be used on member #1 final 1040.
• You will then need to prepare a K-1 from DOD to when it was purchased by member #2.  This K-1 will be used by the estate when preparing the estate form 1041.
• Only member #2 will be eligible for the Section 754 step-up; along with the Section 743 adjustment.
• You shouldn't have to adjust the balance sheet.  The Section 754 and 743 adjustment is for tax only.  As a result, you will always have a book to tax difference.
• While I am not on a Windows environment to see the software, you should be able to enter the time period in the member / partner information section.
• The estate tax return will reflect a step-up to FMV, assuming an estate tax return is required.  But this step-up is not the same as the step-up for Section 754 purposes.  While the figures may be the same, two difference matters. 

[lzedatTT]

Took me awhile to get familar with the reg.s of IRC Section 743(b), but thereafter the vast majority of your reponses were dead on 😉 .

However, I needed to use 'Secial Allocations'  in TT to properly divided the income, expenses, royalties, etc between the various members of the LLC (the default division of schedule K info to the members K-1's didn't work, even with using the DOD of member #1 in the "Addl K-1 Info" Worksheet).