Sale of LLC Interest

[gump0220]

Hi,

I manage an LLC taxed as a partnership.  At the start of 2020, the LLC had nine members.  On Dec 31 2020, I bought out all of the other members.  The value I bought each partner out is proportional to their ownership, and comes out to slightly below each of their adjusted tax basis.

I'd like to file the LLC return with Turbotax Business.  I am having trouble finding where to input this transaction.  I can select "final return" for the partners and also have their go-forward ownership be zero.  But I don't see how I can incorporate the transaction such that it is reflected in their K-1.  For example, my understanding is that this transaction should be reflected as a capital loss on their K-1 (and I assume that makes the ending capital account $0).

Any help is much appreciated.  Thanks!

[Carl]

Not sure if this helps, or not. Might make things worse. But here goes.

First, since a partnership can not exist with only one owner, that means this partnership is being completely dissolved. So remember that you also have to indicate  your own K-1 is final and that you too are leaving the partnership.

Next, (and I'm not sure on this) whatever you paid the other 8 partners should first be shown as a capital contribution to the partnership, by you. (whatever amount is necessary to get the ending capital account balance to $0, after all partners have been distributed their buyout amount.) Then you pay/distribute each of the other partners their share of that contribution you made to the capital account, for their share of the business that you are buying. I would expect that to show up on line 19 of each K-1 issued to the other 8 ex-partners.

My "train of thought" on this may be diffferent that yours, mainly because I don't know what this partnership business was. So that's why I'm being super-generic here.

[gump0220]

That makes sense.  Essentially treat it as a contribution by me and a distribution to them.

The complication is that this math leaves the departing partners with a small positive tax basis after that distribution.  How do I treat that remaining balance?

[Carl]

Just so you're aware, things are clouding over for me now. So is it leaving a small positive tax basis on the partnership? Or on the K-1's? I don't know how to handle that, but perhaps that statement will help you figure it out and understand it. (I certainly don't at this point).

Remember, since the partnership is dissolving,up to 8/9 (and possibly all of it) of what gets distributed to you (and only you) is what you are removing from the partnership for personal use. Any excess cash up to the total amount you contributed over the life of the partnership would be a return of capital investment to you.

@Hal_Al I'm flying blind now and the landing gear is jammed. Help?

[Hal_Al]

Sorry, beyond my expertise.  I'd say poster needs a professional accountant for this.

[tagteam]

@Rick19744 

Has a ton of experience with partnerships so he might have something to add. 

One thing for which there is no doubt is the tax code and regs relating to partnerships is perhaps in the top two most complicated areas of tax law.

[Rick19744 · Accepted solution]

As noted by @tagteam the partnership arena is definitely a difficult area.  There are many (repeat many) issues that will need to be handled here.  I will address at a high level.  You may want to consult with a tax professional depending on the $$ involved or maybe just to even get everything done correctly.

• Your facts indicate that "I" bought out the other members.  This means two things:
  • This is a transaction outside of the partnership, and
  • There is no more partnership after this transaction occurred.
• Your facts are limited, but it appears to me that all the other members only received what you paid them.
• Since there is no more partnership, you will file a final tax return and all K-1's will be marked final as well
• The facts indicate that this occurred at the end of the year, so all members will receive a full allocation of all items.
• Each member that was bought out will need to update their tax basis schedules for the final K-1 activity.  They will then compare their proceeds received from you to their tax basis and determine the overall gain or loss on the sale of their interest.
• Also depending on what assets were held by LLC, the members that were bought out may have to reclassify some of the gain as ordinary income instead of capital gain or loss.
  • This is the result of Section 751 also known as hot assets
  • Each member that was bought out needs to know their respective share of this property
  • This is items such as inventory and depreciation recapture.  It would also include receivables if the partnership was on the cash basis.
  • What happens then is each member that was bought out will then compare their respective amount of Section 751 recapture to their overall gain or loss.  By way of a simple example; if their overall gain was $12,000 and their Section 751 items were $6,000, then this member would report $6,000 as ordinary income (form 4797) and then $6,000 of capital gain.  It can also whipsaw a member as in the case of having an overall gain of $5,000 and Section 751 items of $7,000.  In this case the member would report the $7,000 as ordinary income and then have a $2,000 capital loss.
• For you on the other hand, things will become even more complicated depending on the assets held by the LLC.
  • For purposes of determining your tax consequences, the rules treat this as if there was a deemed liquidation of all of the assets to each member and then you in turn purchased their respective assets.
  • I will assume that any cash that comes out of the LLC does not exceed your tax basis.  If it did, then you will have a recognition event.
  • Assuming the above bullet 2 is not the case, then you will go on and figure out your basis in all of the assets that were deemed to be distributed out to you.
  • This means you will have a bifurcated basis in ALL of the assets;  You will have to compare the basis of the assets distributed to you to your outside tax basis.  Depending on what this looks like, you may have what is known as a substituted basis in your 1/9th of the assets.
  • For the other 8/9th of the assets you will compare the basis of the assets deemed distributed to what you purchased them for.  In this case you could have either a step-up in basis or a step-down.
  • The determination of your new bifurcated basis in the assets is key as this will determine depreciation going forward.
• These transactions are not for the faint of heart.
• You should zero out the balance sheet; assuming one was required.
• Make sure you file form 8308 for each member that sold their interest and this needs to be filed with the form 1065.
• Take a look at Revenue Ruling 99-6.  Your facts are situation 1.
• https://www.irs.gov/pub/irs-drop/rr-99-6.pdf