There are currently two members in the LLC, Member A and Member B each have 50%. Member B wants to leave the LLC and transfer 40% to Member A and transfer 10% to Member C (new member) on 4/15/16. Does this result in a technical termination?
Would it be more beneficial for Member B to transfer 40% to Member A, 9% to Member C and keep a remaining 1%? Then on 4/16/17, transfer his remaining 1% to Member C and leave the LLC.
Yes, if Member B wants to leave the LLC and transfer 40% to Member A and transfer 10% to Member C (new member) on 4/15/16, you would have a technical termination. In that case, you would have to file a final return as of 4/15/16, and proceed as a new partnership going forward.
It would be simpler from a tax reporting basis for Member B to transfer 40% to Member A, 9% to Member C and keep a remaining 1%, then on 4/16/17, transfer his remaining 1% to Member C and leave the LLC.
From the IRS Partnership FAQs:
Section 708(b)(1)(B) provides that a termination occurs where “within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.” This is known as a type B termination or technical termination. You should prepare your returns for the appropriate tax period reflecting the respective partnership interests during that time. The ‘final’ return for the period prior to the change in partner interest should have the “Technical Termination” checkbox marked and the checkbox also marked “final”. A second return will also be filed to reflect the “initial” return of the new partner(s)’ interest(s) and should have the “Technical Termination” checkbox marked and the checkbox also marked “initial”. For further information, please see Item G on front page of the Form 1065 and the Form 1065 instructions.
Yes, if Member B wants to leave the LLC and transfer 40% to Member A and transfer 10% to Member C (new member) on 4/15/16, you would have a technical termination. In that case, you would have to file a final return as of 4/15/16, and proceed as a new partnership going forward.
It would be simpler from a tax reporting basis for Member B to transfer 40% to Member A, 9% to Member C and keep a remaining 1%, then on 4/16/17, transfer his remaining 1% to Member C and leave the LLC.
From the IRS Partnership FAQs:
Section 708(b)(1)(B) provides that a termination occurs where “within a 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.” This is known as a type B termination or technical termination. You should prepare your returns for the appropriate tax period reflecting the respective partnership interests during that time. The ‘final’ return for the period prior to the change in partner interest should have the “Technical Termination” checkbox marked and the checkbox also marked “final”. A second return will also be filed to reflect the “initial” return of the new partner(s)’ interest(s) and should have the “Technical Termination” checkbox marked and the checkbox also marked “initial”. For further information, please see Item G on front page of the Form 1065 and the Form 1065 instructions.