There are limited facts here, but at a high level:
- If this is a real world transaction, then I am going to recommend you have a one on one with a tax professional.
- As noted by @Anonymous_ , a single member LLC (SMLLC) is generally (by default) a disregarded entity for federal income tax purposes. This could change if the SMLLC makes an election to be taxed as an association.
- We also don't know what assets are held by the respective LLC.
- The merging of the SMLLCs is a state matter.
- The resulting merger will still result in a SMLLC for the sole owner.
- Depending on the assets held by the respective LLC, you may end up with some ordinary income (Section 1245 recapture as a result of the sale of 20% personal property or inventory).
- Assuming the SMLLCs default entity status is disregarded entity (owned by the sole owner), any gain other than potential ordinary income as noted, will be LTCG since they have been held over one year. This is because for federal income tax purposes Jo is selling the 20% interest based on your facts, since the SMLLC is disregarded.
- You should also review Revenue Ruling 99-5
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
