How is rollover stock treated when an LLC is sold to a Public Company

[digian]

I'm a partner in a private LLC for 7 years. 

A publicly traded Small Cap corp buys the LLC in 2022-10-30, but it's structured as a merger.

All equity holders get

• 80% cash consideration
• 20% shares of restricted common stock, fully vested immediately, but I can't trade on it for 1 year (lock-up).   I did not retain any ownership in the new company

When do i need to pay Long term capital gains on 20% stock

1. 2022 (even though i can't sell it) - " tax without cash, in absence of 1099-B".  
2. 2023 (when i have ability to sell it, even if i didn't sell it this year)
3. Only in years the shares are sold (a tax-deferred rollover)

the merger agreement and rollover execution docs from the deal provide no explicit guidance, aside from simple and obvious fact that The parties acknowledge receipt of New Interests by Rollover Participant is a taxable transaction for U.S. federal income tax purposes.

[RobertB4444]

In 2022 you had a taxable event with the merger.  You received cash and stock as payment for your equity.  That was reportable and if you made any profit on your sale of the company that portion was taxable.  

Assuming that that was reported then the stock that you received has a value at the time that you received it of 20% of your equity in the company.  You don't need to report that stock at all (because it was part of the transaction that was reported in 2022) until you sell it.  

When you do sell it you need to input the date of the sale and the amount that you were paid.  You will also need to input the date you purchased it (which is the date of the merger) and the amount that you purchased it for (which is the value of the stock on the date that it was transferred to you).

@digian 

[digian]

Thank you and correct.   I did receive profit from the sale.  

1.) I received a 1099-B for the cash portion which i paid tax on by April

2.) I received no authoritative docs for the stock portion.  Aside from a statement showing WHERE the stock was located and the K-1 with only this footnote:  

DURING TAX YEAR YOU SOLD YOUR MEMBER INTEREST TO XXX for $NNN

YOU RECEIVED AN AMOUNT OF XXX STOCK, INCUDED IN YOUR ALLOCABLE SALES PROCEEDS.  CONSULT TAX ADVISOR ON PROPER TREATMENT OF ALLOCABLE SALES PROCEEDS and the STOCK ROLLOVER AMOUNT

Using simple numbers

I sold 50k units of stock A (~ 0 basis) for $10/share (strike price at time of the buying company). 

therefore 500K total profit received:

-- 400k cash reported on 1099-B

-- 100k of stock (10000 shares at 10/share basis)

You are saying none of the 100k was reportable in year received, only in the year(s) as units are sold.  ?  

[digian]

Another way to look at it, i think in 2022 i was in constructive receipt, but the rollover stock was not a tax-deferred transaction becasuse of this ???

• absence of a 1099-B form doesn't necessarily mean you don't have tax obligations. Responsibility for reporting taxable transactions rests with taxpayer.
• Even if you didn't receive a 1099-B, you should still report sale of your company and any associated stock transactions on your tax return.
• Tax treatment of rollover stock may vary depending on factors (i.e. whether…
1. stock is subject to a lockup period - YES
2. publicly traded - YES
3. elect to defer recognition of gain under applicable tax provisions –a tax-deferred rollover prohibited since it was NONE of these transfer types 
   • section 1031 - Like-Kind Exchanges  (LLC private shares <> PUBLIC shares)
   • section 351  – must retain a major control of votes
   • section 368 - corporate Reorgs
   • section 721 – contribution to a partnship