Buyout of LLC members

[David]

New client of a 6 member LLC has bought out the other 5 LLC members during 2011. Client is continuing on with the same company name and EIN. I know a final 1065 return has to be prepared as of the date of the buyout.

Client took out a loan to buy out the other members. If the buyout amount (distribution) for a member exceeds the member's capital account, where is the excess recorded on the books and how is this reported on the K-1? How is this reported in ATX?

Also, if the buyout amount is less than a member's capital account, where is the difference recorded on the books and how is this reported on the K-1? How is this reported in ATX?

This is my first partner buyout and I thought the answer would have been easily determined. My brain must be getting fried - and it's not even April yet... :-)

[mcb39]

I did two of these several years ago and several things came into play. There is a special form for "hot assets" and if there is inventory involved; some of the income is ordinary income and some of the income is CG. Get the Partnership PUB and read, read, read.

[David]

OK, I read the pubs and and other research materials. I understand the hot assets and the general instructions. However, none of the pubs explain exactly how this is booked in the books and in the tax return.

He took out a business loan to payout the other members. If the loan payout to each member exceeds that member's capital account, where does the excess get booked after I zero out the member's capital account?

Likewise, if the payout is less than the member's capital account, where does the difference get booked when I zero out the member's capital account?

The client told me he is taking a section 756 election to step up the basis of the assets. I think he means a 754 election. As far as the 754 election, if I add the difference between the amount of the payout and the member's capital to asset basis,how is this recorded on the books?

Is this a one line adjustment in the other assets section titled "Sec. 754 adjustments"? Or is an entry made to each asset to increase the basis? If so, are the allocations to fixed assets booked to every asset and depreciated?

Or is this booked in the equity section as either a positive or negative balance?

Sorry, this is my first partner buyout.

Thanks for your help.

[Lion EA]

Is one member buying the other members' interests? Or, is the partnership buying back the interest from members? The former would be a Schedule D transaction on the returns of the departing members. The latter would be a Form 1065 transaction. Depending on the percentages involved, the partnership may have dissolved if more than 50% of its interest changed hands, I think. I did only one of these, and it was years ago.