Multi Member LLC to SMLLC

[David]

I am preparing a 1065 for a 2 member LLC. An extension was filed for the 1065.

One LLC member bought out the other member on 1/1/15. I didn't realize this until this year.

The LLC member who bought out the other one paid him $11K from his personal funds and gave him a check from the company for $4K. Shouldn't the $4K be considered a draw for the remaining member?

The departing member's 12/31/14 basis was $17K. Therefore he would recognize a $2K loss from the buyout of his partner interest - correct?

I guess the big question is what tax returns need to be filed. Officially the partnership was terminated on 1/1/15. Therefore a final 1065 should have been filed by 5/15/15 shouldn't it? And the remainder of the year would be reported on the remaining member's schedule C.

What should be done at this time? File a late 1065 for 1 day and have the LLC incur late filing penalties? Would there be relief from any penalties since the LLC members are reporting their K-1s on their timely filed 2015 tax returns? Both members have filed extensions for their personal tax returns.

What have any of you done who have had this situation and, if there were late filing penalties, were you able to successfully get them abated?

Thanks for your help.

[Abby Normal]

Fortunately, the late filing penalty for partnerships can be automatically removed under Rev. Proc. 84-35 and code section 6698(a). Just file the 1065 with the correct short year dates and when the penalty notice comes, you get to be a hero by getting the penalty waved. Also, gives you the opportunity to chastise your client for not keeping you in the loop when anything substantial happens.

Be sure to bill them for the penalty removal!

Here's the wording I use:

Please remove the penalty for late filing of a partnership return under Rev. Proc. 84-35 and code section 6698(a). The partnership is a domestic partnership with 10 or fewer partners, each partner is a natural person or an estate, each partner’s share of each partnership item is the same as such partner’s share of every other item, the partnership has not elected to be subject to the consolidated audit procedures under IRC 6221 through IRC 6233, and all partners reported their share of all pass through items on timely filed individual returns.

[Abby Normal]

Also, ATX will calculate the correct short year depreciation for the 1065, but not for the 1040. You'll have to subtract the depreciation claimed for each asset on the 1065 from the amount calculated on the 1040, so the total depreciation for the year is correct.

[David]

Great! Thanks so much for your help.

[David]

OK, after going through this a little more I want to make sure I am carrying over the correct information to the surviving LLC member's Sch C and 1040.

The only assets at the date of termination were cash for $6K and zero book value for a group of fixed assets purchased in 2013 for $32K which sec 179 deduction was taken.

Each LLC member had $17K basis as of 1/1/15.

My understanding from the research is that the remaining member is deemed to take a distribution for half the cash value of $6K and the departing member is taking a distribution of $15K, the amount paid to him by the remaining member. Is this correct?

It appears that the remaining member has a cost basis in half the cash and fmv of assets attributable to the departing member's half interest. 

What happens to the sec 179 taken in 2013? This isn't considered a sale of the assets so is it as simple as transferring zero value of fixed assets to the SMLLC?

Thanks for your help.

[BHoffman]

Hi David - Rev Rule 99-6 offers guidance.  Might want to take a look 

 

 

[David]

Yes, I looked at that and the comments above are how I understand this should be handled. However, it doesn't seem to address what to do for assets that sec 179 was taken.

It seems as though the remaining member is deemed to take 1/2 the fixed assets at 1/2 fmv. So even though book value is zero, he gets to increase the value of the assets and start depreciating them again?

I always thought assets were transferred out of a partnership/LLC at book value and only corporations reported asset transfers at fmv.

Thanks for any insight.

[jklcpa]

David, it sounds like your client has the scenario described in example 1 of 99-6. This video may be of some help, especially the accompanying transcript that describes the entire transaction step by step. It also includes how to determine the purchaser's basis in the assets. The purchaser's basis in the assets is in 2 pieces: that portion that was distributed to him and its effect, and the portion that he purchased from the selling member.

http://www.pwm-nj.com/knowledge/tax/ruling-99-6

[David]

Thanks, Judy. I appreciate your help.

[DANRVAN]

On ‎09‎/‎12‎/‎2016 at 7:53 AM, David said:

Yes, I looked at that and the comments above are how I understand this should be handled. However, it doesn't seem to address what to do for assets that sec 179 was taken.

It seems as though the remaining member is deemed to take 1/2 the fixed assets at 1/2 fmv. So even though book value is zero, he gets to increase the value of the assets and start depreciating them again?

 

Basically the remaining partner gets 1/2 of the remaining basis of the assets plus the amount allocated from the buyout. In this case it appears  he paid $11,000 for his partner's share of the business.  The $11,000 is allocated among the 1/2 interest assets he bought just as if he had bought a business outright.

It is unclear what the intention was of paying $4,000 to the departing partner. It appears to be a distribution from the partnership unless it can be established that it was paid out after the transition and was part of the payoff.  Was there a written agreement?

I don't see any issue with 179 recaptures since business use did not change at the partnership level.

I would not take any depreciation for 1 day. The business probably did not even operate that day and effectively closed on 12/31/14.

On the remaining partners depreciation schedule he would have a split basis for each asset; his 1/2 basis from the partnership and the 1/2 basis allocated from the buyout whether it be $11,000 or $15,000.

[David]

Thanks so much for your help on this.