Need reassurance on partnership Buyout

[NECPA in NEBRASKA]

Partnership LLC originally had 4 partners; 2 husbands and wives. One wife passed away so her 25% went to her husband. He wanted out and made the remaining 2 partners buy him out on 12/28/23. The only assets are a little bank account, land and a commercial building. There should not be any hot assets.

My dilemma is a new loan was taken out on 12/28/23 by the LLC for the buyout of the partner. There were already two loans on the buildings and land. The remaining partners did sign personally and put up their own land and house as collateral. Is the offset to this new loan a loan to partners? the LLC did not buy anything new. I have been researching this and just don't see any other way to make the balance sheet balance. I am really confused as to why the LLC is making payments for the loan. I only have two partnerships and have not ever seen anything like this. If I am way off base, please let me know and I will try to find the correct research terms to handle this correctly.

Thanks so much! 

[Lee B]

Hopefully this will help: https://www.thetaxadviser.com/issues/2008/oct/terminationofapartnershipinterest.html

[DANRVAN]

1 hour ago, NECPA in NEBRASKA said:

I am really confused as to why the LLC is making payments for the loan.

If the partnership made the payment to the former partner it is considered a redemption of his interest by the partnership,  instead of a buyout of his interest by the remaining partners.

[NECPA in NEBRASKA]

Thank you. They have not given me the actual buyout agreement. It's starting to worry me a bit. I am going to ask for it again.

[NECPA in NEBRASKA]

Thanks for the help. It was explained to me incorrectly by the leaving partner. I should be receiving a copy of the agreement tomorrow. The partnership redeemed the interest. 

[NECPA in NEBRASKA]

Follow up. The buyout check was actually written by the bank to the leaving partner, but the client didn't show it in the check register given to me or the printout of revenues and expenses. I'm waiting on the buyout agreement to hopefully determine if the payment should be 736(a) or 736(b). I hope that it's b or it will be a huge surprise to the outgoing partner to have ordinary income. I'm pretty sure that was not the intention, but I don't know how it was written up.

[DANRVAN]

On 3/20/2024 at 2:23 PM, NECPA in NEBRASKA said:

determine if the payment should be 736(a) or 736(b).

 

On 3/18/2024 at 12:35 PM, NECPA in NEBRASKA said:

The only assets are a little bank account, land and a commercial building.

Sect 736(a) does not make sense for a rental partnership.  

The partnership should be advised to make a section 734 adjustment under a section 754 election,

[NECPA in NEBRASKA]

I got the sales agreement tonight around midnight. Of course, it's not written the way the LLC handled the sale. The remaining partners purchased the partnership interest from the termination partner. Yet, the loan to buy them out was made to the LLC and it is making the payments on the loan. I don't know how to handle this on the balance sheet or in the future. The really crappy thing is this all between relatives. I don't know if the attorney knows how the sale was really handled or if my clients explained it incorrectly. There was no loan papers from the LLC to the remaining partners. I hate to extend this, because the old partner really wants his K1s, but I don't know how to fix it. 

I did tell him to contact the attorney to see if he sees any way to remedy this. If nothing else, maybe he can write up a loan from the LLC to the partners. 

I am so glad that I am done after this year. The whole year has been full of weird messes. 

Thanks to anyone that has any ideas on anything that I am missing to report this stuff.

[kathyc2]

Seems like your transaction would be a debit to partner draws and a credit to loan payable. 

[NECPA in NEBRASKA]

5 hours ago, kathyc2 said:

Seems like your transaction would be a debit to partner draws and a credit to loan payable. 

Too bad that they don't have any equity or money in the LLC. It would be nice if people would ask for advice before they do something. 

[Catherine]

10 minutes ago, NECPA in NEBRASKA said:

It would be nice if people would ask for advice before they do something. 

That is against the unwritten rules. No one may ask for tax advice before doing something. The more idiotic the step, the more strictly this is enforced.

[Lee B]

8 minutes ago, NECPA in NEBRASKA said:

Too bad that they don't have any equity or money in the LLC. It would be nice if people would ask for advice before they do something. 

Yes, when that happens it is frustrating. I have several business clients that make it up as they go along, don't ask questions

and then I have to play detective figure out what they are doing.

[DANRVAN]

23 hours ago, NECPA in NEBRASKA said:

I don't know if the attorney knows how the sale was really handled or if my clients explained it incorrectly

 

23 hours ago, NECPA in NEBRASKA said:

I hate to extend this, because the old partner really wants his K1s, but I don't know how to fix it. 

At this point do you really have a choice but to extend?

Looks to me like you need to call the clients in for a meeting after 4/15 and document their intent. 

Explain that for tax and accounting purposes there is really no reason for the partnership to continue with the remaining husband and wife.

Does the contract take into account that the assumption of selling partner's share of liabilities by remaining couple is consideration paid to him?

I have worked with attorneys that have gone back and rewrote agreements to fit the actual facts.

Unless there was a compelling reason for the remaining couple to continue as a partnership,  I would suggest a liquidation of the partnership followed by a transfer of the assets at the individual level

23 hours ago, NECPA in NEBRASKA said:

Yet, the loan to buy them out was made to the LLC and it is making the payments on the loan.

Okay, so a loan was taken to buy retiring partner and was secured by the building which is owned by partnership?  Retiring partner was cashed out with a check from partnership?  If that is the case and remaining couple wishes to continue as partnership, treat it as a redemption as dictated by the facts.

[NECPA in NEBRASKA]

35 minutes ago, DANRVAN said:

Okay, so a loan was taken to buy retiring partner and was secured by the building which is owned by partnership?  Retiring partner was cashed out with a check from partnership?  If that is the case and remaining couple wishes to continue as partnership, treat it as a redemption as dictated by the facts.

The partnership took out the loan but the bank used the partners land as collateral. There are already mortgages on the rental building.  Thank you so much for taking the time to read this. The LLC is already extended, but the partner that left did not want to extend, because he owes. He is not my client.

The agreements absolutely do not address that the assumption of the liabilities are consideration to him. If I am reading it correctly, he had to pay off his portion, but I will check that out with the attorney. We are supposed to have a conference call soon. 

Thank you again. This has been way too time consuming for this time of year.

[DANRVAN]

6 hours ago, NECPA in NEBRASKA said:

he had to pay off his portion

Without knowing all the facs, It might have been less complicated if they had assumed his share of liabilities instead of borrowing money to pay him cash; which he then used to pay off his share.

[DANRVAN]

7 hours ago, NECPA in NEBRASKA said:

We are supposed to have a conference call soon. 

And you can drive home the point that preliminary tax planning would have saved time and confusion.

[NECPA in NEBRASKA]

DANRVAN, Than you so much for your advice. This mess is being fixed. The attorney is rewriting everything and keeping it so that the remaining partners did the buyout of the old partners shares. The partnership will be terminated and the bank has no problem renaming the loan to them personally, since they already had used their property as collateral. My clients are happy and I have a little less stress.