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Sale of California LLC assets tax consequence

Technical topics regarding tax preparation.
#1
Lalva  
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My client is a member of a LLC based in California taxed as a partnership (2 partners) that was created several years ago. She has 75% of the total interest and her partner has the other 25%. There is a company interested in purchasing the LLC assets (client database, technology platform).

My question is: how is this going to be taxed to my client if the partners just changed the LLC agreement to allocate the interests 95% to my client and 5% to the other partner? I would think that this could be taxed as long term capital gain, since they owned the LLC for a few years, although they acquired the client base over the years. The money spent in technology was deducted as a current expenses (not sure if it should have been capitalized).

Will part of the gain be taxed as ordinary income to my client since she just acquired more interest in the LLC?

Thank you for your help
 

#2
Nilodop  
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How and why is the LLC interest being transferred? Gift? Sale? Compensation?

Or is it the gain on the sale that is being specially allocated 95/5 instead of 75/25?

Once you answer, I probably still won't know the tax implications, but at least it wlll be a start.
 

#3
Nilodop  
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There is a company interested in purchasing the LLC assets (client database, technology platform). . And is there an existing agreement with that company?
 

#4
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Does the "what if" anticipate that the *gain* on the sale of the stuff will be split 95/5, or perhaps we should consider that maybe it's the *proceeds* of the sale, rather than the gain, that your client should be thinking about special allocating between the selling partners?

The question asked in Post #3, just above, is a really really good question!

****************

After rereading the OP, I'm prompted to ask if the change in the percentages of the two partners was in anticipation of the sale of the business assets, or was it just something that happened recently, without a connection to the proposed sale of the LLC's business assets?
 

#5
Nilodop  
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The question asked in Post #3, just above, is a really really good question!. I wonder how two tax concepts work in OP's facts (once we get the facts). One is section 704 and the possibility of amending a partnership agreement with retroactive effect, within limits. The other is the assignment-of-income doctrine.
 

#6
Lalva  
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Thank you for your comments.

The partners changed the operating agreement in anticipation of the sale of the assets, so the proceeds go 95%-5%.

The company thinking about purchasing the assets has never had any relation to the LLC. The partners want to sell the LLC but this company was interested and initially explored the possibility of buying the LLC, but later offered to buy the assets instead of the LLC, not sure why. I guess it makes more sense from the tax point of view.

I thought that the sale of the LLC would produce long term capital gain, but this sale of assets I am not sure. I know that the sale of "hot" assets produces ordinary income, but I am not sure about the sale of a client database and technology platform.

Thank you again for your comments!
 

#7
Lalva  
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How and why is the LLC interest being transferred? Gift? Sale? Compensation?


No compensation, so I guess gift. This is because my client was the one doing most of the work in the LLC.
 

#8
Nilodop  
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No compensation, so I guess gift. This is because my client was the one doing most of the work in the LLC.. That sounds more like compensation to me. The two are not related to each other, right?
 

#9
Lalva  
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The two partners are no related to each other. In fact, they are selling to part ways forever.

When I said no compensation I meant to say that there was no money exchanged between the partners. But my client will receive more money after the sale because of the higher interest %.
 

#10
Nilodop  
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I hope Jeff-Ohio is out there. I think we have a lot of questions:

First post speaks of allocating the interests 95/5 (from 75/25). But then we learn it's a sale of assets, possibly with a special allocation of the proceeds (as distinguished from the gain or loss).

The change is a way of the 25 partner (or the partnership) compensating the 75 partner. That needs to be reported somehow, no?

The operating agreement has, apparently, already been changed, in anticipation of the sale. Changed to be effective as of a date before the sale, we hope.

Do capital accounts follow the special allocation, so the economic effect is substantial? That is, will the 95% of proceeds really go to the 95% partner?

Will there be section 751 treatment of the gain on the sale of the assets?
 

#11
Lalva  
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That's my question. How the assets will be taxed to my client (the 95% partner)?

Will they be capital assets, or ordinary income? They are selling the client database, URL of the company and the Tech platform.

Thanks!
 

#12
Nilodop  
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I'm aware that's your question, but the other questions should also be important to you and your client.

The client database is, I think, not a section 197 asset, because it is self-created. I think its sale results in capital gain treatment.

The technology may be different. This article may be a good place to start your analysis. The technology too may be a capital asset; I'm not sure.

My memory is that Jeff-Ohio is really good in these areas.
 


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