H/W LLC Converting to SMLLC by Gift
Posted: 17-May-2019 8:11pm
Client is a husband and wife LLC taxed as a partnership. On 12/15/2018, husband gives his entire ownership interest in the partnership to his wife, converting it to a disregarded entity.
I originally thought that I should show the wife's capital account moving to 100% of the company's capital, but then I stumbled across Revenue Ruling 99-6. Based on the ruling, it seems like anytime a partnership terminates, all partners are treated as receiving a liquidating distribution of their capital account, meaning that all capital accounts would always be at $0 when a partnership terminates regardless of the way it terminates.
Here is how I think the conversion should be treated:
Anything else peculiar to this situation I may be missing?
Thanks in advance for your confirmation or your suggestions.
I originally thought that I should show the wife's capital account moving to 100% of the company's capital, but then I stumbled across Revenue Ruling 99-6. Based on the ruling, it seems like anytime a partnership terminates, all partners are treated as receiving a liquidating distribution of their capital account, meaning that all capital accounts would always be at $0 when a partnership terminates regardless of the way it terminates.
Here is how I think the conversion should be treated:
- Transactions occurring on 12/15 are considered partnership transactions if they happen prior to the moment that the gift was made and go on the new Schedule C if they happen after that moment.
- Normal depreciation figures are multiplied by (11.5/12) before making it to the return.
- The Schedule C for the new SMLLC treats depreciable property as having been newly placed in service that year with the depreciable lives reset. Because there is no short year on the 1040, the mid quarter convention is applied.
- All property is shown in box 19 of Schedules K-1 as being distributed proportionately to husband and wife.
- Columns (c) and (d) of Schedule L and ending capital accounts on Schedule K-1 all have $0 due to everything being distributed.
Anything else peculiar to this situation I may be missing?
Thanks in advance for your confirmation or your suggestions.