FLLP Interest in exchange of debt

Technical topics regarding tax preparation.
#1
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2-May-2019 9:57am
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MN
Hey guys,

I have a client that has a FLLP with his 2 kids. He has an outside property that he wants to contribute to the FLLP and then his basis and interest would increase, then take this LP interest and exchange it for a satisfaction of debt with his two kids. He currently has 2 outstanding loans with his kids that we have been calculating interest and have a written agreement for.

My question is, the loans are outside of the FLLP so, wouldn't this just be "siloed?' For example he can gift the interest for his kids but then the kids will just forgive the debt so the tax consequences will be the gifting and the COD? Some guidance on this would be great!

Any research or other points would be great! Thank you!
 

#2
Nilodop  
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Pennsylvania
However they do it, I take it the hope is to avoid tax on the gain that I assume is inherent in the "outside property". I doubt this accomplishes that. I'm just guessing, but I think you had better consider whether the FLLP is an investment company as meant by 721(b), whether the step-transaction doctrine applies, the risk that the gain will be ordinary because of section 1239, and whether there is a disguised sale here.
 

#3
Posts:
24
Joined:
2-May-2019 9:57am
Location:
MN
Thank you Nilodop!!

I agree with you and my first question to the TP was why trade a capital gain for a potential ordinary on relief of debt, when the interest is a lower value compared to the debt. He doesn't want to use cash to clear the debt, so that's his reasoning.
 


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