Cancellation of Debt Related to Interest in Partnership

Technical topics regarding tax preparation.
#1
Dbertke  
Posts:
77
Joined:
10-Oct-2019 2:18pm
Location:
Ohio
I am dealing with an issue related to Cancellation of Debt that I haven't encountered before.

Taxpayer purchased an ownership interest in an LLC that was knee deep in debt against my advice. No money was exchanged for purchase of the LLC interest, as the value of the LLC was essentially zero when you factored in the outstanding debt.

To keep it simple, the taxpayer has recognized net income of zero from this LLC over the last couple of years, and now the LLC has ceased operations. After liquidating all assets the LLC is still left with a significant amount of outstanding debt, which I assume is going to be cancelled by the lendor. As a result, the LLC will report cancellation of debt income.

How will this cancellation of debt effect my client as a member of the LLC? He has some debt basis in the LLC, but there are no other attributes that could be used to offset the COD income.

Does this taxpayer effectively recognize ordinary income for the COD and then have a capital loss upon liquidation of the LLC, or is there another more favorable outcome?

Thank you.
 

Return to Taxation



Who is online

Users browsing this forum: austincpa, DaleGMac14, exao, FiguredBasis, Google [Bot], GRobCPA, IDunnoItDepends, JoJoCPA, JR1, ManVsTax, SALYstrikesagain, sjrcpa, SlipperyPencil, Terry Oraha, Wiles and 185 guests