Like kind exchange

Technical topics regarding tax preparation.
#1
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A father and son have asked me to assist them with an exchange of membership interests. They each own 50% of the membership interests in two separate LLCs. They intend to exchange LLC interests so that the father will own 100% of restaurant A and the son will own 100% of Restaurant B. Both entities file under Subchapter S.

I believe that a direct exchange like this automatically qualifies for like-kind exchange treatment, but I am wanting to make sure I am not missing anything or if there is any special or extra documentation we need to complete to make the exchange tax-free. They tell me that restaurant A is probably a little more valuable/profitable than restaurant B, but even so there will be no cash payment or “boot” to equal out the exchange values.
 

#2
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If this is deemed to be an exchange of partnership interests, I don’t think LKE works (it works with jointly owned property).

Also, don’t get an intermediary involved - the irs pretty much assumes, from what I can tell, that makes the transaction abusive (ie, taxable)
 

#3
Nilodop  
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He said they are check-the-box S corps., not partnerships. If there is a way to do what they want to do, it will likely be found in Subchapter C.
 

#4
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Whoops!

My memory (poor as it is) has a similar holdup about getting 1031 treatment with stocks. And personal property 1031 exchanges got tossed with the TCJA.

Why not do a tax-free corporate reorganization to split up the companies (whereby each shareholder gives up shares in one company for all the shares in the other company)? I believe these rules work for S as well as C corps.
 

#5
Nilodop  
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Reorg rules do indeed work for S corps as well as C corps, but is what you describe a reorg? I think not.

And, to OP, these are definitely not 1031 like-kind exchanges. And the disparity in values will need to be dealt with.

Some thoughts:

Gifts would be pretty straightforward. Could be direct between dad and son, or indirect via contributions of stock to each corp as treasury stock. Problem with both is that it would be obvious upon examination that these are really "cross gifts", taxable as a sale or exchange.

But so what if these are taxable sales or exchanges? Maybe the respective bases and values are not too different, given that they are S corps. Or same result via redemptions, maybe even on installment basis.
 

#6
Pitch78  
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Would have been better under a holding company, then might be able to do a 355. I would run the numbers, as Nilodop suggests, on a redemption or actual sale and see how they work out. Could consider doing a holding company now and a 355 in a few years. Step transaction is a concern, but the longer the time span, the better.
 

#7
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Would Sec 1045 work?
~Captcook
 

#8
Nilodop  
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Nope.
 

#9
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May be able to simply drop the two corporations into a holding company, followed by a reorg that splits ownership between the two entities. You probably want a tax attorney involved if the numbers are significant. I assume there must be a gain anticipated that is large enough to warrant the question ?
 

#10
Nilodop  
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It fascinates me when a member asks a question and then more or less disappears. Yet help for the member continues to be posted. OP last logged in after #4 was posted, so has seen nothing since. Leaves member with an incomplete answer, leaves the rest of us with no idea what OP decided. OP's loss, mainly, but also shorts the educational aspects of TPT. I suspect there's a bit to be learned from this thread.

For instance, subject to hearing more facts, I wonder whether the answer is as simple as a taxable exchange.

For instance, I wonder if OP knows that even before 1031 was amended to limit it to real property, that partnership interests did not qualify for 1031 treatment. (And still don't, with one inapplicable exception).

For instance, as Pitch78 and HenryDavid said, there may be a tax-free way to do this. But do note that these are S corps., and the idea of a holding company is probably not doable.
 

#11
Pitch78  
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Glad you brought this up Nilodop. This is not the only time it has happened. And, frankly, it is frustrating. I do not understand why someone bothers posting and never follows up.

As for the holding company, I agree. I was initially thinking it would be a disregarded LLC, but that is not possible.
 

#12
Coddington  
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We can only see when someone is logged in. We can't see if they're reading posts while not logged in. For example, when I'm on my iPhone, I'm usually not logged in (due to the privacy mode). When I'm on my computer, I'm always logged in. Since I read most posts on my phone, my views and visits are undercounted. So we can't always assume lack of verbal followup means they haven't seen it.
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Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#13
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That’s great, but what is suggested is that the Moderators contact Patrick Merryman – and any similar MIA poster - and tell him (or her) to quite asking questions on this forum if he/she won’t follow-up with additional posts. At a minimum, show a little respect by acknowledging the others who have spent time trying to help answer a question.

But maybe he’s not so merry because he got the Covid. Or maybe he got merried. Who knows, but I personally find it disrespectful unless there is ultimately a valid reason.
 

#14
Pitch78  
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Well said Jeff. I will add another peeve. Providing so few facts that it takes ten or more posts to figure out what is going on. The question asked by professors in law school is "What is the most important part of a case?" The answer: "The facts!"
 

#15
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I apologize to those irritated by my absence. I have been working to gather facts on this particular situation and actually have a meeting today where I expect to find out some additional info. I do appreciate the suggestions and have been checking back every day (obviously was not logged in when I did so). I realize that I should have provided an update or at least an acknowledgement before now. I will provide an update once I have more info.
 

#16
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I have now been able to gather additional facts in this case and the basis of the two restaurants are very different. For Restaurant A both shareholders have a $0 basis, whereas restaurant B they both have approximately 275K basis.
Further, I ran average net income for the past five years and A's avg NI is about 8500 (due to a 260k loss in 2019), B's is roughly 130k.

Given these facts, does anyone have any additional suggestions? Thanks
 

#17
Nilodop  
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I'd assume the bases and FMVs are about equal to each other. So establish that by an appraisal. Then have father "sell" son his half of B "stock" in exchange for father's half of A stock. This should be treated as, and reported as, a bargain sale from father to son. Son reports a sale at +/- his basis. Father reports a part sale, part gift, total of $275k, mostly gift. No tax to anyone.
 

#18
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Nilodop wrote:I'd assume the bases and FMVs are about equal to each other. So establish that by an appraisal. Then have father "sell" son his half of B "stock" in exchange for father's half of A stock. This should be treated as, and reported as, a bargain sale from father to son. Son reports a sale at +/- his basis. Father reports a part sale, part gift, total of $275k, mostly gift. No tax to anyone.


Thanks for the suggestion.
 

#19
Wiles  
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For Restaurant A both shareholders have a $0 basis, whereas restaurant B they both have approximately 275K basis.

I'd assume the bases and FMVs are about equal to each other.

Therefore, the value of 50% of A = $0 and the value of 50% B = $275K. And the father is making a gift of $275K.

But those values don't jive with this from the OP:
They tell me that restaurant A is probably a little more valuable/profitable than restaurant B...

But that statement in the OP doesn't jive with this:
Further, I ran average net income for the past five years and A's avg NI is about 8500 (due to a 260k loss in 2019), B's is roughly 130k.

patrickmerryman - Just make sure the client understands the issue about the respective values in excess of basis.
 


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