LLC 1065, one member selling 50% to the other member

I have a client with an LLC, no written operating agreement or buy sell agreement.
One partner wants to no longer be active in the entity due to difference among the partners. Partner one wants to go in a new direction, no longer has the time or energy to run the entity. Partner 2 was really just tagging along, funding half the capital for inventory purchases, to my understanding. This entity is an online reseller.
They have come to an agreement among themselves that partner 2 will buy out partner 1, for "assets" so the purchase can be deductible. Partner 1 is a client for 10 years, and I mentioned he should sell the stock for the LTCG, etc etc. Partner 2 will not do the deal unless he reaps some tax benefit from the buyout.
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I don't do anything for Partner 2. He is a grade A time waster, likes to call and ask me questions about his personal taxes under the guise of having me prepare them, then does it himself with turbotax.
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This entity has no real assets other than bank account and inventory, so any "asset" he purchases would be intangible, other than the systems in place to purchase inventory and then resell online, no physical locations, etc.
The whole thing strikes me as convoluted and against the grain of a normal buyout sale.
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Any thoughts or opinions?

If they are filing a 1065, you have a partnership for federal income tax purposes. Thus, there is no option for a "stock sale." Any sale will need to be allocated among the underlying assets.

If there isn't anything more going on in this entity, what kind of price are we talking about? Would there be just as much value for Partner 1 to abandon his interest, get an ordinary loss out of the deal, and move on?

Rev proc 99-6

I'm not an expert in this at all, but isn't 50% of ownership change results in an automatic dissolution?

That used to be true for a very long time. TCJA did away with the technical termination rules.

But if 1 member sells to another in a 2 member LLC, you have an actual termination.

Would there be just as much value for Partner 1 to abandon his interest, get an ordinary loss out of the deal, and move on?

If a Partner was relieved of any debt on abandonment then he/she would be unable to take an ordinary loss.

I'm not an expert in this at all, but isn't 50% of ownership change results in an automatic dissolution?

As for the dissolution - agree that in the situation of this post, when one partner sells his entire interest to the other partnership, there is a dissolution of the partnership because one must have at least two partners to have a partnership.

The repeal of technical terminations no longer applies after December 31, 2017 when there is a greater than (edit) 50% or more ownership change. See link for detail on this: https://www.irs.gov/newsroom/questions- ... rc-sec-708

If a Partner was relieved of any debt on abandonment then he/she would be unable to take an ordinary loss.

Agreed, but then there's this...

This entity has no real assets other than bank account and inventory...

I took this to assume there wouldn't be any debt.

CaptCook - that was a good assumption on your part based on the post - agree. Just thought my additional comment would be beneficial because at times, things do get left out or later discovered when everything shakes out.

Should anyone want to read further on why there is no ordinary loss treatment when there is any relief of debt here is a good write up on the subject and be sure to read and understand Revenue Ruling 93-80.

https://www.cpajournal.com/2016/10/01/p ... andonment/

The repeal of technical terminations no longer applies after December 31, 2017 when there is a greater than (edit) 50% or more ownership change. See link for detail on this: ,https://www.irs.gov/newsroom/questions- ... rc-sec-708

. Kind of needs some edits to be correct. As is, it has two errors, each providing conflicting info that makes the statement impossible to interpret.

Here's how the law changed. Apply it and the errors are easy to fix.

Amendments
2017—Subsec. (b)(1). Pub. L. 115–97 struck out dash after “only if” and subpar. (A) designation before “no part” and struck out subpar. (B) which read as follows: “within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits”.
Effective Date of 2017 Amendment
Amendment by Pub. L. 115–97 applicable to partnership taxable years beginning after Dec. 31, 2017, see section 13504(c) of Pub. L. 115–97, set out as a note under section 168 of this title.

Rev proc 99-6

A 99-6 situation where A is treated as selling his share to B.

In regards to B, the transaction is treated as a liquidating distribution where he receives 1/2 of assets and purchases the remaining 1/2 from A.

[quote Kind of needs some edits to be correct. As is, it has two errors, each providing conflicting info that makes the statement impossible to interpret.][/quote]

Okay - I'll just have to disagree

The repeal of technical terminations no longer applies after December 31, 2017 - that is correct

when there is a greater than (edit) 50% or more ownership change - that is correct

I'll just have to stay with my comment.

First one says the repeal no longer applies. I think the repeal does apply; thus, no technical terminations.

Second one says when there is a greater than 50% or more ownership change. Delete greater than.

I rest my case. Thanksgiving.

If they are filing a 1065, you have a partnership for federal income tax purposes. Thus, there is no option for a "stock sale." Any sale will need to be allocated among the underlying assets.

If there isn't anything more going on in this entity, what kind of price are we talking about? Would there be just as much value for Partner 1 to abandon his interest, get an ordinary loss out of the deal, and move on?

Online reseller grossing about 1.5M last year, but only 90k net due to heavy inventory investment that was all expensed for 4th qtr 2019 holiday season.
There was an interested 3rd party who somehow arrived at a valuation of ~850k-1Mil (based on owner discretionary of 400-450k)?
I have no idea how they determined this valuation (also don't know what the 2020 numbers look like).
Partner A offered Partner B the buyout at roughly 80%, so 50% was sold for roughly 350k.
Deal was done before I could really get involved in any meaningful way.
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I am not sure if Partner B will be a client after 2019 returns are done.
If this is a termination, that would seem to indicate Partner B needs a new EIN, and cannot continue on in 2020 as a DRE with the same EIN, am I understanding that correctly?