LLC interest purchase

I have a situation that I want to make sure I’m thinking through correctly….
My client, owns 50% of an LLC. The other 50% member wishes to get out of the LLC. The leaving member is converting his loans and accrued interest to equity. He is then selling his 50% interest to the remaining member. I don’t believe there will be cancellation of debt income because of the conversion. Is there anything else I need to be careful about? Thanks for any advice!

Is there any other debt allocated to him?
Have they determined the assets to which the proceeds are allocated?

There is no other debt allocated to him. They have also determined the assets and prepared Form 8594. My understanding is that there is no COD since the debt was converted to equity. Does that sound right?

If it's not too late you may want to consider setting up a controlled unrelated buyer to purchase 100% of the stock with a 336(e) or 1038(h)(10) election. I call it an LBO-CUB transaction.

If it's not too late you may want to consider setting up a controlled unrelated buyer to purchase 100% of the stock with a 336(e) or 1038(h)(10) election. I call it an LBO-CUB transaction.

I think we're dealing with a partnership/LLC here. Not a stock purchase.
Also, just in case anyone else is reading, you mean "338(h)(10)" instead of "1038(h)(10)".

There is no other debt allocated to him. They have also determined the assets and prepared Form 8594. My understanding is that there is no COD since the debt was converted to equity. Does that sound right?

Yes, that sounds right. RR 99-5 describes your situation. Here's a great article outlining the dynamics: https://www.journalofaccountancy.com/is ... sions.html

50/50 MMLLC to SMLL

OK. I have been looking into this LLC conversion matter. Briefly, Partner A sold his half to partner B in 2019. A partnership return was filed. But only the partners K-1 was checked final. I am filing for 2020,

1. Do I need to file the change of entity form ? or is it automatic
2. This happened in 2019. Can I just file Schedule C for 2020 ?

Thanks in advance for any help.

If it's not too late you may want to consider setting up a controlled unrelated buyer to purchase 100% of the stock with a 336(e) or 1038(h)(10) election. I call it an LBO-CUB transaction.

I think we're dealing with a partnership/LLC here. Not a stock purchase.
Also, just in case anyone else is reading, you mean "338(h)(10)" instead of "1038(h)(10)".

Greetings,
You are correct re my typo. I assumed the LLC was an S corporation. If taxed as a partnership, instead of a cross-purchase the buyer could form a controlled, unrelated buyer to purchase 100% of the membership interests for a long-term note, thereby converting future ordinary income to LTCG.
Steve