Sale of LLC interests?

Technical topics regarding tax preparation.
#1
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My prospective client contacted me last year, was buying an ongoing business and wanted me to handle the tax return going forward. Although I had suggested the client sit down with me before wrapping it all up so we could eye ball things, he went ahead and closed on 12/31/21. One thing i had asked him before all this, was he buying the business or the assets and he assurred me the assets. Fast fwd, he called me today upset, the accountant for the seller has the 2021 return ready and wants my client to come sign it....sinking feeling on my end. Sure enough, client sends me a copy of the sales agreement and he bought

"all of their membership interests in the Company and all other rights, title and interest in and to the Company and its assets of every kind, nature and description, tangible and intangible, real, personal and mixed, wherever located"

im no lawyer but to me it sounds like he bought the llc, not the assets. So a couple of questions:
1)how screwed is he lol. I was always of the understanding its better for the buyer usually to buy assets not stock or llc interests. Doesnt this mean everything he spent buying it goes to cost basis now, instead of depreciable items like equip, goodwill, etc. Or can he allocate out of the sales price so much for stock and so much for capital assets? Would a 8594 still need to be done?
2) does he have to sign the return? doesnt that make him liable at least on the face of it, for the 2021 tax return?
3) by doing this, hasnt he just assumed all the LLC's problems....back payroll taxes, etc etc?

hopefully this isnt as bad as im thinking it is?
 

#2
Nilodop  
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Was seller a DRE?
 

#3
oldguy  
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If from a single member LLC, it's an asset purchase ( Ignored entity - purchase is purchase of LLC assets).

If from multi-member llC, it's also an asset purchase for your client - see situation 2 of rev rul 99-6.

Your client is fine.
 

#4
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Nilodop wrote:Was seller a DRE?


sorry should have included it, seller is a multimember llc, taxed as a partnership.
 

#5
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oldguy wrote:If from a single member LLC, it's an asset purchase ( Ignored entity - purchase is purchase of LLC assets).

If from multi-member llC, it's also an asset purchase for your client - see situation 2 of rev rul 99-6.

Your client is fine.


awesome thanks for that.

so if this is viewed as a partnership termination by the sellers, then my client shouldnt be the one to sign their final return I wouldnt think?

so i guess the selling party would need to prepare the 8594 after all?
 

#6
sjrcpa  
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Your client, as an individual, purchased 100% of the interests in the LLC?

Absent specific language in the sales contract, your client is the owner of the LLC at the time of filing its 2021 1065 so your client is responsible for filing it.
 

#7
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I agree with your conclusion that the language says he bought all of the membership interests, which makes him a SMLLC, which is a DRE. The partnership is terminated for income tax purposes. The transaction is treated as if the partnership distributed all of its assets in dissolution and the members then sold all of the distributed assets to the buyer. (See Rev. Rul. 99-6, Situation 2.) While I did not research the issue, I don't see much merit in the idea that the LLC has to file the final income tax return -- because that would be quite inconsistent with the treatment just described.

In any event, the LLC continues in existence for state law purposes -- which means the LLC liabilities come along for the ride. That also applies for employment tax purposes. (See Treas. Reg. §301.7701-2(c)(2)(iv).) I'd be happy to be proven wrong, but I'm thinking the LLC has to file the final 940 and 941 for the partnership. I'd include the LLC liabilities in determining the basis of the purchased assets. (Rev. Rul. 99-6 assumed no liabilities at the LLC level.)
Steve
 

#8
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good stuff guys thanks so much!
 


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