Huge Can of Worms....LLC with Foreign Member

[gfizer]

New client came in yesterday.  He formed an LLC with his ex-wife who is a citizen and resident of a foreign country.  The LLC purchased a house and re-sold it in a seller financed transaction in 2016.  The LLC hold a valid first mortgage against the property.  According to my client his ex helped with the down-payment on the purchase of the house and was made a member only to protect her "investment."  He is receiving all the income and paying all the expenses.  I am at a loss.  When I first learned of the multi-member LLC I thought, "okay. File a 1065 (they did not elect S-corp treatment) and pass income through to member." Then the more he talked, the more complicated it got.  How do I go about filing a partnership return where one partner is foreign and has no ITIN and receives no income?  It's too late in the game for this.  I will definitely be putting this on extension (individual return - partnership is already late) but I still am unsure how to proceed.  Thoughts and ideas are appreciated.

[ILLMAS]

Single member = Sch C

 

[jklcpa]

They shouldn't have legally been able to form an LLC without each member having an SSN or ITIN.  Also, the LLC couldn't elect S-corp with a foreign owner.  That leaves partnership or disregarded entity.

Were these two individuals married at the time of LLC formation? In general, H-W LLCs can elect to be a disregarded entity. I'll post a link to a topic that I remember on this subject from a while ago.  Anyway, the question in my mind on this ultimately is this  - If the ex-wife is not sharing in the profits, gains, deductions, and losses, is there really a partner relationship at all, or is this a disregarded entity to be reported solely on your client's return based on that fact alone?   Is the installment sale the only reportable item or was the property rented prior to sale, are there other properties involved?

 

Maybe you don't need this, but here is the link to the other topics:

 

Edited April 7, 2017 by jklcpa
added the links

[schirallicpa]

9 minutes ago, ILLMAS said:

Single member = Sch C

 

Remembering that the LLC is only a state designation - I think this is your answer - to file single member Sch C - because essentially the other member doesn't exist since they are not a citizen, don't have ID #, and the LLC is ineffective. They could not have formed an S-corp anyway.  Can't see personally how the LLC protects them anyway.  Essentially, the person loaned some money.  They should have just made a legal contract, not an LLC

[BHoffman]

The LLC is disregarded, so wouldn't your client just report an installment sale?  He ought to change the LLC papers with whatever his State dept. who handles that stuff, but I wouldn't complicate it with a 1065.

[gfizer]

57 minutes ago, jklcpa said:

Were these two individuals married at the time of LLC formation? In general, H-W LLCs can elect to be a disregarded entity. I'll post a link to a topic that I remember on this subject from a while ago.  Anyway, the question in my mind on this ultimately is this  - If the ex-wife is not sharing in the profits, gains, deductions, and losses, is there really a partner relationship at all, or is this a disregarded entity to be reported solely on your client's return based on that fact alone?   Is the installment sale the only reportable item or was the property rented prior to sale, are there other properties involved?

 

I have spoken with him again.  It just keeps getting better.  He now says they are technically married and have been for many years but that they have never lived together.  The LLC was created for the sole purpose of buying, selling and holding the mortgage on this one property.  There is no other property and no other income from any source.  The property was not rented.  

All in all it looks like a pretty stupid move to me - they bought the house for $150K and signed a mortgage (him as managing member) and then sold it to someone else the same week for the same price.  The only difference is the bank is charging the LLC 4.5% on an ARM and he is charging the purchaser 5.5% on a fixed rate mortgage.  Just stupid in my opinion.  

This guy may not be the smartest cookie in the batch, plus when he came in today he was groaning and carrying on and finally said he was having terrible cramps and asked to use my bathroom.  He is quickly elevating himself to least favorite client status!

Kentucky doesn't require you to even list the names of members when you form an LLC - only an organizer and registered agent.  The wife is listed as a member on the annual report which is filed with the secretary of state - and only the name and business address is required on that filing.

 

 

[BHoffman]

Strike 1 - Late

Strike 2 - Liar

Strike 3 - Loser

 

[BLACK BART]

Such cases don't know, understand, or care about any of the regulations and/or obstacles mentioned.  He's interested in making money, period! Everything else (including you) is just white noise to him. They will present you with new facts as you proceed (sometimes invalidating what you've just done) depending on what they consider your "need to know."   

It would be a good idea to suggest H&R Block, say they have a large staff, you don't, and it's too complicated to get involved with now or later. 

In the event you do go through with it; I predict a bitter fight about your fee.

[JohnH]

15 minutes ago, BLACK BART said:

Such cases don't know, understand, or care about any of the regulations and/or obstacles mentioned.  He's interested in making money, period! Everything else (including you) is just white noise to him. They will present you with new facts as you proceed (sometimes invalidating what you've just done) depending on what they consider your "need to know."   

It would be a good idea to suggest H&R Block, say they have a large staff, you don't, and it's too complicated to get involved with now or later. 

In the event you do go through with it; I predict a bitter fight about your fee.

Bingo!