LLC member walks away

[cpabsd]

                I have an LLC that was owned 51% by my client and 49% by Joe( fake name).   Anyway, on 7/13/17, Joe gave my client his 49% ownership just as a gift.  Joe was never involved in the business. They filed a 1065.   Also on 7/14/17, My client who is now 100% owner, elected S Corp status.  I know we need to file a form 1065 for period until 7/13/17 and 1120S for period from 7/14/17 forward.  My question – since Joe walked away, does my client just gain basis in the amount of Joe’s basis?  Is there an election to make for this?  Retained earnings is positive but breakdown between Joe and my client shows Joe equity account as positive and my client's is negative.  Please help.  

Thank you!

[Pacun]

Technically it is a gift an not a taxable event to your client, but Joe needs to file a gift tax return if needed.

[DANRVAN]

Sounds to me like the partnership was dissolved on 7/13 and your client received all the assets in a liquidating distribution.  Then he contributed those assets to S. Corp.

[jasdlm]

I don't think the IRS buys in to 'business gifts'.  I agree that the partnership terminated.  I believe that under section 708, a partnership terminates when a multi-member partnership becomes a disregarded entity by virtue of all its outstanding ownership interests becoming owned by one partner.  

I believe this would not apply in the event of the death of a partner (where an estate would still be an owner) but would even apply if there was a buy-sell that allowed one partner to become sole owner at the death of another.  This is superfluous, however, because if your guy 'walked away', it doesn't sound like he died ;).

My understanding of 708.  Could be all wet.