LLC shareholder equity

[Steve M]

2 partners started an LLC in 2005. One contributed vehicle (Bus Tour Business) and the other contributed $25K cash. Partnership terminated in Oct 06 because partners couldn't get along. Partner who contributed the $25K brought me the books to do the 2006 final return. While completing Sch L, I found a $25K difference because the $25K was never entered into the partnership account; it went to the other partner. When they dissolved the partnership, the second partner returned the $25K personally. My question is, what basis did the partner have who contributed the cash? And how do I account for the $25K exchanging hands back and forth? Did it really have anything to do with the partnership as far as the IRS is concerned?

I really like to get some other thoughts on this senario.

Thanks,

Steve M

[OldJack]

Of course you will need to discuss the $25k with the cash LLC member to be sure you handle it correct. But I would expect that the cash LLC member contributed the cash to purchase his number of units/shares or percentage of ownership and it should be recorded that way. Then I expect the Bus contributing LLC member took a number of units/shares or percentage of ownership for the Bus and had a loan due him for the balance of the value of his Bus. That makes each member with the correct number of units/shares or percentage of ownership and value according to their agreement. Thus when the Bus member took the $25k he would be reducing the loan due him.

Unfortunantly, the Bus member has now got to recognize a taxable gain on the boot for the cash taken as a part sale of his Bus.

[kcjenkins]

I agree. It sounds like member A had a bus that they agreed was worth $50K. He contributed that to the business, member B contributed $25K, and member A took that as payment for half the bus. So then they had a business with a $50K bus, equally contributed by the members.

Now, when the business ended, A buys back B's half of the bus. If you treat it that way, you should end up with a correct picture of what happened.

[Steve M]

Thanks to both of you. I was having trouble getting my mind wrapped around the situation. There was no loan on the bus so there was no debt recorded.

Since the asset (the bus) is still in use, would it be correct to reflect the sale of the bus on a 4797? Since the partnership ended and the other owner continued on, I would assume that the bus was sold for the original price and that the continuing owner would also have a taxable event as a result of the sale. Let me know if my thinking is flawed.

Again thanks. This board is so useful to bounce ideas around. I really appreciate it.

Steve M

[OldJack]

True.. its the fact that when the bus was contributed the individual got $25k. Unless he has already recognized the income or took the money out of the business for some other reason. He can withdraw the bus on termination without paying a tax unless he is taking more than his basis. You have to talk to the members/partners to be sure you understand what was the deal.

Also, When the partnership terminates the cash partner appears to have gotten nothing for his investment so he has a 1040 Sch-D capital loss unless he has already reduced his basis as a result of loss deductions or property distributions (draws).

[kcjenkins]

Actually, Jack, when the cash partner left he got his 25K back, but got it from the bus partner. So it looks to me like the bus partner sold half interest in the bus to the cash partner at the beginning, then bought back that half interest for the same amount at the end. Or you could say that he put the bus in the business, then sold half the business to the cash partner. I say he had income at the start, when he took out the 25K, whether you look at it as selling half the bus or selling half the business, and he has now bought an asset, the second partners 'share' in the business.

[OldJack]

I say he had income at the start, when he took out the 25K, whether you look at it as selling half the bus or selling half the business, and he has now bought an asset, the second partners 'share' in the business.

Yeah KC... I missed in the original post the fact that the cash partner got his investment back at termination. A case could be made that the bus partner contributed the money back to give to the cash partner and the entries just need to be made on the books.

I would say if there were documents, or partner statements to back it up, a case could be made that the bus partner contributed the bus to the partnership (but check the title) for a 50% ownership with a loan due him for the excess value over the cash partners investment and that the $25k taken back was just a payment on that loan due the bus partner (should have been a paper document).

However, if that is true, then the bus did not belong to any one partner when in the business. But the bus partner could take the bus in liquidation if he contributes additional capital to create basis equal to the value when he first contributed it to the partnership (ie: the $25k that ended up to the cash partner). The bus partners basis would be his 50% matching $25, plus the loan due him, plus the additional contribution of $25k that brings him back to his original basis before the LLC/Partnership. Therefore, if the partners both agree that was the intent going in and terminating out there should be no tax to either partner as they both got back what they put in.