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We have a multiple member DE LLC. Members want a liquidity event $35MM (the m&#

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We have a multiple member...
We have a multiple member DE LLC. Members want a liquidity event > $35MM (the money invested thus far) and we want to recapilatize the LLC using debt to provide that liquidity event. My questions are as follows: 1) Is it possible to structure the recapitalization such that the members have minimal or no tax consequences regarding distributions in excess of capital contributed and capital gains and if so, how should it be structured? 2) What are the relevant sections of the IRC that support such a tax free recapitalization?
Submitted: 7 years ago.Category: Tax
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10/3/2010
Tax Professional: Richard, Tax Attorney replied 7 years ago
Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 56,020
Experience: 29 years of experience as a tax, real estate, and business attorney.
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Good afternoon. Here are the basic rules...

 

A current distribution is one in which the partner's interest in the partnership continues. In a current proportionate distrubution:

  • The partnership will not recognize a gain or loss.IRC section 731(b).
  • The distributee partner will generally not recognize gain, unless money distributed exceeds the partner's outside basis in his partnership interest.IRC section 731(a).
  • The distributee partner will never recognize a loss.IRC sections 731(a) and 732(a).
  • The distributee partner's basis in property received will generally be equal to the partnership's basis in the property (i.e. the partner takes a "carryover" basis).IRC section 732(a)(1).
  • If an IRC section 754 election is in effect, the distribution may impact the basis of undistributed property left in the partnership.See IRC section 734(a).

The basis of a partner in his partnership interest is his original capital contribution, then increased or decreased for partnership income and loss, then increased for his share of partnership debt.

 

If you are going to borrow money to make distributions, each partner's basis is going to have to be in excess of the money being distributed so there will be no gain on the distribution.

 

 

I hope this has given you the guidance you were seeking. I wish you the best of luck!

 

If you have a follow-up question, please remember that there might be a delay between your follow up questions and my answers because I may be helping other clients or taking a break.

 

If I have adequately answered your question, even though the answer might not have been the one for which you hoped, I would appreciate it if you would please click the GREEN ACCEPT button so that I receive credit for my work; otherwise, though you have made a deposit, I do not receive credit.

 

If you need additional clarification on this question after clicking ACCEPT, please do not hesitate to click Reply and I will be happy to do what I can to help you further. Thanks for allowing me to be of service to you.

 

The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.

Richard
Richard, Tax Attorney
Category: Tax
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