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Buying out members of Law Firm PLLC A law firm consist of 3

Buying out members of Law...
Buying out members of Law Firm PLLCA law firm consist of 3 lawyers 50/25/25. The two minor owners are going to buy out the 50% owner.1) Can the PLLC write a check to the 50 owner?
If this happens, would the check be coded to equity account therefore lowering the equity of the two 25 partners?2) Would the two 25 partners take a distribution, then pay the 50 partner directly, thus causing outside basis?
If this happens, how can the two 25 partners claim goodwill purchase so they can amortize this.My ultimate goal is for the 50 partner to have capital gains to report and then the two 25s will have goodwill to amortize. And my brain is not thinking clearly on how to record all this.Thanks,
JW
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Answered in 1 hour by:
11/13/2017
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
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Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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If the two 25% partners take a distribution to buy out the 50% partner, the distribution will lower their basis by the amount of distribution.

If the partnership wrote a check to the 50% partner, this would be similar to a redemption. The two 25% partners will not get additional basis.

If the two 25% partners were to take a distribution and they bought out the 50% partner, there would be a step-up in basis under IRC §743(b) there would be a step-up in basis for the partnership assets. Under IRC §755, any excess step-up that is not allocated to assets is allocated to partnership goodwill.

While it is not totally free from doubt (the IRS could challenge it) it is possible to take an IRC §197 amortization of the goodwill step-up.

Here is a good discussion of the topic:

http://www.taxresourcegroup.com/library/memo/1385.html

Since the 50% partner is being bought out, it is a technical termination of the partnership.

The 50% partner will be treated as having a sale of partnership interest which will generate capital gain.

I hope this answers your question. If you have any more, please feel free to ask and I will be happy to answer.

Thanks!

Roger

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Customer reply replied 1 month ago
Capital Gains for the 50% lawyer is what we are looking for on an installment sale. Trying to figure out who should pay the outgoing attorney, the PLLC or the individual partners?Also, if the 25% partners buy the 50% in pieces, would that keep from having to do a technical termination?The situation is a father and two children. We are trying to figure out how to transition the father out as his workload will be decreasing. They (children) will and want to continue to pay father a certain amount as his "retirement". That is why we are looking for capital gains treatments. Maybe a mixture of active K1 income and an installment payment that he can claim as capital gains.
Customer reply replied 1 month ago
Capital Gains for the 50% lawyer is what we are looking for on an installment sale. Trying to figure out who should pay the outgoing attorney, the PLLC or the individual partners?Also, if the 25% partners buy the 50% in pieces, would that keep from having to do a technical termination?The situation is a father and two children. We are trying to figure out how to transition the father out as his workload will be decreasing. They (children) will and want to continue to pay father a certain amount as his "retirement". That is why we are looking for capital gains treatments. Maybe a mixture of active K1 income and an installment payment that he can claim as capital gains.

As I stated above - the individual partners should pay the departing attorney. If you have the partnership pay it, then it is a redemption and there is no basis step-up.

Under IRC §708(b)(1)(B), a technical termination occurs when there is a sale or exchange of 50% or more of the total interest in a partnership’s capital and profits within a 12-month period. This causes the tax year of the partnership to close. So if the children purchased the interest over a two or three year period, that would avoid the technical termination.

If this is a family issue, then the father may agree to stretch it out over 2 - 3 years.

taxmanrog
taxmanrog, Certified Public Accountant (CPA)
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