LLC Liquidation-negative capital account

[mike_...@my-dejanews.com]

Immediately before liquidation, an LLC (taxed as
partnership) has two 50% members and only a $100K liability
and a $(100K) negative capital account. Can the liability be
distributed (assumed) to the two partners in liquidation
without triggering a tax consequence to the two partners.
Would the simultaneous debt assumption and debt relief under
IRC 752(a&b) have no net affect? I realize that the
partners basis in the assumed debt might be zero (the basis
in their interests before the liquidation). I thought that
this would naturally be a taxable event (i.e. liquidation
with negative capital account), but I am having trouble
walking through the IRC sections.

[parcpa]

mike_...@my-dejanews.com wrote:

Are the partners actually assuming the debt? Were they
guarantors of the debt?

It would be good to know these facts. The first thing that
comes to mind is why are they assuming liability for the
debt. As an LLC they may not be obligated under state law
to make good on it (although I find it admirable for them to
be honoring the debt of their company). Anyway, assuming
that they either guaranteed the debt previously such that
they are obligated or are assuming the debt out of personal
ethical reasons, the answer should be the same. Prior to
the assumption, they were each allocable 50% of the debt
under 752. The assumption of the debt is treated as a cash
contribution by an amount equal to the reduction in their
allocable share of partnership debt. It's as if they
borrowed cash, put cash in to the LLC who paid off its debt,
and the partners now have an individual liability. No gain
on this transaction should result.

[internat...@my-dejanews.com]

mike_...@my-dejanews.com wrote:

> Immediately before liquidation, an LLC (taxed as
> partnership) has two 50% members and only a $100K liability
> and a $(100K) negative capital account. Can the liability be
> distributed (assumed) to the two partners in liquidation
> without triggering a tax consequence to the two partners.
> Would the simultaneous debt assumption and debt relief under
> IRC 752(a&b) have no net affect? I realize that the
> partners basis in the assumed debt might be zero (the basis
> in their interests before the liquidation). I thought that
> this would naturally be a taxable event (i.e. liquidation
> with negative capital account), but I am having trouble
> walking through the IRC sections.

It might make a difference to whom the debt is owed, but in
the ordinary case, if the "partners" shared equally before
liquidation and assume respsonsibility for the company's
debt 50-50, there will be no change in their liabilities,
and hence no deemed distribution under section 752 and no
gain under section 731.

I assume the partners are already personally liable (e.g.
as guarantors) for the debt. Otherwise, it would not make
sense for them to assume the debt since they should be
protected by the limited liability of LLC members.

[mike_...@my-dejanews.com]

In response to your inquiry regarding whether the partners
are actually assuming the debt, I was simply seeking
potential non-taxable alternatives to wind-up the LLC which
has discontinued its business. The debt is actually owed to
another related party (C Corp) owned by the partners. I did
not want to extinguish or forgive the debt because of the
potential income tax issues.

[alan...@my-dejanews.com]

Understood. I thought that something like that explained
the situation. In that case, the best you can do is what
you have planned to do; there should be no gain on the
partnership liquidation in that case. Whether the loan
resulted in a constructive dividend from the C corp. to its
shareholders at any time is a separate question.

This is not intended to be relied upon as professional
advice.