Discussion:COD, LLC Debt reduction
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Discussion Forum Index --> Advanced Tax Questions --> COD, LLC Debt reduction
Discussion Forum Index --> Tax Questions --> COD, LLC Debt reduction
| 20 November 2009 | |
| An LLC was formed with twelve members contributing a total $3,000,000. $1,000,000 was contributed in cash, the balance of $2,000,000 were promisssory notes.
The LLC purchased land for $3,000,000, giving a down payment of $800,000, and a secured deed of trust to the seller for $2,200,000, (due in 5 years). Two years later, the value of the land has dropped drastically. LLC and seller negotiate a reduction in the purchase price by $1,300,000, leaving a balance due on the Deed of Trust of $900,000, payable to the seller in 30 days. This transaction falls under the "Purchase Price Reduction" exception as detailed in IRC SEC 108(e)(5). On this transaction, no COD is recognized and there is no problem. The LLC members still owe the LLC $2,000,000 for their origianl investment in the entity. They agree to pay $900,000 immediately, to satisfy the new agreeement betweent the buyer and seller. This would leave them owing the LLC $1,100,000 (original $2,000,000 less $900,000 payment). The LLC does not "need" the remaining balance from the members, as they will have completely paid off the land purchase. The question is: How can the LLC forgive the balance due from the members on the loan, without generating COD income to the member? Secondly, the LLC does NOT want to change the LLC member percentages. The goal is to leave the ownership structure in place, at the same percentages, while reducing the requirement that the members with outstanding loans, NOT be required to pay the loan. Is this possible in any way? I don't believe it is, but wanted another oponion or two. I believe the members either recognize COD income, or, reduce their ownership interest in the LLC. Appreciate any input... Thanks | |
| November 20, 2009 | |
| Are the note balances in the same proportions as the membership interests? If so, it's going to be the same as if everyone paid off their notes and then the LLC distributed its excess cash to its members, which will likely be tax-free. | |
| 20 November 2009 | |
| Unfortunately, no. Initially some members purchased their ownership interest all in cash; others purchased via cash and debt.
Those that used debt, did so at different ratio's. For a $300,000 contribution: One member put in $150K of cash, and a note of $150, Another member put in Cash of $$75, and debt of $225. In essence, each person chose how much to contribute initially in cash vs debt, so the amounts are totally different. | |
| 20 November 2009 | |
| could the 3 settle up outside of the LLC? The guys who paid money receiving cash now to even it up>? | |
| 21 November 2009 | |
| That's a possiblity, which I will look into. Otherwise, I see the following options:
1. The members who have their debt reduced have COD income, but their ownership interest remains unchanged. 2. Reduce their owernship interest in the same ratio as their debt is reduced. No income to them, they are just adjusting their ownership based on the reduction of the note due to the LLC. 3. Reduce their basis in the LLC, without adjusting ownership. In esscence. simply make a special allocation distribution to the members whose debt is being reduced, without any effect to their ownership interest. This doesnt' seem "fair" but is it doable? Am I over analyzing this? The more I think about it the more I'm confusing myself and it can't be that difficult.... | |
| November 21, 2009 | |
| Are they seriously considering just forgiving some people's debt, while others have none or proportionately less, with no offsetting benefit for the others? There's no law that everybody has to get an equally good deal, but I would start to be concerned that you have taxable gifts in that case. | |
| 21 November 2009 | |
| The "Managing Member" has represented that he has approval from all of the other members (except one who he is working on). Not surprisingly the Manager is one of the members that is having his debt eliminated, and thinks it's perfectly fair to NOT reduce is ownership interest. It seems insane that the other members would agree to this, but apparently they have so far. Personally I think what the Manager is doing is unethical, but that's a different issue. However, if there is major tax ramifications, I suspect he'll listen to reason.
Unfortunately, I'm having a very difficult time determining exactly what the proper tax treatment is!! | |
| 23 November 2009 | |
| Can anybody give me some input on this issue? I'm really stuck and I'm not sure how to handle.
Basically, can an LLC reduce the debt due from a Member(s), without generating COD to that member. Several members owe the LLC ($1,100,000). They LLC want to forgive that debt, without generating COD to the members, by reducing the members basis, while not lowering the member's ownership percentage. Is this doable? | |
