Discussion:Buy-out consulting agreement
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Discussion Forum Index --> Advanced Tax Questions --> Buy-out consulting agreement
Discussion Forum Index --> Tax Questions --> Buy-out consulting agreement
Houston2001 (talk|edits) said: | 18 April 2008 |
| An LLC has a consulting contract with termination clause. Let's say the buy-out calculation equals $100. But then the two parties agree to $200 for the buy out amount. This is $100 more than the contract stipulates.
Question: would this be ordinary income or capital gain? | |
RoyDaleOne (talk|edits) said: | 18 April 2008 |
| Is the contract a "capital asset" to the seller? | |
| 18 April 2008 | |
| Is this the same LLC/termination clause client from your other discussion? | |
Houston2001 (talk|edits) said: | 18 April 2008 |
| Trillium-yes this is the same issue. Just trying to help structure the transaction in the most tax effective way.
RoyDaleOne-Currently the contract earnings are considered ordinary income. The contract is not currently booked as a capital asset as it was created and initiated by the current members. | |
RoyDaleOne (talk|edits) said: | 18 April 2008 |
| What I was trying to tell you is go read the definition of capital assets, you get capital gains from capital assets. Not having direct access to the contract I can not tell for sure what it says and therefore how can I or anyone classify the transactions.
Yes, you can obtain the benefits of the capital gains form the sale of a contract, sometimes you can not. I do however guess that you could get capital gains on this transaction, but that is just a guess. Recording of the contract as a capital asset has nothing much to do with its tax treatment. | |
| 18 April 2008 | |
| Houston: there are a lot of facts in that other discussion that haven't been mentioned here (e.g., that it's not the contract being sold, but rather the LLC, and the purchaser is the same company the contract is with, etc.). It sounds to me like you've got to get somebody looking at the bigger picture, rather than picking out smaller issues to strategize about - but I may be wrong about that (I'm wrong about a lot of things!). | |
RoyDaleOne (talk|edits) said: | 18 April 2008 |
| For example look at the buyout of a lease..
Cite: Gain or loss from the cancellation of a lease thus qualifies for sale or exchange treatment, which will generally result in a capital gain or loss on the receipt of the proceeds. Any bonus received by a tenant from the lessor for the renewal of a lease is taxable as ordinary income in the year of receipt, regardless of the parties' description of the payment. Crile v. Commissioner, 55 F.2d 804 (6th Cir. 1932); Jennings & Co. v. Commissioner, 59 F.2d 32 (9th Cir.), cert. denied, 287 U.S. 600 (1932); Estate of Frankenfield, 17 T.C. 1304 (1952). A 1932 case still the law of the land. LOL The transaction could qualify as sale or exchange, therefore, I am getting big bucks for that little bit of knowledge. | |
Houston2001 (talk|edits) said: | 20 April 2008 |
| Trillium: The deal is not complete. The company is open to either the purchase of the LLC or buying out the contract. I am just trying to help it get structured in such a way to minimize the taxes, if at all possible.
And yes the bigger picture is important. They are already in for many hours of high rate legal bills on this one. But I am here to just do some extra checking as the difference in the tax rate changes the tax bill by 6 figures. Interestingly enough, this is not a black and white issue. They have yet to get a decisive position. | |
