Discussion:Disguised sale question
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Discussion Forum Index --> Advanced Tax Questions --> Disguised sale question
Discussion Forum Index --> Tax Questions --> Disguised sale question
| 4 February 2008 | |
| Hi all, after consulting code sec 707 and regs and commentary I can't find my answer so any input would be really appreciated. So here is the situation:
Taxpayer, member of a single member LLC, holds a condo building in the LLC with a basis of 4 mil and debt of 3.7 mil. He is financially distressed; the debt is technically QNR. An "angel" LLC has come along and offered to take on the debt owed on the property in exchange for the taxpayer's contribution of the building into this angel's LLC for which the taxpayer will get a 50% interest in the angel's LLC. Apparently the debt will be guaranteed by the 2 members of the angel LLC; taxpayer will not be on the hook any longer. Is this a disguised sale? I thought not since there was no cash being exchanged between the taxpayer and the investor; however the taxpayer is economically much better off since the debt is extinguished (as far as he is concerned) upon contributing the building to the angel's LLC. Thanks very much for your help and hope all have as good a tax season as possible. | |
| 4 February 2008 | |
| my gut says yes. One could - sell part of a building for cash, pay off debt & then secure new debt with the new owner... or skip a few steps & transfer the existing debt to the new owner. | |
| 4 February 2008 | |
| If the debt was incurred in the 2-year period preceding the transfer, this could be a disguised sale. | |
RoyDaleOne (talk|edits) said: | 4 February 2008 |
| The rules governing parntership transactions with a partner are complex and I never give advise without brushing up on them. I have had this type of situation more than once before and I recommend you get a grasp of the rules because the complexity of the rules before proceeding. I would. | |
| February 5, 2008 | |
| Just to show how this could play out, assume the following: (1) the $3.7M liability is not a “qualified liability” within the meaning of Reg. 1.707-5(a)(6) and (2) the FMV of the property is $5M. Based on these assumptions, there is a disguised sale upon the contribution of the property to the LLC that results in a gain of $740,000.
Because the taxpayer's share of the $3.7M debt after contribution to the LLC is zero, the entire $3.7M of debt relief is treated as sale proceeds. The basis of the property sold is determined by multiplying the total basis of $4M by the ratio of proceeds received to total property value ($3.7M / $5M = 74%). So, total basis sold equals $4M * 74% = $2.96M and therefore the taxpayer's gain equals $3.7M - $2.96M = $740K. The partnership's basis in the property equals $4,740,000 which is the $1,040,000 of remaining “unsold” basis ($4M - $2.96M = $1.04M) plus the $3,700,000 purchase price “paid” by the partnership. If the $3.7M liability is in fact a “qualified liability,” there should be no disguised sale as this transaction is not otherwise treated as a sale [see Reg. 1.707-1(a)(5)]. | |
