Partnership liquidating distribution and example

TAX ISSUES IN CONNECTION WITH PARTNERSHIP EQUITY COMPENSATION, OPTIONS AND RESTRICTED INTERESTS by Roger Royse 1. Limited liability companies (LLC)[1] have become a popular choice of operating entity in recent years due to (among other reasons) the recognition of limited liability companies by all 50 states, the “check-the-box” regulations, and the shareholder and single-class-of-stock limitations on S corporations. A threshold issue concerns whether an employee who receives an interest in an LLC (an “employee/member”) will be treated for tax purposes as a partner, an employee, or both. A serious entrepreneurial risk that a partner will not receive payments, or will lose his capital, indicates partner status. An employee relationship is indicated if the member’s interest in the LLC is small in relation to the payment or allocation in question. The IRS has consistently maintained that a person cannot simultaneously be an employee and a partner.

In that case, the loss on the liquidation of the corporation would be 0,000, which, could also be subject to being carried forward and used at the rate of ,000 a year.This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.The outside basis is the owners basis in their interests in the entity. Ball, the outside basis, is

In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.

This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.

Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.

The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.

Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.

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In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.The outside basis is the owners basis in their interests in the entity. Ball, the outside basis, is $1 million because there is a step-up in the basis of Mr.Often, the inside and outside basis can be quite different. Ball contributed $1,000 for all of the stock in N‑Run, Inc. Balls stock in N-Run to the fair market value (FMV) of the stock on the date of death. Ball died without a Will or Trust, and his heirs cannot agree on anything, such as whether they should sell the entire corporation, sell its assets, or liquidate the corporation.In considering the alternatives, the difference between the inside and the outside basis can be important. Balls Estate sells all of the stock in the corporation to a buyer for its FMV, there will be no gain for tax purposes because the outside basis of $1 million is equal to the sales price.On the other hand, if the corporation sells its assets or liquidates, taxable gain on the corporate level will be determined by the inside basis.The tax consequences here depend upon whether N-Run is a C corporation or an S corporation.If N-Run is a C corporation, the liquidating distribution of $1 million, reduced by the $320,000 of corporate level taxes, will trigger recognition of gain or loss to the shareholder (the Estate) to the extent of the difference between the amount of the after-tax distribution ($680,000) and the outside basis ($1 million), meaning that there will be a loss of $320,000 at the shareholder level.

million because there is a step-up in the basis of Mr.Often, the inside and outside basis can be quite different. Ball contributed

In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.

This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.

Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.

The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.

Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.

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In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.The outside basis is the owners basis in their interests in the entity. Ball, the outside basis, is $1 million because there is a step-up in the basis of Mr.Often, the inside and outside basis can be quite different. Ball contributed $1,000 for all of the stock in N‑Run, Inc. Balls stock in N-Run to the fair market value (FMV) of the stock on the date of death. Ball died without a Will or Trust, and his heirs cannot agree on anything, such as whether they should sell the entire corporation, sell its assets, or liquidate the corporation.In considering the alternatives, the difference between the inside and the outside basis can be important. Balls Estate sells all of the stock in the corporation to a buyer for its FMV, there will be no gain for tax purposes because the outside basis of $1 million is equal to the sales price.On the other hand, if the corporation sells its assets or liquidates, taxable gain on the corporate level will be determined by the inside basis.The tax consequences here depend upon whether N-Run is a C corporation or an S corporation.If N-Run is a C corporation, the liquidating distribution of $1 million, reduced by the $320,000 of corporate level taxes, will trigger recognition of gain or loss to the shareholder (the Estate) to the extent of the difference between the amount of the after-tax distribution ($680,000) and the outside basis ($1 million), meaning that there will be a loss of $320,000 at the shareholder level.

,000 for all of the stock in N‑Run, Inc. Balls stock in N-Run to the fair market value (FMV) of the stock on the date of death. Ball died without a Will or Trust, and his heirs cannot agree on anything, such as whether they should sell the entire corporation, sell its assets, or liquidate the corporation.In considering the alternatives, the difference between the inside and the outside basis can be important. Balls Estate sells all of the stock in the corporation to a buyer for its FMV, there will be no gain for tax purposes because the outside basis of

In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.

This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.

Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.

The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.

Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.

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In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.The outside basis is the owners basis in their interests in the entity. Ball, the outside basis, is $1 million because there is a step-up in the basis of Mr.Often, the inside and outside basis can be quite different. Ball contributed $1,000 for all of the stock in N‑Run, Inc. Balls stock in N-Run to the fair market value (FMV) of the stock on the date of death. Ball died without a Will or Trust, and his heirs cannot agree on anything, such as whether they should sell the entire corporation, sell its assets, or liquidate the corporation.In considering the alternatives, the difference between the inside and the outside basis can be important. Balls Estate sells all of the stock in the corporation to a buyer for its FMV, there will be no gain for tax purposes because the outside basis of $1 million is equal to the sales price.On the other hand, if the corporation sells its assets or liquidates, taxable gain on the corporate level will be determined by the inside basis.The tax consequences here depend upon whether N-Run is a C corporation or an S corporation.If N-Run is a C corporation, the liquidating distribution of $1 million, reduced by the $320,000 of corporate level taxes, will trigger recognition of gain or loss to the shareholder (the Estate) to the extent of the difference between the amount of the after-tax distribution ($680,000) and the outside basis ($1 million), meaning that there will be a loss of $320,000 at the shareholder level.

million is equal to the sales price.On the other hand, if the corporation sells its assets or liquidates, taxable gain on the corporate level will be determined by the inside basis.The tax consequences here depend upon whether N-Run is a C corporation or an S corporation.If N-Run is a C corporation, the liquidating distribution of

In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.

This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.

Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.

The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.

Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.

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In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.The outside basis is the owners basis in their interests in the entity. Ball, the outside basis, is $1 million because there is a step-up in the basis of Mr.Often, the inside and outside basis can be quite different. Ball contributed $1,000 for all of the stock in N‑Run, Inc. Balls stock in N-Run to the fair market value (FMV) of the stock on the date of death. Ball died without a Will or Trust, and his heirs cannot agree on anything, such as whether they should sell the entire corporation, sell its assets, or liquidate the corporation.In considering the alternatives, the difference between the inside and the outside basis can be important. Balls Estate sells all of the stock in the corporation to a buyer for its FMV, there will be no gain for tax purposes because the outside basis of $1 million is equal to the sales price.On the other hand, if the corporation sells its assets or liquidates, taxable gain on the corporate level will be determined by the inside basis.The tax consequences here depend upon whether N-Run is a C corporation or an S corporation.If N-Run is a C corporation, the liquidating distribution of $1 million, reduced by the $320,000 of corporate level taxes, will trigger recognition of gain or loss to the shareholder (the Estate) to the extent of the difference between the amount of the after-tax distribution ($680,000) and the outside basis ($1 million), meaning that there will be a loss of $320,000 at the shareholder level.

million, reduced by the 0,000 of corporate level taxes, will trigger recognition of gain or loss to the shareholder (the Estate) to the extent of the difference between the amount of the after-tax distribution (0,000) and the outside basis (

In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.

This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.

Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.

The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.

Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.

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In that case, the loss on the liquidation of the corporation would be $940,000, which, could also be subject to being carried forward and used at the rate of $3,000 a year.This Article describes some of those structures and discusses the tax issues that arise out of the integration of corporate startup structures into an LLC world. An employee is taxed on payments actually or constructively received from the employer, regardless of the income of the LLC. However, situations can be envisioned in which a person is clearly acting as a partner or as an employee, for example, a receptionist who also has a profits interest.Because of the current IRS position, however, the careful tax planner should determine whether the person is more partner-like or employee-like, and structure the relationship consistently.The receptionist in the example above could be given a compensatory bonus based on profitability rather than a profits interest, thereby preserving the economic deal (except for tax issues) without creating tax risk. It does not answer the threshold question of whether the holder of the profits interest is a partner at all (or a non-partner service provider), but seems to imply that the IRS will treat him or her as a partner if the partnership does so.Another way of dealing with the benefits issues is to form a separate entity that employs the employee/partners and leases them to the LLC, as illustrated in Diagram 3. 93-27, the receipt of a profits interest is generally not a taxable event for the partner or the partnership. 2001-43 further stated that the employee need not make a section 83(b) election with respect to a profits interest. More significantly, the IRS treatment apparently depends heavily on the interest being a profits and not a capital interest.The outside basis is the owners basis in their interests in the entity. Ball, the outside basis, is $1 million because there is a step-up in the basis of Mr.Often, the inside and outside basis can be quite different. Ball contributed $1,000 for all of the stock in N‑Run, Inc. Balls stock in N-Run to the fair market value (FMV) of the stock on the date of death. Ball died without a Will or Trust, and his heirs cannot agree on anything, such as whether they should sell the entire corporation, sell its assets, or liquidate the corporation.In considering the alternatives, the difference between the inside and the outside basis can be important. Balls Estate sells all of the stock in the corporation to a buyer for its FMV, there will be no gain for tax purposes because the outside basis of $1 million is equal to the sales price.On the other hand, if the corporation sells its assets or liquidates, taxable gain on the corporate level will be determined by the inside basis.The tax consequences here depend upon whether N-Run is a C corporation or an S corporation.If N-Run is a C corporation, the liquidating distribution of $1 million, reduced by the $320,000 of corporate level taxes, will trigger recognition of gain or loss to the shareholder (the Estate) to the extent of the difference between the amount of the after-tax distribution ($680,000) and the outside basis ($1 million), meaning that there will be a loss of $320,000 at the shareholder level.

million), meaning that there will be a loss of 0,000 at the shareholder level.