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A member sells their interest in a three-member LLC partnership to a new member outside of the LLC. The selling member loaned fund to the LLC. Is the loan taxable as canceled debt as the selling member is not looking for repayment?

AzzurriT
Level 2
 
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IRonMaN
Level 15

Then you have debt forgiveness income.


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IRonMaN
Level 15

If he doesn’t want it back was it a loan or equity?


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AzzurriT
Level 2

It was a loan.  He sold his equity to an outside member

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IRonMaN
Level 15

Did he formally notify the partnership that he was forgiving the debt?  Does the partnership really want to pick up income for forgiveness of debt or does it and the former partner wish to convert it to equity?


Slava Ukraini!
AzzurriT
Level 2

The selling partner does not want to convert to equity and is not looking to collect on that loan.  When he sold his equity, he was done with the business.  Can the loan convert to equity for the remaining members?  

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IRonMaN
Level 15

Converting to equity adds to his basis.  But back to my prior question that you didn't answer, did he formally notify the partnership that he was forgiving the debt?


Slava Ukraini!
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AzzurriT
Level 2

Yes he did inform them of cancelling the debt.  My apologies

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IRonMaN
Level 15

Then you have debt forgiveness income.


Slava Ukraini!
AzzurriT
Level 2

Thank you

qbteachmt
Level 15

What does the sale have to do with the debt? You included all of that as if they apply to each other. Does the buyer think they got the debt position in the purchase?

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AzzurriT
Level 2

The question was asked on how to handle the outstanding debt that the selling partner held.  When they sold their interest, they are not seeking repayment.  I was asking to see if there were other options besides debt forgiveness income.  

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