Correct Informational Form???

[daspackmule]

Hello all!

I have a question regarding which information reporting form to use for a unique situation.

I have a client, a partnership (and multi-member LLC for state tax purposes), that made payments to a former member as part of an agreement that occurred in 2020. The agreement obligates my client to make fixed monthly payments over a set time frame at an agreed-upon interest rate. The basis for the agreement was the former member's transfer of his interest in the partnership to the long-standing managing member and his daughter, who became the new member of the partnership. Both existing members' interest percentages increased as a result of this transaction.

Payments in 2020 were required, but none were made. My client did begin making monthly payments in 2021 and the former member asked which informational form he needs to file and send to my client to acknowledge receipt of payments that include interest income.

The agreement governing the transfer of the former member's interest is absent any language on informational reporting requirements, and the agreed-upon amount is not collateralized by real property (or anything for that matter).

Anyone have any recommendations on the specific informational form and box to use?

At first, was thinking a 1098, but there's not collateralization with real property (nothing collateralized, actually) and the instructions for 1099-INT do not include anything specific enough to justify using that form.

I was actually thinking it would be best reported back to my client on form 1099-MISC in Box 3. 

Thoughts?

[qbteachmt]

"The basis for the agreement was the former member's transfer of his interest in the partnership to the long-standing managing member and his daughter,"

I think you are describing a sale of the interest.

"agreement obligates my client to make fixed monthly payments over a set time frame at an agreed-upon interest rate."

Which is an installment sale.

"Payments in 2020 were required, but none were made"

The entity cannot buy out the member with the entity's resources that would already be allocated to that member. The entity can be a source of funding for a buying member to use to buy out another member, but technically, this sale is between private parties. The entity didn't sell itself, take on a new partner or divest itself of a member.

"Anyone have any recommendations on the specific informational form and box to use?"

Nothing you described fits what you are thinking of doing.

It seems you have one person who sold to two others. There should be something documenting the leaving member's position and the agreement as Note Payable between the private parties.

You might want to seek a guru for some guidance on all of this. A mentor can make a difference.