25%
75%
Target
Seller
1065
Buyer
Seller is treated as contributing 25% of the assets of target SMLLC in a 721 transaction.
4.
Buyer is treated as purchasing 75% of the assets held by target SMLLC and contributing them to target partnership in a 721 transaction, the code section that governs the tax-free contribution of assets in exchange for partnership interest.
3.
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
Buyer is deemed to purchase 75% of assets in the target SMLLC.
1.
1065 LLC
Target
75%
Cash
Target
Seller
1065
Buyer
Buyer is treated as purchasing 75% of the assets held by target SMLLC and contributing them to target partnership in a 721 transaction, the code section that governs the tax-free contribution of assets in exchange for partnership interest.
3.
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
Buyer is deemed to purchase 75% of assets in the target SMLLC.
1.
1065 LLC
Target
Cash
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
Buyer is deemed to purchase 75% of assets in the target SMLLC.
1.
Seller
1065
Buyer
SMLLC
Target
1065 LLC
Target
Cash
SMLLC
Target
Seller
1065
Buyer
Buyer is deemed to purchase 75% of assets in the target SMLLC.
1.
Seller is treated as contributing 25% of the assets of target SMLLC in a 721 transaction.
4.
Buyer's tax treatment is governed under the terms of code 721.
3.
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
Buyer contributes cash equal to 75% of the value to target SMLLC in exchange for a 75% interest.
1.
75%
25%
Cash
Seller
1065
Buyer
SMLLC
Target
1065 LLC
Target
Buyer's tax treatment is governed under the terms of code 721.
3.
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
Buyer contributes cash equal to 75% of the value to target SMLLC in exchange for a 75% interest.
1.
75%
25%
Cash
Seller
1065
Buyer
SMLLC
Target
1065 LLC
Target
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
Buyer contributes cash equal to 75% of the value to target SMLLC in exchange for a 75% interest.
1.
75%
Cash
Seller
1065
Buyer
SMLLC
Target
1065 LLC
Target
Buyer contributes cash equal to 75% of the value to target SMLLC in exchange for a 75% interest.
1.
75%
25%
Cash
Seller
1065
Buyer
SMLLC
Target
Scenario 1
Scenario 2
Scenario differences
Issues to consider
A buyer pays cash to a seller for interest in the single member LLC (SMLLC), which becomes a regarded entity.
Scenario 1
A buyer pays cash to an SMLLC in exchange for an equivalent interest
in that SMLLC.
Scenario 2
Target 1065 contributes 25% of the assets with a carryover basis but receives a 25% stepped-up capital account for 704(b) purposes.
Scenario 1:
1. Taxable vs. nontaxable
Differences between scenarios 1 and 2
Target 1065 contributes 100% of the assets with a carryover basis but receives a 100% stepped-up capital account for 704(b) purposes.
Scenario 2:
Target 1065 partnership receives tax basis equal to full market value for 75% of the assets.
Scenario 1:
Target 1065 partnership retains carryover tax basis for 100% of the assets.
Scenario 2:
2. Step up
Target 1065 contributes 25% of the assets with a carryover basis but receives a 25% stepped-up capital account for 704(b) purposes.
Scenario 1:
Target 1065 contributes 100% of the assets with a carryover basis but receives a 100% stepped-up capital account for 704(b) purposes.
Scenario 2:
3. Target 1065 contribution to new target partnership
Deductibility of transaction expenses
Potential tax issues to consider
Seller costs
Buyer costs
Lender costs
Depreciation expense on contributed assets
704(c) on contributed assets – methods
Scenario 2
Scenario 1
Buyer costs
Seller costs
Deductibility of transaction expenses
Issues to consider
Scenario 1
Scenario differences
Issues to consider
75%
Seller
1065
Buyer
1065 LLC
Target
25%
Scenario 2
Buyer contributes cash equal to 75% of the value to target SMLLC in exchange for a 75% interest.
1.
A buyer pays cash to an SMLLC in exchange for an equivalent interest in that SMLLC.
Target SMLLC blossoms into a Form 1065 partnership for federal tax purposes.
2.
75%
Cash
Seller
1065
Buyer
SMLLC
Target
Buyer's tax treatment is governed under the terms of code 721.
3.
75%
Cash
Seller
1065
Buyer
SMLLC
Target
1065 LLC
Target
Seller is treated as contributing 25% of the assets of target SMLLC in a 721 transaction.
4.
75%
Cash
Seller
1065
Buyer
SMLLC
Target
1065 LLC
Target
25%
Scenario differences
3. Target 1065 contribution to new target partnership
Target 1065 partnership recognizes no tax on the contribution of cash.
Scenario 2:
Target 1065 partnership has a taxable sale of 75% on the assets of target SMLLC.
Scenario 1:
1. Taxable vs. nontaxable
Target 1065 partnership retains carryover tax basis for 100% of the assets.
Scenario 2:
Target 1065 partnership receives tax basis equal to full market value for 75% of the assets.
Scenario 1:
2. Step up
Lender costs
Depreciation expense on contributed assets
704(c) on contributed assets – methods