Help me sort this out!!!!

[faithnlve]

What is the name of your state? VT...here is the problem. I was a 25% partner with two other people in an LLC. The other two partners were divided as follows: 25% and 50%. The business was not even open to public yet and my brother wanted to buy out my 25%. The other two partners agreed to this strongly. So I did. Here was the agreement with my brother. My brother offered me this: "I know you owe me money from over a year ago to help you pay some bills...but I want to offer you this." If I forgive you what you owe me and you sell me your 25% of this business your now in for $5000.00 would you agree to this? I replied back, "So your saying if I sell you my 25% of this new business for $5,000.00 then I won't have to pay you back the money I owe you either? He said yes. So he wrote me a check for $5,000 for my 25% on AUGUST 24TH. I cashed it that day and paid all my bills off. The other partners were family, and really wanted my brother in. What a relief. So, the next day the other two partners whom wanted him in, called me and said that they met with my brother and he started making changes and NOW don't want him in. I told them I already accepted the money and agreed to change over my partnership, even though I had not signed anything to him yet. The other two partners said dont sign it over yet, we will pay him back what he gave you and you stay in the business. We will figure something out. I said ok, but if he didn't agree to taking the money back, I was still signing over the 25% to him since we already agreed upon it, and the check he gave me was cashed and used. Well, I did not know until the next day that the other two partners wrote a check for 8500.00 not 5000.00 to my brother for him not to take my 25%. I said wait, I owed him 3500.00 which was money I borrowed on a personal basis, he bought my 25% for 5000.00 and said he would forgive me what I owed him if I would take his check for $5000.00. The other two partners are now saying I owe them 8500.00. I said no, I do not agree to that. I offerred to sign my 25% over to "them", they said no, we will figure this out. Two months later I am kicked out as a partner and told I was not a partner as of August 24TH, so I demanded payment as an employee for hours I worked, they paid me. NOW, I am told that I am receiving a 1099 form for the whole amount of 8500.00 for the money they gave to my brother since the 3500.00 was something called a "boot", (irs terms) even though I never received it in cash. Someone help me understand all this?? I feel that the personal loan of 3500.00 was forgiven and the 5000.00 was what I sold my brother the company for, and should receive a 1099 form for the 5000.00. Thanks

 

[divgradcurl]

You are liable for taxes on the entire $8500 dollars. When a loan is forgiven, the amount that is forgiven is considered income for the purpose of taxation. Now, if it was just a gift, then of course there would be no tax on the forgiven $3000 -- but since it really wasn't forgiven, but was instead essentially part of the purchase price of the share of the LLC, it's a capital gain for you, and you need to pay taxes on it. In other words, your brother paid you $8500 for the interest in the LLC; your "gain" is that $8500 minus whatever investment your originally put into the LLC -- if that's nothing, then your taxable gain is the full $8500.

You might want to sit down with your tax preparer and see if there is some way you can adjust your "basis" upwards to reduce the gain for tax purposes -- but other than that, it was correct for them to issue a 1099 reflecting $8500. It would not have been correct for them to issue a 1099 for $5000.

BTW, "boot" is just a tax term for a cash or other things of value added to a "trade" to make the trade an equal trade -- in this case, you traded an $8500 value interest in the LLC for $5000 + $3500 in loan forgiveness -- the loan forgiveness is the "boot" to make the transaction equal.

 

[faithnlve]

Ok, I did re-read what I wrote and it didnt seem that confusing to understand. Anyways, I guess my attorney told me I do not get a 1099 from the accountant, that it will come from my brother. So the accountant was wrong there. My brother gets a 1099 from the accountant for the 8500.00 from the check he received, but it will be a wash with him anyways. As for the boot I did not receive 8500.00 I received 5000.00 and my 1099 comes from my bro. Thanks

 

[divgradcurl]

Ok. Just one question, though -- you are out of the LLC, and received $8500 in total compensation for the ownership interest in the LLC, right? $5000 cash, and $3500 in loan forgiveness. How do you figure you are not liable for taxes on the entire amount of $8500?

 

[faithnlve]

No I did not receive 8500.00. My brother said if I sold him my share of 25% for 5000.00 he would forgive me the money I owed him. He wanted in that bad. It was after I sold to him that the other two partners decided later they wanted me back. I said I already sold my share to him for 5000.00. Well, my brother first offerred them 12,000 to buy it back. Then said ok, 8500.00 since I forgave my sister what she owed me for selling to me, you have to buy it from me now for 8500.00. I did not know about that deal till later. I only received 5000.00 in cash. thanks Faith

 

[divgradcurl]

You still might want to check with your tax preparer -- loan forgiveness is generally counted as income, so likely you still owe taxes on that anyway -- and the long-term capital gains rate will almost certainly be lower than your standard income rate.

 

[faithnlve]

the loan was before the llc. It was money my brother loaned me for bills at the time. He said as far as he was concerned the forgiveness was a gift from him to me. My attorney told me as long as it was a gift then, I would not be taxed. A family member can give what they want to another family member without having to pay taxes, plus there is no money trail like checks and so forth, he gave me cash. So as long as it was a gift the LLC partners cannot include that amount of the gift as part of the purchase to my brother, even though they paid more to him afterwards to buy my 25% from him. Faith