In summary, deliberate structuring and proper documentation will serve all parties and their lawyers well. The remorse of a buyer or seller caused by “retrospective” tax planning and non-compliance with THE LLC enterprise agreement can result in a disruption of activity and costly long-term litigation. In order to avoid unintended negative consequences, counsel should ensure that the client`s transaction complies with THE LLC operating agreement and ensure that the documentation is produced in accordance with the intentions and informed decision of the parties. It is also important for counsel to recognize that the interest of the outgoing member does not necessarily correspond to the interest of the remaining members in the choice between sale and withdrawal. Counsel should advise all parties, including the LLC, to consult with their own tax advisors to compare different tax scenarios before entering into negotiations so that the parties can make an informed, consistent and reasonable decision. In accordance with the relevant legal provisions of Sub-Chapter K of the Internal Revenue Code (“IRC”), LLC members have some flexibility in allocating their tax burden by structuring the transaction as a sale or withdrawal. The tax differences between the sale and withdrawal can be significant, as the outgoing member`s profit and the tax base of the remaining members are treated differently. Other factors that influence tax treatment may include whether THE LLC assets include so-called “hot assets” within the meaning of Section 751 of the IRC (i.e. inventory and unrealized receivables), whether payments to the outgoing member are made in increments, whether the LLC distributes assets instead of cash (or a mixture of both) to the outgoing member , if the business value or value of the business is considered to be part of LLC`s capital. if the outgoing member`s interest is financed by an LLC debt and if the outgoing member`s contribution to the LLC was in the form of services rather than cash and property. Carefully crafted withdrawal agreements can protect the remaining members from the burden of their untested or unknown successors and minimize the risk of litigation and stress among co-owners caused by the uncertainty of an outgoing owner. However, the feasibility of these types of agreements should be subject to regular review.
For example, feasibility is important to ensure that the company has sufficient resources to cash in the shares – and also for practice, to confirm that the terms and conditions are always in line with the needs and objectives of the owner and the company. In short, the tax court found that the transaction was clearly a sale, as can be seen from the agreement elaborated precisely by counsel for the parties. The tax court found that the recordings clearly indicated that the partners intended to take the sale route in their negotiations, and the final agreement prepared by their counsel accurately reflected such unambiguous intentions.