Jump to content
utb21

K-1 Issue ... Debt forgiveness reported as income

Recommended Posts

I am a minority member of an LLC. The entity reported a $200,000 loss in 2011 and has been essentially dormant since then. I attempted to withdraw from the entity several years ago - but for the sake of this discussion, let's assume I am still a member. The managing members decided to wind this entity down, and the 2017 K-1 shows $200,000 of "income" due to forgiveness of a debt. But the operating agreement states that, "No member shall be liable for the debts, obligations or liabilities of the company, including under a judgment, decree or order of court."

 

My question: if I am not liable for the LLC's debts, why would forgiveness of that debt constitute income to me? 

 

Share this post


Link to post
Share on other sites

Just because the operating agreement contains the quoted statement (which is a completely unnecessary statement since that's one of the fundamental features of the corporate and LLC business forms) doesn't necessarily make it true.  Moreover, and in any event, you've now been given a K-1 and will have to deal with it and will probably need a tax attorney to review the LLC documentation and advise you and, if appropriate, send some sort of rebuttal letter to the managing member, etc.

Share this post


Link to post
Share on other sites
19 hours ago, pg1067 said:

Just because the operating agreement contains the quoted statement (which is a completely unnecessary statement since that's one of the fundamental features of the corporate and LLC business forms) doesn't necessarily make it true.  Moreover, and in any event, you've now been given a K-1 and will have to deal with it and will probably need a tax attorney to review the LLC documentation and advise you and, if appropriate, send some sort of rebuttal letter to the managing member, etc.

 

Thank you for your response. I understand that LLC members are generally not personally liable for LLC debts. I included the quoted statement as evidence that the operating agreement echoes that sentiment (also does not address individual liability for additional capital contributions). Assuming the operating agreement says nothing else about capital contributions, is my original analysis correct? 

Share this post


Link to post
Share on other sites

Without input from a tax attorney, I would hesitate to say yes, since this is basically a tax issue not a debt issue, since you are not being asked to repay the debt, but report it on your income taxes as income. Seek assistance from a tax attorney.

Share this post


Link to post
Share on other sites
48 minutes ago, utb21 said:

Assuming the operating agreement says nothing else about capital contributions, is my original analysis correct?

 

We don't have enough information to know.  A tax lawyer posts here fairly regularly, I would wait and see if he happens along your post.

Share this post


Link to post
Share on other sites
27 minutes ago, pg1067 said:

 

We don't have enough information to know.  A tax lawyer posts here fairly regularly, I would wait and see if he happens along your post.

 

Got it. Thanks for the feedback.

Share this post


Link to post
Share on other sites
On 4/30/2018 at 2:50 PM, utb21 said:

My question: if I am not liable for the LLC's debts, why would forgiveness of that debt constitute income to me? 

 

 

The answer is that a LLC organized in the U.S. with more than one member is treated as a partnership under federal tax law and as a result all the income, deductions, and credits of the partnership flow to the partners for federal income tax purposes. The fact that for non-tax purposes the LLC provides its members with limited liability under state law has nothing to do with the federal tax treatment of the LLC.

 

Now, that said, some or all of that debt discharge may be excluded from your income depending on the details of the debt and your financial circumstances. You ought to see a tax attorney or other tax professional to go over this and work out what the tax consequence will be. A tax attorney could also look to see if the LLC got the debt discharge right in the first place.

Share this post


Link to post
Share on other sites
4 hours ago, Tax_Counsel said:

 

The answer is that a LLC organized in the U.S. with more than one member is treated as a partnership under federal tax law and as a result all the income, deductions, and credits of the partnership flow to the partners for federal income tax purposes. The fact that for non-tax purposes the LLC provides its members with limited liability under state law has nothing to do with the federal tax treatment of the LLC.

 

Now, that said, some or all of that debt discharge may be excluded from your income depending on the details of the debt and your financial circumstances. You ought to see a tax attorney or other tax professional to go over this and work out what the tax consequence will be. A tax attorney could also look to see if the LLC got the debt discharge right in the first place.

 

Much appreciated. Will seek professional advice.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

×
×
  • Create New...