Model Llc Membership Interest Redemption Agreement
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. There are cases where the IRS can look behind the form chosen by the parties and redefine the transaction. Such a case is one where the refund appears to be funded by the contribution of a remaining member to the LLC. Another is that the interests of the remaining members do not increase pro-rata after the transaction. In these circumstances, a rebutted presumption of a disguised sale may appear under Section 707 of the IRC. In order to avoid unintended consequences, counsel should carefully consider all relevant facts and circumstances, including the CLL`s cash situation, when structuring the transaction. When a client requests the preparation of a purchase or sale contract for the interests of the limited liability company (GMB), the legal advisor should always gather additional information before preparing such an agreement in order to obtain a complete picture of the exchange.
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. The Court of Appeal upheld the Decision of the Court of Appeal. The Foxman case illustrates the flexibility of LLC members to allocate their tax burdens to some extent and the importance of consistent and consistent documentation. The choice of sale or withdrawal of the parties is generally respected by the tax authorities as long as the supporting documents are in accordance with the members` intentions. 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. The main reason is that the legal counsel must decide whether the transaction is structured by the LLC as a sale of outgoing member holdings (“outgoing member”) to a remaining member or as a withdrawal (or “liquidation distribution”) of the outgoing member`s shares.