Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of “give them unappreciated shares” vs “sell when we don’t want to have a gain” comes up often here. I do not understand how this defers capital gains – as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
- Michael Boyd
Salt Pond Investments
Bob Mann on
Search the archives for the many discussions on this topic. It's all thoroughly explained multiple times.
Bob Mann
On 09/22/2022 3:08 PM Michael Boyd via bivio.com <user*37394800001@bivio.com> wrote:
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
- Michael Boyd
Salt Pond Investments
ira smilovitz on
Michael,
Your starting assumption is wrong. The withdrawal of a partner isn't a sale of a partnership interest. If it were, your analysis would be correct or at least more correct. What is actually happening is a liquidation of a partnership interest. The rules are that any cash received reduces the member's tax basis. If there is remaining tax basis, it is allocated to the assets received. If the cash received is greater than the tax basis, the excess is capital gain and the assets received assume $0 cost basis to the withdrawing member.
The IRC reference for this is §732. If you really want to dig into this further, look at sections §731-737 and the associated regs. Reg §1.732-1 is most relevant to the present situation.
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
- Michael Boyd
Salt Pond Investments
Anna Murray on
Ira is right. To put it simply as my old accounting prof said: "Boot(cash) triggers gain for the partner leaving. Giving him stock instead does not.
Your starting assumption is wrong. The withdrawal of a partner isn't a sale of a partnership interest. If it were, your analysis would be correct or at least more correct. What is actually happening is a liquidation of a partnership interest. The rules are that any cash received reduces the member's tax basis. If there is remaining tax basis, it is allocated to the assets received. If the cash received is greater than the tax basis, the excess is capital gain and the assets received assume $0 cost basis to the withdrawing member.
The IRC reference for this is §732. If you really want to dig into this further, look at sections §731-737 and the associated regs. Reg §1.732-1 is most relevant to the present situation.
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
- Michael Boyd
Salt Pond Investments
mjboyd on
Thanks Ira et all for pointing to the "it's a liquidation not a sale" point.
Was definitely looking at this through the lens of a partnership sale where marketable securities may be considered bootable/deemed cash.
Michael Boyd
Salt Pond Investments
From: club_cafe@bivio.com <club_cafe@bivio.com> On Behalf Of Anna Murray via bivio.com Sent: Friday, September 23, 2022 10:08 AM To: club_cafe@bivio.com Subject: Re: [club_cafe] Tax rules around partner withdrawal
Ira is right. To put it simply as my old accounting prof said: "Boot(cash) triggers gain for the partner leaving. Giving him stock instead does not.
Your starting assumption is wrong. The withdrawal of a partner isn't a sale of a partnership interest. If it were, your analysis would be correct or at least more correct. What is actually happening is a liquidation of a partnership interest. The rules are that any cash received reduces the member's tax basis. If there is remaining tax basis, it is allocated to the assets received. If the cash received is greater than the tax basis, the excess is capital gain and the assets received assume $0 cost basis to the withdrawing member.
The IRC reference for this is §732. If you really want to dig into this further, look at sections §731-737 and the associated regs. Reg §1.732-1 is most relevant to the present situation.
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.
- Michael Boyd
Salt Pond Investments
Paul Giles on
Hi Mike
I have been following this along for the past week. My head was/is spinning a bit. This will definitely go into my saved file for future reference.
When do we process Lew? Before or after next week's meeting?
I hope to have all the work done prior to Tuesday for review. Are you going to be at the meeting?
Have a great weekend!
Paul
On September 23, 2022 at 11:42 AM "Michael Boyd via bivio.com" <user*37394800001@bivio.com> wrote:
Thanks Ira et all for pointing to the "it's a liquidation not a sale" point.
Was definitely looking at this through the lens of a partnership sale where marketable securities may be considered bootable/deemed cash.
Michael Boyd
Salt Pond Investments
From: club_cafe@bivio.com <club_cafe@bivio.com> On Behalf Of Anna Murray via bivio.com Sent: Friday, September 23, 2022 10:08 AM To: club_cafe@bivio.com Subject: Re: [club_cafe] Tax rules around partner withdrawal
Ira is right. To put it simply as my old accounting prof said: "Boot(cash) triggers gain for the partner leaving. Giving him stock instead does not.
Your starting assumption is wrong. The withdrawal of a partner isn't a sale of a partnership interest. If it were, your analysis would be correct or at least more correct. What is actually happening is a liquidation of a partnership interest. The rules are that any cash received reduces the member's tax basis. If there is remaining tax basis, it is allocated to the assets received. If the cash received is greater than the tax basis, the excess is capital gain and the assets received assume $0 cost basis to the withdrawing member.
The IRC reference for this is §732. If you really want to dig into this further, look at sections §731-737 and the associated regs. Reg §1.732-1 is most relevant to the present situation.
Starting this as a separate thread and directing to Ira with an ask to help educate me on this.
The topic of "give them unappreciated shares" vs "sell when we don't want to have a gain" comes up often here. I do not understand how this defers capital gains - as either scenario should trigger gains for the club and could trigger gains for the withdrawing member.
Main question to Ira: What tax code supports capital gain deferral when appreciated stock is provided in lieu of cash from an investment club to a member?
My position is that the payment of cash or transfer of appreciated shares represents a "sale or exchange" transaction which would trigger capital gains rules for the club. Upon the payment/transfer, control and ownership of the cash/shares changes hands, from the club to the individual member. The transaction would:
a) trigger capital gain realization for the club on the transferred stock shares upon loss of control by the club and exchange out to the member, calculated as market value at date of transfer less tax basis in the stock shares held by the club. This capital gain is distributed to members per the club rules.
b) trigger capital gain realization for the member, calculated by the market value of their club ownership less their tax basis of contributions to the club. The member has a tax realization upon the exchange of their club shares for cash/shares of appreciated securities.
I do get that there are a few scenarios that could allow capital gain deferral for the member on the contribution of appreciated shares into a club (different corporate / trust structures or special non-dilutive share contributions). Yet clubs are typically LLCs with pass-through partnership taxation and would not be open to those options. Plus, we're talking about the sale or exchange out.
Thanks for any clarification or guidance you can provide.
As FYI, our club keeps it simple - all withdrawals are paid out in cash, funded either by stock sales (one of our approved reasons for selling a stock) or by additional member contributions to increase available cash.