Withdrawing club partner
Bob Atkinson raises some questions about member buy outs.
We just received our first withdrawal notice today from a member of our investment club and we have a well defined process for recognition of the notice, valuation date, methods of payment and timeframe to pay.
However, it has been suggested by a couple members " What if one or more on-going members want to buy out the departing members shares in full and  assume the shares accumulated during the departing members tenure?"
Question 1 -- Is this a viable alternative for cashing out a departing member
Yes, it is indeed viable. However, you should not have the purchasing members issue checks directly to the departing members. Have the purchasing members issue their checks directly to the club, thus earning additional units at the current valuation. Then use the cash to purchase the units from the departing members at the same price.
This practice will create all the required records and will reflect the correct tax basis for all members.
Question 2 -- If not, why not? This does not seem to have a downside unless it relates to taxes at year end.
I can conceive of no undesirable tax effects triggered by the use of additional funds from existing members to buy out departing members.
Before you actually consummate this transaction, I would urge you to consider paying off the departing members with appreciated stock instead of cash. Both Jerry and I feel that this method can be more advantageous for the club and the departing members. I won't make this response any longer by going into all the ramifications of paying with stock, but you can read Jerry's excellent discourse on the subject at Jerry's Best on the NAIC Web Site
If you would like further clarification on the benefits of using appreciated stock for payoffs, please come back.
Rip West
Ridgway, CO