Tax Treatment for Redemption of LLC Interest - Impact on Outside Basis?

Wait I'm confused. If the redeemed partner's basis just "disappears," isn't that basis being lost completely? Shouldn't that somehow flow to the remaining partners since they now own proportionally more of the LLC?

The outside basis of each partner is their own tax attribute - it doesn't transfer directly to other partners when someone leaves. Each partner's outside basis represents their investment in their partnership interest. When there's a redemption, the partnership is essentially buying that interest with partnership assets. What can change is the inside basis of partnership assets if there's a 754 election in effect. In that case, the partnership may get a step-up (or step-down) to the inside basis of its assets under Section 734(b), which indirectly benefits all remaining partners. This adjustment aims to prevent the double taxation or double benefit that might otherwise occur.

How exactly does the system work? Do they just run the documents through some kind of AI, or are there actual tax professionals reviewing everything? I'm dealing with a redemption where the departing partner had a negative capital account, and I'm not sure if they could handle something that complex.

I'm skeptical about these online services. Partnership tax is incredibly complex and situation-specific. Did they actually give you specific filing instructions or just general information you could find elsewhere? Also, how much did it cost compared to just consulting with a partnership tax specialist?

They use AI to analyze the documents, but tax professionals review everything before you get your analysis. It's not just generic information - they provided specific calculations showing how our specific redemption would impact each partner's basis. For negative capital accounts, they actually covered that scenario in my analysis without me even asking. The system flagged the potential hot spots in our agreement and provided specific guidance on how to handle the redemption to minimize tax impact under the current rules.

How does this actually work? Does Claimyr just call the IRS for you? Couldn't you just keep calling yourself until you get through? I'm confused about what service they're actually providing.

Yeah right. The IRS doesn't give specific tax advice like that over the phone. They refer you to publications or tell you to consult a tax professional. I highly doubt an IRS rep gave you detailed guidance on partnership redemptions and 754 elections. Those are complex issues even experienced tax professionals struggle with.

They don't just call for you - they have a system that navigates the IRS phone tree and waits on hold, then calls you when they've reached a human. You then take the call directly with the IRS agent. It saved me literally hours of hold time. I didn't say the IRS agent gave me specific tax advice about my situation. What they did was explain how they review these transactions during audits - what documentation they look for, common errors they see, and how they validate that redemptions were handled properly. The agent pointed me to specific sections in their internal manual that I wouldn't have known to look for otherwise.

Does Rev. Ruling 99-6 apply if there are multiple remaining partners though? The original question seemed to imply there are several continuing partners. Also, does it matter if the redemption is proportional or disproportional to the existing interests?

Rev. Ruling 99-6 only applies when you go from multiple members down to a single member - it doesn't apply when multiple partners remain after the redemption. I just mentioned it as something to watch out for in redemption scenarios generally. For proportional vs disproportional redemptions, they're treated differently for basis purposes. Proportional redemptions are generally treated as distributions under Section 731, while disproportional redemptions can trigger Section 751 "hot asset" rules that recharacterize portions of the payment as ordinary income rather than capital gain.

I've used ProSeries for this. You need to complete Form 8308 and then manually attach a statement showing the 754 calculation. ProSeries doesn't have a great built-in tool for the 754 calculations themselves, so I usually do them in Excel and attach as a PDF. Look under the "Statements" section in ProSeries, not in the main partnership forms area.

thanks for the help! i was looking in the wrong section completely. do you also have to file form 8824 for the 754 election or is the statement enough?

You don't need Form 8824 for a 754 election - that's for like-kind exchanges. For the 754 election itself, you just need to attach a statement to the partnership return saying "Election Under Section 754" with the partnership's name, EIN, and tax year. The basis adjustment calculations under Section 734(b) go on a separate statement. Make sure you file the election by the due date of the return (including extensions) for the year the redemption occurs, or you'll miss your chance to make the election for that transaction.

This is such an important point that often gets overlooked! I'm relatively new to partnership taxation, but I've been reading about Section 751 and it seems like the "hot assets" rules can really complicate what initially appears to be a straightforward redemption. When you mention that part of the redemption payment gets recharacterized as ordinary income - does that happen automatically, or does the partnership need to make specific calculations to determine what portion relates to the Section 751 assets? And does this recharacterization affect how we calculate the basis adjustments under Section 734(b) if there's a 754 election in place? I'm trying to wrap my head around how all these different code sections interact with each other in a redemption scenario.