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FULL WITHDRAWAL
A Partner is making a full withdrawal. I've read and sent
most of the pertinent info I've found on the Cafe to the
Partners. A few Partners do not believe the info I've
copied below and want to see it in an IRS Pub. I've been
unable to find the correct IRS Pub. Any help appreciated.
Thanks.......Jay

==========

From a tax point of view, in a club organized as a
partnership, a full withdrawal is an opportunity for every
partner to defer taxation on their share of unrealized gain
in the transferred securities. (Transferring securities to a
fully withdrawing partner is not a taxable event.) By
transferring appreciated securities to fund a full
withdrawal, the withdrawing partner defers taxation until
they sell those securities and the remaining partners defer
taxation until they fully withdraw from the partnership (and
even longer if they too are paid with appreciated securities
which they continue to hold). Note that taxation isn't
eliminated, it's just deferred.
Partnership distributions are covered by Publication 541. Go
to www.irs.gov and search for "partnership" to find the
publication. You may have some difficulty in understanding
the publication. I certainly did!
Dear Jay,

As William described, partnership taxation is discussed here:

Publication 541

As he also mentioned, even if you have the information, if you have not studied partnership accounting and taxation, it may not be terribly easy to digest.

This raises a good point. Partnership accounting and taxation is not a trivial subject. Probably explaining its finer points is beyond the skill sets most of you club treasurers have acquired. Please know that you can feel comfortable having any of your club members contact us directly in support@bivio.com if they need something explained to them that is a little bit over your head.

We'd much rather spend the time to explain things to them ahead of time than have to break bad news to you about what it might take to try and extricate you from complicated mistakes that you make when you don't really understand something.

We try and give you a simple cookbook for handling common investment club transactions. I assure you our instructions are correct. The problems arise if you don't follow them. Sometimes this happens when other club members try and interpret things themselves and pressure a treasurer into making entries.

We're very friendly and totally understand that there are no silly questions. We understand that the fine points of partnership taxation are not easy to understand and not easy for club treasurers to explain to other club members.

If you don't get anywhere trying to read Publication 541, have your members email us in support with whatever specific issues they don't understand and we'll help take the burden off your shoulders to try and explain things to them.




Laurie Frederiksen
Invest with your friends!
www.bivio.com

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On Sat, Aug 17, 2013 at 2:41 PM, Jay Sternin <via95135@yahoo.com> wrote:
A Partner is making a full withdrawal. I've read and sent
most of the pertinent info I've found on the Cafe to the
Partners. A few Partners do not believe the info I've
copied below and want to see it in an IRS Pub. I've been
unable to find the correct IRS Pub. Any help appreciated.
Thanks.......Jay

==========

From a tax point of view, in a club organized as a
partnership, a full withdrawal is an opportunity for every
partner to defer taxation on their share of unrealized gain
in the transferred securities. (Transferring securities to a
fully withdrawing partner is not a taxable event.) By
transferring appreciated securities to fund a full
withdrawal, the withdrawing partner defers taxation until
they sell those securities and the remaining partners defer
taxation until they fully withdraw from the partnership (and
even longer if they too are paid with appreciated securities
which they continue to hold). Note that taxation isn't
eliminated, it's just deferred.

If we transfer appreciated stock (plus a little cash) for
the full withdraw
1. The withdrawing partner fully defers taxes on the stock??
Under all conditions??
2. when he (eventually) sells i'm not clear what his basis
is?

For the clubs year end taxes, how do we report the transfer?

thx......Jay
Dear Jay,

The withdrawing members tax basis in the stock received will be his tax basis for his investment in the club minus the amount of any cash received. His gain when he ultimately sells the stock will be the difference between that and the amount he eventually sells the stock for.

When you enter the withdrawal, a withdrawal report is prepared which you will give to him. It will show any gain from the withdrawal that he needs to report now and it will show the updated cost basis for the stock he receives.

bivio will put the information that the club needs to report in the correct places on the club tax forms.



Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio
Follow Us on Google+


Click here to
Subscribe to the Club Cafe email list. Click here to Unsubscribe


On Sun, Aug 18, 2013 at 7:22 PM, Jay Sternin <via95135@yahoo.com> wrote:
If we transfer appreciated stock (plus a little cash) for
the full withdraw
1. The withdrawing partner fully defers taxes on the stock??
Under all conditions??
2. when he (eventually) sells i'm not clear what his basis
is?

For the clubs year end taxes, how do we report the transfer?

thx......Jay

Laurie, I've heard and my Club has used the "give up stocks/sell down stocks" recommendation, but the logic behind does make my head swim.  I've had similar questions that Jay and his Club's members have.  Brief explanations haven't fully educated me.  Could you put on a webinar that thoroughly shows how this all works, including showing in exact detail how the leaving member is taxed vs. how the remaining club members are taxed, and when.  How will this affect the K-1s for all?  (If you have done this already, could you reference where we can watch it?)

Thank you,
 
Roy Chastain
Engaging in a new adventure:  Exercise Program starts today.  (Keep the EMTs on standby!)


From: Laurie Frederiksen <laurie@bivio.biz>
To: The Club Cafe <club_cafe@bivio.com>
Sent: Sunday, August 18, 2013 4:33 PM
Subject: Re: [club_cafe] Re: FULL WITHDRAWAL

Dear Jay,

The withdrawing members tax basis in the stock received will be his tax basis for his investment in the club minus the amount of any cash received.   His gain when he ultimately sells the stock will be the difference between that and the amount he eventually sells the stock for.

When you enter the withdrawal,  a withdrawal report is prepared which you will give to him.  It will show any gain from the withdrawal that he needs to report now and it will show the updated cost basis for the stock he receives.

bivio will put the information that the club needs to report in the correct places on the club tax forms.



Laurie Frederiksen
Invest with your friends!
www.bivio.com


On Sun, Aug 18, 2013 at 7:22 PM, Jay Sternin <via95135@yahoo.com> wrote:
If we transfer appreciated stock (plus a little cash) for
the full withdraw
1. The withdrawing partner fully defers taxes on the stock??
Under all conditions??
2. when he (eventually) sells i'm not clear what his basis
is?

For the clubs year end taxes, how do we report the transfer?

thx......Jay



> If we transfer appreciated stock (plus a little cash) for the full
> withdraw
> 1. The withdrawing partner fully defers taxes on the stock??
> Under all conditions??
> 2. when he (eventually) sells i'm not clear what his basis is?

It might help to think of this as follows. It's not really the tax that
gets deferred. What's deferred is the sale of the stock and the resulting
(taxable) realized gain or loss.

When an investment club (partnership) transfers stock to a fully withdrawing
partner that is a non-taxable event. At the time of the transfer there is
no realized gain or loss and, so, no tax due. The club will never sell the
transferred shares (it doesn't own them anymore) and, so, the club will
never realize a capital gain or loss on those transferred shares.

The withdrawn partner's tax basis in the club (less the amount of the
withdrawal paid in cash) becomes their basis in the transferred stock. As
Laurie described, this basis is shown on the partner's Withdrawal Report.
Only when that partner eventually sells the transferred shares will a gain
(or loss) be realized and only then does it become taxable. In this way,
the withdrawn partner defers realizing a capital gain (or loss) until they
choose to sell the transferred shares (perhaps years later).

What about the remaining members? Consider what would have happened if the
club sold the stock (instead of transferring it) and paid the withdrawal
100% in cash. Since it's generally best for the remaining members if highly
appreciated stock is transferred, let's assume the club sold the stock at a
profit. That realized capital gain will be allocated proportionately among
all the members and will appear on the K-1 forms at the end of the year.
Also ... this is key to understanding the deferral ... each member's tax
basis in the club will be *increased* by their share of that realized gain.

So, what happens if the club transfers that highly appreciated stock instead
of selling it? In that case there is no realized gain for the club to
allocate among the members and ... this is key ... *no* corresponding
increase in the member's tax basis. So, when each remaining member
eventually withdraws from the club their realized gain (or loss) will be
larger than it would have been if the stock had been sold by the club rather
than transferred. In this way, the remaining members each defer realizing
their share of gain on the transferred stock until they each eventually
withdraw from the club. Of course, the greatest amount of deferal comes
from transfering the most highly appreciated stock the club owns.

Hope that helps.

-Jim Thomas

P.S. Note that if the withdrawn partner immediately sells the transferred
stock, their gain or loss will be essentially the same as their gain or loss
if their withdrawal had been paid 100% in cash. So, even if the withdrawing
partner prefers cash, it makes very little difference to them whether their
withdrawal is paid with stock or cash. It is for this reason that in a
typical investment club partnership agreement the decision of whether to pay
a fully withdrawing member with stock or cash is made by the remaining
members.
hey laurie,
do you ever sleep??? thx......Jay
thx jim.
all very clear now...jay


From: Jim Thomas <jimt075@comcast.net>
To: club_cafe@bivio.com
Sent: Sunday, August 18, 2013 6:54 PM
Subject: Re: [club_cafe] Re: FULL WITHDRAWAL

> If we transfer appreciated stock (plus a little cash) for the full withdraw
> 1. The withdrawing partner fully defers taxes on the stock??
> Under all conditions??
> 2. when he (eventually) sells i'm not clear what his basis is?

It might help to think of this as follows.  It's not really the tax that gets deferred.  What's deferred is the sale of the stock and the resulting (taxable) realized gain or loss.

When an investment club (partnership) transfers stock to a fully withdrawing partner that is a non-taxable event.  At the time of the transfer there is no realized gain or loss and, so, no tax due.  The club will never sell the transferred shares (it doesn't own them anymore) and, so, the club will never realize a capital gain or loss on those transferred shares.

The withdrawn partner's tax basis in the club (less the amount of the withdrawal paid in cash) becomes their basis in the transferred stock.  As Laurie described, this basis is shown on the partner's Withdrawal Report. Only when that partner eventually sells the transferred shares will a gain (or loss) be realized and only then does it become taxable.  In this way, the withdrawn partner defers realizing a capital gain (or loss) until they choose to sell the transferred shares (perhaps years later).

What about the remaining members?  Consider what would have happened if the club sold the stock (instead of transferring it) and paid the withdrawal 100% in cash.  Since it's generally best for the remaining members if highly appreciated stock is transferred, let's assume the club sold the stock at a profit.  That realized capital gain will be allocated proportionately among all the members and will appear on the K-1 forms at the end of the year. Also ... this is key to understanding the deferral ... each member's tax basis in the club will be *increased* by their share of that realized gain.

So, what happens if the club transfers that highly appreciated stock instead of selling it?  In that case there is no realized gain for the club to allocate among the members and ... this is key ... *no* corresponding increase in the member's tax basis.  So, when each remaining member eventually withdraws from the club their realized gain (or loss) will be larger than it would have been if the stock had been sold by the club rather than transferred.  In this way, the remaining members each defer realizing their share of gain on the transferred stock until they each eventually withdraw from the club.  Of course, the greatest amount of deferal comes from transfering the most highly appreciated stock the club owns.

Hope that helps.

-Jim Thomas

P.S.  Note that if the withdrawn partner immediately sells the transferred stock, their gain or loss will be essentially the same as their gain or loss if their withdrawal had been paid 100% in cash.  So, even if the withdrawing partner prefers cash, it makes very little difference to them whether their withdrawal is paid with stock or cash.  It is for this reason that in a typical investment club partnership agreement the decision of whether to pay a fully withdrawing member with stock or cash is made by the remaining members.



Jim, thank you for your written explanation.  But, I need actual calculations in order to fully understand the ramifications of transferring stock.  It was my understanding that there would be no adverse consequences to the resigning partner.  It seems that such a belief does not stand up to scrutiny.  Also, I've come up with a bizarre tax resul.  So, please tell me where I have misstated the situation.
Below are two scenarios for payout to a resigning Partner, using the following assumption: 
Assumption:  Club's assets are $10,000.00, and there are 10 Partners, and each one's percentage of ownership just happens to be 10% each.  Partner A permanently leaves the club and the payout will be $1,000.00.   Stock XYZ happens to be worth an even $1000.00.  Ignoring commissions and fees, how will taxes be paid?
SCENARIO 1:  Club sells Stock XYZ for $1,000.00, with the cost basis at $600.00.  The $1,000.00 received from the sale of the stock will be paid to Partner A.  The $400.00 gain will be applied as follows:  $400 (Long-term Capital) Gain to each club Partner in their K-1, and will be taxed at each individual's tax rate.  The "total payout" will in reality be less than $1,000.00.  ($1000 payout minus the tax on the $40 LTCG.)  Assuming the LTCG tax is $6.00, the "total payout" will be $994.00.  There is no tax deferral (at least until he following April.)
SCENARIO 2:  Club transfers the same $1,000.00 worth of Stock XYZ to Partner A, which is immediately sold.  (Essentially, the "deferral" is extinguished the day after the resignation is paid out.)  There are no tax consequences to the remaining 9 Partners.  Won't Partner A, pay LTCG tax on the $400?  If so, this results in a $60.00 LTCG tax, providing Partner A with a "total payout" of $940.00.  This, however, appears to result in a $54.00 penalty for Partner A leaving the Club.  Is this what is intended?
A year later, Partner B leaves the club.  Her cost basis is $40 higher because the $400.00ncapital gain in Stock XYZ was not allotted to her and the other remaining members.  She now pays LTCG tax on that $40.00.
Please show me where I erred, because by my calculations not only will the taxes will be paid by Partner A, there is double taxation imposed on the other Partners later.  My logic must be faulty, because I can't believe this tax treatment and the penalty are the intended results. 
 
Roy Chastain
Engaging in a new adventure:  Exercise Program starts today.  (Keep the EMTs on standby!)


From: Jim Thomas <jimt075@comcast.net>
To: club_cafe@bivio.com
Sent: Sunday, August 18, 2013 6:54 PM
Subject: Re: [club_cafe] Re: FULL WITHDRAWAL

> If we transfer appreciated stock (plus a little cash) for the full
> withdraw
> 1. The withdrawing partner fully defers taxes on the stock??
> Under all conditions??
> 2. when he (eventually) sells i'm not clear what his basis is?

It might help to think of this as follows.  It's not really the tax that
gets deferred.  What's deferred is the sale of the stock and the resulting
(taxable) realized gain or loss.


-Jim Thomas

P.S.  Note that if the withdrawn partner immediately sells the transferred
stock, their gain or loss will be essentially the same as their gain or loss
if their withdrawal had been paid 100% in cash.  So, even if the withdrawing
partner prefers cash, it makes very little difference to them whether their
withdrawal is paid with stock or cash.  It is for this reason that in a
typical investment club partnership agreement the decision of whether to pay
a fully withdrawing member with stock or cash is made by the remaining
members.




Roy,
 
> Assumption:  Club's assets are $10,000.00, and there are 10 Partners, and each one's percentage of ownership just happens to be 10% each.  Partner A permanently leaves the club and the payout will be $1,000.00.   Stock XYZ happens to be worth an even $1000.00.  Ignoring commissions and fees, how will taxes be paid? <
 
You forgot to mention the tax basis of the various partners in the club.  Let's say each partner has a tax basis of $800.
 
 
> SCENARIO 1:  Club sells Stock XYZ for $1,000.00, with the cost basis at $600.00.  The $1,000.00 received from the sale of the stock will be paid to Partner A. <
 
The club realizes a capital gain of $400 on the XYZ stock.  $40 of that (10%) will be allocated to each partner (including the withdrawing parner) on their year-end K-1 form.  Every partner's tax basis in the club is increased to $840.
 
The withdrawn partner will have realized capital gain from two sources.  First, will be the $40 capital gain on their K-1 form (their share of the club's gain from selling XYZ).  In addition to that $40, the withdrawn partner will realize a capital gain due to their withdrawal in the amount of $160 ($1,000 cash received minus $840 tax basis in the club).  So, in total, the withdrawn partner will have $200 in capital gain to report this year.  Whether the $40 gain is short-term or long-term depends on how long the club held the shares.  If the withdrawing partner has belonged to the club for more than a year the entire $160 gain is long-term, if not the entire $160 gain is short-term.
 
 
> SCENARIO 2:  Club transfers the same $1,000.00 worth of Stock XYZ to Partner A, which is immediately sold. <
 
The withdrawn partner's tax basis in the XYZ stock is $800, the same as their tax basis in the club.  (The club's tax basis in the XYZ stock is irrelevant.)  The member sells XYZ for $1,000 and realizes a $200 capital gain.  The net gain is the same as in Scenario 1.  The member's holding period for XYZ includes the club's holding period, so that determines whether the gain is short-term or long-term.
 
 
> A year later, Partner B leaves the club.  Her cost basis is $40 higher because the $400.00 capital gain in Stock XYZ was not allotted to her and the other remaining members.  She now pays LTCG tax on that $40.00. <
 
Her cost basis in the club is $40 *lower* than it would be in Scenario 1.  So, her capital gain upon withdrawal is $40 higher (than it would be in Scenario 1).  She deferred realizing that $40 gain for a year.
 
-Jim Thomas
 
Jim,

Why do you first say that partner B has a $40 higher cost basis then you say it is $40 lower?  I understand the $40 lower but don't understand why it is $40 higher also.

Sent from my iPad

On Aug 19, 2013, at 5:31 PM, "Jim Thomas" <jimt075@comcast.net> wrote:

Roy,
 
> Assumption:  Club's assets are $10,000.00, and there are 10 Partners, and each one's percentage of ownership just happens to be 10% each.  Partner A permanently leaves the club and the payout will be $1,000.00.   Stock XYZ happens to be worth an even $1000.00.  Ignoring commissions and fees, how will taxes be paid? <
 
You forgot to mention the tax basis of the various partners in the club.  Let's say each partner has a tax basis of $800.
 
 
> SCENARIO 1:  Club sells Stock XYZ for $1,000.00, with the cost basis at $600.00.  The $1,000.00 received from the sale of the stock will be paid to Partner A. <
 
The club realizes a capital gain of $400 on the XYZ stock.  $40 of that (10%) will be allocated to each partner (including the withdrawing parner) on their year-end K-1 form.  Every partner's tax basis in the club is increased to $840.
 
The withdrawn partner will have realized capital gain from two sources.  First, will be the $40 capital gain on their K-1 form (their share of the club's gain from selling XYZ).  In addition to that $40, the withdrawn partner will realize a capital gain due to their withdrawal in the amount of $160 ($1,000 cash received minus $840 tax basis in the club).  So, in total, the withdrawn partner will have $200 in capital gain to report this year.  Whether the $40 gain is short-term or long-term depends on how long the club held the shares.  If the withdrawing partner has belonged to the club for more than a year the entire $160 gain is long-term, if not the entire $160 gain is short-term.
 
 
> SCENARIO 2:  Club transfers the same $1,000.00 worth of Stock XYZ to Partner A, which is immediately sold. <
 
The withdrawn partner's tax basis in the XYZ stock is $800, the same as their tax basis in the club.  (The club's tax basis in the XYZ stock is irrelevant.)  The member sells XYZ for $1,000 and realizes a $200 capital gain.  The net gain is the same as in Scenario 1.  The member's holding period for XYZ includes the club's holding period, so that determines whether the gain is short-term or long-term.
 
 
> A year later, Partner B leaves the club.  Her cost basis is $40 higher because the $400.00 capital gain in Stock XYZ was not allotted to her and the other remaining members.  She now pays LTCG tax on that $40.00. <
 
Her cost basis in the club is $40 *lower* than it would be in Scenario 1.  So, her capital gain upon withdrawal is $40 higher (than it would be in Scenario 1).  She deferred realizing that $40 gain for a year.
 
-Jim Thomas
 

Linda,
 
> Why do you first say that partner B has a $40 higher cost basis ... <
 
I was quoting Roy (who misspoke).
 
 
> ... then you say it is $40 lower? <
 
That was me stating the correct situation.
 
-Jim Thomas