FULL WITHDRAWAL
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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! 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'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. 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 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 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, 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.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. 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 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, 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.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. 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 > 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
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
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