club_cafe: Re.Partial Withdrawals
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club_cafe: Re.Partial Withdrawals In a message dated 2/6/2004 7:34:06 PM Eastern Standard Time, ado@bivio.com writes:
IRA No and no. Follow the logic. Withdrawing member wants $8K. Since this is less than his current cost basis, it is a tax-free withdrawal for him. His cost basis will be lowered by $8K to $2K and his value in the club will be lowered by $8K to $7K. He still has the $5K of embedded profit that he will pay tax on someday (assuming no future earnings or change in value).
Now let's look at the other members. Member A has a cost basis of $Ax and a current value of $Ay. "A" has an embedded profit of $Ay-$Ax. If "A" contributes $4K towards the buyout, "A"'s cost basis becomes $Ax+4K and current value is $Ay+4K. The same profit is still there and the same future tax liability.
Now, as things change in the future, "A" will get a bigger share of the pie, but that's how it should be since "A" now owns more of the pie. This is exactly what you want to happen if you believe the club is making good investments....you want to own a bigger share of the profits.
No. No. No. Nothing. The only person who sees a change in the number of units is the person making the withdrawal. The unit price represents the current value of the club divided by the number of units outstanding. It bears no relationship to the cost basis of any member. If you want proof, just look at your current membership. Divide each member's cost basis by the number of units s/he owns. The average cost basis/unit for each member will be different. The only thing that changes is that the remaining members see their %ownership increase so that the %ownership of all members totals to 100. The member taking the withdrawal sees his %ownership decrease. Future tax commitments are the same.
A partial withdrawal is only an exchange of future gains for cash in pocket now.
Yes.
5. Yes. The decision is up to the club. I said that cash is easiest because there are certain circumstances where giving appreciated stock is not good. Notice, Jerry said "generally good". If you give cash, you don't have to worry about this. If you are careful about what you do, giving the "right" stock is probably better.
Ira Smilovitz
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