club_cafe: Investment Club Operations Handbook

iras1 on

In a message dated 10/28/2007 11:04:18 A.M. Eastern Daylight Time, nycpartners@bivio.com writes:

I was reading the Investment Club Operations Handbook
recently (BetterInvesting), and I was hoping someone could
clarify two questions that I had:

(1) When there is a new member admitted or change to the
partnership agreement, how is the agreement actually revised
- meaning do you add an addendum page with everyone's
signature, or do you re-create the whole document?

We have a letter that states that the new member has received a copy of the partnership agreement and agrees to be bound by its terms. The new member signs that letter and the letter is attached to the original PA.

(2) In terms of taxes, the handbook says when a member
withdrawals, the withdrawal itself is a taxable event based
on their cost basis. But, this does not make sense to me
because all gain/losses, interest, dividends, etc are
already being passed through to the individual members based
on their proportional ownership. It seems this would be
double counting. For example, if a club had a 25% return in
year one and sold all investments and went to cash, the unit
value would rise from $10 to $12.50. The gains would be
passed through proportionately. If a member withdrew, why
would the increase from $10 to $12.50 be a taxable event
when the underlying securities transactions have already
been accounted for on the K-1? Am I missing something?

It wouldn't be a taxable event under your scenario and you are missing somethin. There are two types of activities which lead to taxes: actions taken by the club, which affect all members, and actions taken by one (or more) members which affect only them. Actions taken by a member are reported on the withdrawal report, and the actions taken by the club are reported on Schedule K-1 each year. What you are missing is that each member's cost (tax) basis is adjusted by the net profit or loss reported on the K-1. Looking at your example above, if the member also had a 25% return in one year (each member's return is not necessarily the same as the club's due to differences in deposit timing/amounts), when the investments were sold, his taxable basis would adjust upward to $12.50/unit. The withdrawal would show no taxable gain. On the other hand, if the club didn't sell any of its investments but had cash on hand to fund the withdrawal, the K-1 would show no reportable income, but the withdrawal would show a taxable gain of $2.50/unit. Net result, there is no double counting.

Ira Smilovitz

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danny matthews on

Could a club have a signature line with a line to show the date signed by each individual member?

Danny Matthews

From: IraS1@aol.com
Date: Sun, 28 Oct 2007 11:16:42 -0400

(1) When there is a new member admitted or change to the
partnership agreement, how is the agreement actually revised
- meaning do you add an addendum page with everyone's
signature, or do you re-create the whole document?

We have a letter that states that the new member has received a copy of the partnership agreement and agrees to be bound by its terms. The new member signs that letter and the letter is attached to the original PA.

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John Q. Public on

> (2) In terms of taxes, the handbook says when a
> member
> withdrawals, the withdrawal itself is a taxable event based
> on
> their cost basis.  But, this does not make sense to me
> because all
> gain/losses, interest, dividends, etc are
> already being passed through to
> the individual members based
> on their proportional ownership.  It
> seems this would be
> double counting.  For example, if a club had a 25%
> return in
> year one and sold all investments and went to cash, the
> unit
> value would rise from $10 to $12.50.  The gains would
> be
> passed through proportionately.  If a member withdrew, why
> would
> the increase from $10 to $12.50 be a taxable event
> when the underlying
> securities transactions have already
> been accounted for on the K-1? 
> Am I missing something?
>
> It wouldn't be a taxable event under your scenario and you are missing
> somethin. There are two types of activities which lead to taxes: actions taken
> by the club, which affect all members, and actions taken by one (or more)
> members which affect only them. Actions taken by a member are reported on the
> withdrawal report, and the actions taken by the club are reported on Schedule
> K-1 each year. What you are missing is that each member's cost (tax) basis is
> adjusted by the net profit or loss reported on the K-1. Looking at your example
> above, if the member also had a 25% return in one year (each member's return is
> not necessarily the same as the club's due to differences in deposit
> timing/amounts), when the investments were sold, his taxable basis would adjust
> upward to $12.50/unit. The withdrawal would show no taxable gain. On the other
> hand, if the club didn't sell any of its investments but had cash on hand to
> fund the withdrawal, the K-1 would show no reportable income, but the withdrawal
> would show a taxable gain of $2.50/unit. Net result, there is no double
> counting.

Thanks, this is really helpful. In the latter scenario
(club has cash on hand to fund withdrawal), how is that
recorded on the K-1? Is it "sale of investment club unit"?
Secondly, does it affect the remaing members in any way?
Would their taxable basis adjust downward to reflect the
realizing by the withdrawing member? Thanks.

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