Withdrawals and Your Partnership Agreement

Laurie Frederiksen on

In our treasurers training webinar last night about Non Monthly Treasurers Tasks, we discussed the information you will need from your partnership agreement to enter a withdrawal. It is:

1. Withdrawal valuation date

a. What date will you use to establish what the member is owed?

2. Time Frame

a. The time frame for paying off a member who has requested a withdrawal.

3. Payment method-

a. Will you pay a withdrawal in stock or cash?

b. Who determines this, the club or the withdrawing member?

c. Do you charge a withdrawal fee?

Our recommendations are these:

1. Withdrawal valuation date

a. 2 days before the second meeting following the receipt of the request to withdraw

2. Time Frame

a. If transferring stock, transfer it within 2 days of the withdrawal valuation date. If paying cash, pay within 10 days of the withdrawal valuation date.

3. Payment Method

a. Withdrawal Fees-We suggest you do not charge them.

b. Full withdrawal

i. First choice-Transfer appreciated stock (club chooses stock)

ii. Second choice-Cash

iii. Club makes the final determination of payment method

c. Partial withdrawal

i. Appreciated Stock or cash

ii. Withdrawing member chooses whether stock or cash

iii. Club chooses specific stocks

What does your club partnership agreement say about these parameters? You might find it interesting to put a review and discussion of this topic on an upcoming agenda. It’s important that everyone in the club understand how you’ve agreed to operate if you do have a withdrawal.

Laurie Frederiksen

www.bivio.com

iras1 on

No!!! Partial withdrawals are best paid in cash. Transferring appreciated stock in a partial withdrawal can create a large current tax liability for the partner, since the partner's basis in the transferred shares is the same as the club's basis. If cash is used, no tax liability exists unless the partial withdrawal exceeds the partner's tax basis in the club.

Ira Smilovitz

Join me at InvestEd 2010

Investor Education at Its Best^TM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/

In a message dated 05/26/10 13:20:18 Eastern Daylight Time, laurie@bivio.biz writes:

c.    Partial withdrawal

                                          i.    Appreciated Stock or cash

                                         ii.    Withdrawing member chooses whether stock or cash

                                        iii.    Club chooses specific stocks

Laurie Frederiksen on

Hi Ira,

So is the information in this article not correct?

https://www.bivio.com/trez_talk/mail-msg?t=2981700003

I thought the reason that the Partner got to choose whether to receive stock or cash was because his tax liability would depend

on his personal circumstances and either Appreciated stock or cash was equivalent in terms of it’s impact on the club?

Laurie

Rip West on

Laurie [and Ira]

<<
So is the information in this article not correct?

https://www.bivio.com/trez_talk/mail-msg?t=2981700003
>>

Of course not! It's a trez-talk article and they are never wrong<g> In the normal course of business, it doesn't make sense to use stocks to fund a partial withdrawal. As has been pointed out, this can lead to consequences that were unintended at the time of the request. In a usual case, the withdrawing partner is asking for a partial in order to raise cash. Why make him pay a capital gains tax to get the cash? There have been cases where a partial withdrawal in stock can make some sense. Mark Robertson was involved in a case like that a few years back, where the partner had a very large position in the club, and this seemed the only way to lessen that position without subjecting the rest of the club to some taxable income.

The wording of the standard partnership agreement protects the partial withdrawer from having to pay tax on a greatly appreciated stock that might otherwise be transferred to him. He doesn't need that protection in a total withdrawal.

Rip West
Saint Paul, MN

iras1 on

The information is correct, but is written in a very confusing manner. Jerry approaches each alternative from three perspectives: the withdrawing member, the other members and the club. In fact, there are really only two perspectives: the withdrawing member's and the other members'.

Note the following in alternative 4:

"If the club's cost basis in the transferred stock plus cash is less than the withdrawing member's cost basis in the club, the transfer of appreciated stock may cause the withdrawing member to realize a larger gain upon the sale of the stock than if the withdrawing member received cash. "

Since most members taking partial withdrawals are doing so because they need the funds for another purpose, they're likely to sell the shares quickly. The club is "sticking" an ongoing partner with an accelerated tax liability, which won't be recovered until that member fully withdraws from the club.

Ira Smilovitz

Join me at InvestEd 2010

Investor Education at Its Best^TM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/

In a message dated 05/26/10 14:23:20 Eastern Daylight Time, laurie@bivio.biz writes:

So is the information in this article not correct?

https://www.bivio.com/trez_talk/mail-msg?t=2981700003

Laurie Frederiksen on

But if the club has to sell appreciated stock to raise the cash, it seems as though all the club members would have current capital gains which they might not have otherwise. If there might be a scenario where it would be a win for everyone to transfer appreciated stock, why wouldn’t they do that?

So it seems as though the answer is “It Depends”.

This is actually what I was trying to indicate. I did not say the first choice was to transfer appreciated stock like I did with a full withdrawal. I just listed it as a possible payment method. I think the trez talk article lays out the choices pretty well. The sentence you have quoted is only one of the possible scenarios. There are also circumstances where it would benefit the withdrawing member and the club for him to receive appreciated stock.

The whole point of the message was to get clubs to look at what they specify. Perhaps what’s needed is just some more words that put more emphasis on the importance of evaluating the alternatives carefully.

I do wonder why the choice of receiving stock or cash is left up to the withdrawing member rather than both him and the club. It seems as though there are circumstances where he could make a decision that might not be in the best interests of the other members.

Laurie

iras1 on

In a message dated 05/26/10 17:53:31 Eastern Daylight Time, laurie@bivio.biz writes:

So it seems as though the answer is "It Depends".

This is actually what I was trying to indicate. I did not say the first choice was to transfer appreciated stock like I did with a full withdrawal. I just listed it as a possible payment method.

Correct, it depends. Your intention wasn't obvious to me without further explanation. I would list the partial withdrawal option as "cash or appreciated stock", not the other way around. As we've seen, there are subtleties involved with the choice of shares to transfer in a partial withdrawal which don't exist for a full withdrawal. I'm not confident that most treasurers will be able to choose the "right" shares to transfer.

Ira Smilovitz

Join me at InvestEd 2010

Investor Education at Its Best^TM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/

Laurie Frederiksen on

>I would list the partial withdrawal option as "cash or appreciated stock", not the other way around.

Good idea. It's good to have "peer review" on these things. When I wrote it, what was on my mind was to make sure people

didn't transfer stock that showed a loss. It's always good to get a variety of eyes and thoughts when we're trying

to communicate something.

:)

Thanks for the input.

Laurie

Jim Thomas on

The sections on withdrawals in http://www.bivio.com/pugetsoundbi/files/ClubAccounting/Club%20Accounting%20Concepts.pdf might be interesting reading regarding this topic.

-Jim Thomas