Holding period of partnership/LLC interests.Limited liability company (LLC (Logical Link Control) See "LANs" under data link protocol. LLC - Logical Link Control ) interests are adjusted on a periodic basis pursuant to the LLC's operating agreement. For example, at the end of the first year, a member may have had a 20% interest in an LLC. At the end of the next year, based on performance and other criteria, such member's interest might be increased to 25%. This is quite common in service partnerships and LLCs (i.e., law and accounting firms). If a member who acquired an LLC interest over various periods, were to sell his or her entire interest, how would the holding period rules (for computing long-term and short-term capital gain Short-term capital gain A profit on the sale of a security or mutual fund share that has been held for one year or less. A short-term capital gain is taxed as ordinary income. ) apply? Holding Period Rules Regs. Sec. 1.1223-3(a) (1), Rules relating to the holding periods of partnership interests, states,"[a] partner shall not have a divided holding period in an interest in a partnership unless ... the partner acquired portions of an interest at different times ..." Clearly, partnership interests are not viewed as one interest as to holding periods, but are bifurcated bi·fur·cate v. bi·fur·cat·ed, bi·fur·cat·ing, bi·fur·cates v.tr. To divide into two parts or branches. v.intr. To separate into two parts or branches; fork. adj. based on the time of receipt of the various interests. Regs. Sec. 1.1223-3(b)(1) provides, "[t]he portion of a partnership interest to which a holding period relates" is determined by computing a fraction, the numerator numerator the upper part of a fraction. numerator relationship see additive genetic relationship. numerator Epidemiology The upper part of a fraction of which is the fair market value (FMV FMV - full-motion video ) of the partnership interest received, and the denominator of which is the entire partnership interest's FMV (determined immediately after the transaction); see Regs. Sec. 1.1223-3(f), Example (1). All of the above rules apply if the increase in the partnership or LLC interest resulted in Sec. 83 income to the member; if not, the holding period is not bifurcated. Thus, if an LLC interest were to he sold during the current year (and assuming that capital accounts are adjusted annually), a portion of any member's capital gain would be short term. The amount classified as short term would be the proportionate increase in the member's interest over the interest he or she held at the end of the prior year. Conclusion The short-term holding period portion of the partnership interest is determined by value, not simply by percentage or tax basis. However, any portion of the member's gain attributed to Sec. 751 "hot assets" (e.g., unrealized receivables) would be taxed as ordinary income, not capital gain. FROM BERNARD LEIBTAG, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , MBA MBA abbr. Master of Business Administration Noun 1. MBA - a master's degree in business Master in Business, Master in Business Administration , GORFINE, SCHILLER & GARDYN, P.A., BALTIMORE (OWINGS MILLS), MD |
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