I think we've missed a chance to make this *more complicated*. For
example, in a partnership that's got "fixed" percentages, but pays its
partners guaranteed payments for their services - based on something
other than the fixed partner percentages - there's always the
possibility that the partners agree to give the partners a "kicker" to
help them pay their taxes on their partnership income. If the kicker
is paid as a guaranteed payment, then the complications begin...!! I
could go deeper into this morass but I get confused when I try to
think and type at the same time.

e.g. two partners are 50-50 in ownership of a business, but one
partner's working full-time for the partnership and one's either
wealthy or retired or lazy (or all three, but why identify myself so
carefully) and only puts in a few hours a week. However, the wealthy,
retired, lazy partner is just making sales calls, while the "full-
time" partner handles all the administrative crapola in addition to
being in sales, too. The partners agree that their guaranteed
payments for any year will be a combination of an hourly wage for the
admin partner's time spent "in the office" plus a "commission" on the
sales generated by each partner, plus a "kicker" to help them pay
their taxes. End result: the partners are 50-50 but their "tax
kicker" won't - not by design at least - be 50-50, but since it's paid
as a guaranteed payment, it's deductible 50-50 even though it may be
paid out in any ratio that the formula determines.

What the formula would be for the tax kicker, well that's an entirely
different story, it'll be in the next chapter of my upcoming book
"Real World Solutions to Nagging Puzzles in Flow-Through Entity
Taxation".

[footnote: when the "worker" partner approached the "retired" partner
about this "tax kicker" payment the "retired" partner (the rich lazy
one) said something like "Well, son, you just pay your taxes like
everybody else does, by writing a check to the gummint." Then he was
reminded that he was rich and retired and lazy, and the other guy
really had to make it on what he could earn from the partnership.
They agreed on a formula for a deductible payment to each of them "for
taxes". One that wouldn't deplete their capital accounts
unsymmetrically.]

Just kidding about "my upcoming book"...

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"Katie" <katiej_1958[at]yahoo.com> wrote in message
news:65811125-9ab2-42f4-85ea-cb6a00b4993e[at]z72g2000hsb.googlegroups.com...
- quote -


yes, but if nothing about taxes is stated in the operating agreement, then
any payments to help cover tax payments would have to be pro rata, based on
profit distributions. In other words, if you want payments to cover tax
liabilities even though some members are in different tax brackets, THAT
should be spelled out in the operating agreement.

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On Jul 11, 9:02*am, "Gil Faver" <rowdy'sb...[at]xxyz.com> wrote:
- quote -


Better put it in the Operating Agreement, Gil <G> .

Katie

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"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote:

- quote -

That's normal, and you can certainly write your agreement that way.
But if the other guy is in a higher tax bracket and put in most of the
money in exchange for you doing most of the work, it might well be
something that you would have agreed to.

Stu

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"Stuart Bronstein" <spamtrap[at]lexregia.com> wrote in message
news:Xns9AD852528C2E7avocatstuyahoofr[at]130.133.1.4...
- quote -

yes, great info. But I said "should". I mean, what the heck do I care
about what tax bracket my co-owner is in? If I put in x%, I want x% out.
Or, if the other co-owner is contributing management skills, so I put in x%
and I get y%, I want y%, not something other than y% concocted based on
various tax brackets.

but hey, that's me.

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Katie <katiej_1958[at]yahoo.com> wrote:

- quote -

Thanks Katie. Great information.

Stu

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On Jul 10, 8:31*pm, Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -


I don't think it matters why the distributions are made -- to cover
the taxes or just because the partner/member needs the money for
whatever purpose. If this were an S corporation the distributions
would have to be made in proportion to the stockholders' percentages;
otherwise the S election could be blown. But in a partnership, as
long as the partnership agreement or LLC OA allows it, I don't think
there is any rule about disproportionate distributions. Sec 704
(substantial economic effect) applies to the determination of
distributive shares, not cash distributions.

A distribution to a partner from a partnership is not taxable income
to the partner unless it is in excess of the partner's basis. No gain
or loss is recognized by the partnership on the distribution of
property, including cash, to a partner. IRC Sec 731.

Katie in San Diego

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Katie <katiej_1958[at]yahoo.com> wrote:

- quote -

Thanks. I was thinking that if I'm a 50% owner and receive a greater
distribution than my partner, to the extent I got more that could be
treated as a redemption, reducing my share from 50% to, say 49.5%.

- quote -

Exactly.

- quote -

The issue was whether or not partners or members in an LLC can receive
differing distributions in the amount that their LLC income increased
their income tax. My initial thought is that something like that has
economic substance so it would be permitted. But if they do that, it
has an effect beyond simply the disbursal of money, because the
difference has to be dealt with somewhere - I'd guess the capital
account, though you might have better ideas for that.

Stu

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On Jul 10, 11:59*am, Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -


No, Stu, you can't change the distributive shares of income by making
distributions. As long as the members agree and the distributions
don't violate the operating agreement, each member can receive a
different amount of distribution, and the distribution affects that
member's capital account. So the members end up with different
capital amounts and different tax basis in the LLC. That's fine as
long as it doesn't violate the operating agreement. Of course it will
potentially affect each member's ability to deduct his or her
distributive share of future losses, and any gain or loss on sale or
other disposition of a member's interest in the LLC.

Katie in San Diego

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Bill Brown <brownwp[at]longwood.edu> wrote:
- quote -

Of course. But I don't think you can really divorce the two. If an
unequal distribution is made in a way that is reflected in the
partners' capital accounts, their ultimate interests remain the same
though their relative investments will be thought to have changed.
There should be no tax implication for that at all (except for the
ultimate division of profits).

I suspect it's more likely that the distributions would not affect the
capital accounts, but would be unequal because that's what each needs.
In that case it would affect the partners' taxable distributions - in
other words their relative profits.

Stu

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On Jul 10, 12:43*pm, Stuart Bronstein <spamt...[at]lexregia.com> wrote:
- quote -

The IRC makes that requirement for dividing up profits and losses by
partnerships. There is no tax rule I'm aware of that says how
distributions have to be handled.

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"Gil Faver" <rowdy'sboss[at]xxyz.com> wrote:

- quote -

Normally that's the case. But it doesn't necessarily need to be. The
IRS says that distributions must reflect economic reality - not just,
for example, give most of the profit to the low income partner and the
deductions to the high income partner.

I don't know if this particular issue has been litigated, but it seems
to me that it could well be a permissible way to do things. Of course,
the disbursements would have to be properly reflected o the partners'
K-1'.

Stu

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On Jul 10, 10:54*am, "Gil Faver" <rowdy'sb...[at]xxyz.com> wrote> I would think the distribution should be in proportion to the LLC members'
- quote -

That would depend upon the agreement among the LLC members.

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"Katie" <katiej_1958[at]yahoo.com> wrote in message
news:97ac126f-a2c3-49ef-8277-7605f2987128[at]d45g2000hsc.googlegroups.com...
- quote -


I would think the distribution should be in proportion to the LLC members'
proportion of the LLC profits shown on their K1, since some members may be
in different marginal tax brackets. Not simply "reimbursing" each member
for its tax liability.

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On Jul 9, 9:03*pm, Kelly <wxwi...[at]gmail.com> wrote:
- quote -

The LLC's income passes through to the members and is taxed to them
whether or not it is distributed. That's what has created the tax
liabilities you would like to have the LLC reimburse.

Distributions of income that the members have already paid tax on are
not taxable income to the members. The distribution would be reported
on Schedule K and each member's K-1 under Part II, item L,
"withdrawals and distributions." They reduce the member's capital
account.

Katie in San Diego

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On Jul 9, 11:22*pm, Katie <katiej_1...[at]yahoo.com> wrote:
- quote -

Thanks Bill and Katie -

Is the distribution taxable to the members? Is it reported on the
K-1's?

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On Jul 9, 8:01*pm, Bill Brown <brow...[at]longwood.edu> wrote:
- quote -


Right, Bill, thanks for the clarification.

Katie

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On Jul 9, 7:28*pm, Katie <katiej_1...[at]yahoo.com> wrote The LLC can certainly make a cash distribution to the members to cover
- quote -

When Katie says, "no tax effect to ... the LLC," she means the LLC
does not report a deductible expense for this distribution. There is
no tax deduction for anyone for the payment of federal income taxes.

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On Jul 9, 3:41*pm, Kelly <wxwi...[at]gmail.com> wrote:
- quote -


The LLC can certainly make a cash distribution to the members to cover
the tax liabilities they incurred. Profitable partnerships and S
corporations often distribute enough cash to their owners to cover
their individual income tax liabilities. The distribution would be
just that, and would have no tax effect to either the LLC or the
members, apart from reducing the members' basis in the LLC.

Katie in San Diego

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Hi There,

My husband is a member of a 2 person LLC that is treated as a
partnership for tax purposes. Each member receives monthly guaranteed
payments. Additionally, the LLC was profitable and the profits were
passed through to each member on the K-1's. This passthrough created
a large tax bill for each member, even though they did not actually
recieve the profits in cash. We would ultimately like for the LLC to
reimburse the members for the tax that they incurred due to profits
and potentially the portion of the SE taxes that would normally be
paid by an employer on behalf of an employee. I would greatly
appreciate any suggestions on how this could be handled? Is this
something that is standard practice? Would the payment of taxes be an
distribution to the members? Would the LLC then take a deduction for
taxes paid?

Thanks in Advance,

Kelly

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