I need help in sorting out whether this is a taxable event and how to handle the transactions that transpired. Below is the circumstance:
1) Six individuals transferred land with a mortgage to a LLC. The partnership held a special meeting to assume the mortgage on the land and the debt would be divided among the members of the partnership. The members of the partnership include 60% to a S Corp, 20% to one individual and 20% to another individual. Four of the members that transferred the property are shareholders in the S Corp and the other 2 individuals are spouses of 2 of the shareholders.
2) A Quit Claim Deed was used to transfer the property to LLC, however, the bank is unaware of the transfer and consider the six individuals liable for the loan. Further the bank has no knowledge of the LLC assuming the liability for the loan.
3) No partnership interest was given to any of the individuals that transferred the property.
4) No appraisal was done on the property at the time of the transfer to the LLC.
My questions are as follows:
1) Can the partnership consider this mortgage as a liability of the partnership and divide the interest payments among the members of the partnership as a nonrecourse liability?
2)Since no appraisal was performed what else can be used to determine the basis of the land at the time of the transfer? Can the loan value be used?
3) Since 4 of the members belong to the S Corp which is a member of the LLC does that affect the basis of the S Corp? Their total percentage combined is only 77% in the S Corp.
I appreciate any suggestions, recommendations you can provide to help me figure this out.
If 6 individuals transferred land to an LLC, I fail to see how the S Corp became a shareholder when the individuals transferred property to the LLC. You said the six individuals did not receive any partnership interests. I'm at a loss to understand how the S Corp became a 60% partner in the partnership.
The debt is a debt of the six individuals and would not be deductible through the partnership.
I would guess that the two individuals that own 20% of the partnership wwill be distressed to learn that the 60% S Corp partnership really doesn't have a partnership interest. The six people who owned the property should have contributed the land and the note if assignable to the S Corp in a section 351 tax free incorporation. The corporation could then exchange the land for 100% of partnership interests. However, I believe that the land cpomes out of the S Corp at FMV and the S corp shareholders could have gain or loss on the transaction. The two 20% shareholders would or could have then purchase their respective interests from the S Corp. This doesn't answer your question, however, this is the way it could have happened and have been effective.