Section 351 or 354 or Section 721?

Question

I would like to transfer publically traded stocks (like Intel) from a personally titled Ameritrade account into a new Partnership (LLC) account with Ameritrade. So long as I maintain a majority control over the Partnership by receiving the proper percentage of membership interest in the LLC for the current market value of the stock transferred, it is my belief that this would not be considered a taxable event by the IRS under either Section

721, Section 351, or Section 354. My personal basis on each stock investment would therefore transfer to the LLC and become the cost basis for each investment that the LLC owns. The LLC will hold these investments long-term (possibly make some new purchases with cash) and potentially (yet rarely) sell and re-invest in other stocks (asset re-allocation). In a sense, this would be an "investment company / LLC / partnership". Section 721 and 351 makes note of an exception to the rule referring to an "investment company" (as defined in Section 351). Also, publically held stock may be considered an "intangible" asset. Could you please explain whether section (d) of Section 721 ("Transfers of intangibles") needs to be considered in regards to this transfer in order to keep it a non-taxable transfer? Thanks,

-David

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Brian · Accepted Answer

The partnership basis will be FMV on the date of contribution, not your cost basis. Any pre-contribution gain must be recognized by you when the security is sold. Pre-contribution losses are more complex.

aufein · Answer

I disagreed with the previous posting. Generally contribution to a partnership is tax-free and therefore the basis in the partneship interest (outside basis) is the carryover over basis in the property contributed plus pro-rata share of liabilities assumed. Sec.721. There may be build-in gain in the property that is required to be recognized upon certain conditions. Additionally, I was wondering why Sec.351 is mentioned. 351 governs contributions to corporations only. Contribution to the LLC that is a single member LLC is igrnored since such LLC is disregarded from its owner. I assume the LLC Partnership discussed above is an LLC with two owners.

Stuart A. Bronstein · Answer

An LLC can elect to be taxed as a partnership (or proprietor if only one owner), or as a corporation. If taxed as a corporation section 351 would certainly be a factor.

Because only a two (or more) member LLC is a legitimate entity? Perhaps in some states, but not in California. Stu

Drew Edmundson · Answer

The paragraph you need to look at is 721(b), assuming theLLC is really a partnership for tax purposes.

Drew Edmundson · Answer

Sorry, I see that you had already noticed this paragraph.

Section 351 or 354 or Section 721?

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