I always find it interesting the differing opinions you get when you have a bundle of Financial Professionals together with varying backgrounds and thought this scenario that came up during the instruction of a Minority Business Accelerator Class. Company A is an LLC Partnership with 2 Existing Partners (Partner A and Partner B) that own 50,000 Membership Units Each (100,000 Membership Units Total). Individual C has developed some IP that has no Tangible valuation but Company A wants to acquire this IP and all parties agree to a Purchase Price of $700,000 for the IP per the following Breakdown:.. Cash at Closing: $100,000 Note Payable (3 Year): $100,000 Company A Membership Units: 10,000 (@ $50/Unit x 10,000 = $500,000). Here is where the fun began and all the varying opinions started coming about, so let's see how it play out on this forum as to how it should be entered: Scenario 1 - Record all with a Cash Value: Cash (Credit) $100,000 Note Payable (Credit) $100,000 Members' Capital (Credit) $500,000 Goodwill (Debit) $700,000 In scenario 1, the Individual C has to pay taxes on the entire balance or $700,000 (less the Deduction for the N/P (i.e. Loan)) but "C" now has $500,000 worth of Basis (External). Scenario 2 - Record only Real Cash as Cash Values: Cash (Credit) $100,000 Note Payable (Credit) $100,000 Goodwill (Debit) $200,000 In Scenario 2, only "true" cash is recorded, because the unit valuation has zero merit and nothing tangible was ever disbursed. Therefore, "C" does not have to pay taxes on the Units Provided because (in Reality) they have a true value of $0.00 per Unit, which also results in Zero Basis in Company A. Upon selling their shares, they would then end up paying a capital gains tax. The Membership Units would only be seen within the Cap Table. These were the two most heated discussions, I won't bother with the others, so let's see what other opinions come about on this forum regarding this scenario. It will be fun to take more opinions back into class discussion next month. *Note: One Tax professional mentioned utilizing Scenario 1 but Individual "C" would be able to take advantage of a "Minority Interest" Credit, not sure what he was talking about and he could not recall the Factual credit at the time. Looking forward to all of the discussions. SB
