This column1 considers the tax consequences resulting to the individual partner or limited liability company (LLC) when the interest in the partnership or LLC (Interest) is (i) contributed to charity, (ii) gifted to a family member or (iii) held until death of the owner. The discussion deals with an Interest in a partnership or LLC owning real property that secures a loan that defaults or is restructured (Troubled Investment).
Contributing the Partnership or Limited Liability Company Interest to Charity. Generally, a charitable contribution of the Interest will not place the partner or member in a better after-tax position than if he had sold his Interest. This is especially true when the share of liabilities exceeds the fair market value (FMV) of the Interest. Where the liabilities encumbering the Interest exceed the FMV of the Interest, the contribution of the Interest will be treated as a sale with the donor recognizing gain equal to the excess of the liabilities he is relieved of over his adjusted basis in his Interest. In addition, it is normally difficult to find a charitable organization that is willing to assume or take subject to the liabilities associated with the unwanted Interest in a Troubled Investment. Finally, the valuation of the donated Interest will often be subject to audit by the IRS.
