BLG is a limited liability Company taxed as a partnership and has four shareholders each owning 25% of the outstanding Interests (Shares). The shareholders’ outside basis in their respective Interests is $1.00 On February 20, 2018, POM LLC, a single member limited liability company, sold its 25% in BLG Interests to ODY LLC, a limited liability company taxed as a Partnership, for $700,000 payable $100,000 cash at closing and a Promissory Note in the amount of $600,000 bearing interest at 5% with monthly principal payments of $10,000 plus monthly interest payments for sixty months. ODY LLC’s Managing Member personally guaranteed the Promissory Note
BLG is a limited liability Company taxed as a partnership and has four shareholders each owning 25% of the outstanding Interests (Shares). The shareholders’ outside basis in their respective Interests is $1.00
On February 20, 2018, POM LLC, a single member limited liability company, sold its 25% in BLG Interests to ODY LLC, a limited liability company taxed as a Partnership, for $700,000 payable $100,000 cash at closing and a Promissory Note in the amount of $600,000 bearing interest at 5% with monthly principal payments of $10,000 plus monthly interest payments for sixty months. ODY LLC’s Managing Member personally guaranteed the Promissory Note
On February 20, 2019 by mutual agreement between the parties, the Promissory Note was renegotiated and the payment of principal on the Promissory Note, which had been reduced by principal payments of $120,000, was extended two years, principal payments were modified to $8,000 per month and the interest rate was raised to 7% annually on the outstanding balance of $480,000.
In December of 2019, ODY LLC received a notice of default from POM LLC. Subsequently, ODY LLC, to avoid filing for bankruptcy, negotiated a restructuring of the Promissory Note.
On February 20, 2020 with the remaining principal balance of the Promissory Note reduced to $440,000 plus accrued and unpaid interest of $18,000, the parties further agreed to restructure the Promissory Note reducing the principal and accrued interest due to $270,000 with payment terms of $5,000 per month without interest.
Assume that the Managing Member of ODY LLC had a net worth of $100,000 at all times prior to any cancellation of indebtedness in 2020 exclusive of his interest in ODY LLC which had had a zero net worth.
Question: identify all the tax issues associated with these facts faced by POM LLC and ODY LLC and their respective Members in each of the following tax years: 2018, 2019 and 2020. Consider taxable gains and losses, investment interest deductions and any imputed interest income or deductions to the parties stemming from imputed interest.
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