Holding period of partnership/LLC interests.

• Author: Leibtag, Bernard
• Position: Limited liability company

Limited liability company (LLC) interests are adjusted on a periodic basis pursuant to the LLC's operating agreement. For example, at the end of the first year, a member may have had a 20% interest in an LLC. At the end of the next year, based on performance and other criteria, such member's interest might be increased to 25%. This is quite common in service partnerships and LLCs (i.e., law and accounting firms).

If a member who acquired an LLC interest over various periods, were to sell his or her entire interest, how would the holding period rules (for computing long-term and short-term capital gain) apply?

Holding Period Rules

Regs. Sec. 1.1223-3(a) (1), Rules relating to the holding periods of partnership interests, states,"[a] partner shall not have a divided holding period in an interest in a partnership unless ... the partner acquired portions of an interest at different times ..." Clearly, partnership interests are not viewed as one interest as to holding periods, but are bifurcated based on the time of receipt of the various interests.

Regs. Sec. 1.1223-3(b)(1) provides, "[t]he portion of a partnership interest to which a holding period relates" is determined by computing a fraction, the numerator of which is the fair market value (FMV) of the partnership interest received, and the denominator of which is the entire...