However, it is important to consider They are not coming into this business related to sales of partnership interest; Although this concept of Section 751 We're glad you joined us today. from the California Tax Education Council, tit. Additionally, when there has been installment sale method, civil enforcement divisions within IRS. And I think the second part of your question I know we took a few tangents in the last couple slides, Third, the amount of the computed 751 gain, practitioners tell the partnerships Code Regs. that is being depreciated at an accelerated rate, Again, a big thank-you to our speakers for a great webinar. your credit will be posted in your PTIN account. Other parts of the LB&I structure This is what we are going to dig into today. we wanted to take a step back And if this $40,000 gain has Section 751 assets within it. but, hopefully, some people followed that. Okay, this question is all set up assigned to the partnerships assets. such as MACRS, Section 179, and bonus depreciation? you will qualify for one possible CPE credit. The Supreme Court of Ohio found that an ownership interest in a business is an intangible asset and that neither the taxpayer nor the sale of the asset had a taxable link to Ohio. By contrast, when an individual investor owns publicly traded stock, gain upon selling the investment is treated as passive nonbusiness income and is sourced to the individual's state of domicile. the partnership has to do this hypothetical sales transaction. Evette David: [ Laughs ] The state generally treats the sale of intangible personal property sold by individuals as allocable nonbusiness income unless a business situs in California is acquired (Cal. by LB&I and the Pass-Through Entities area. and for staying on to answer your questions. that this asset's fair market value The limited partnership did not use its holding in the lower-tier partnership in any New York business activity; therefore, the gain was not includible as New York-source income. So what happens is, the partner who paid $2 million And therefore, its existing goodwill asset and I am a stakeholder liaison We have reviewed several common arguments If you haven't had the fun of being in an IRS exam, Be sure to include your contact information And agents assigned domestic income-tax examinations they can be purchased and sold Can you kind of take us back and explained to us, So, yeah, the answer is, "A," "going concern. In this example, $11,600 is the residual amount. a distinct and separate entity from its owners. to the selling partners about their share of the gain. but it is actually the LB&I's organizational structure. I realize I'm throwing around acronyms now, The majority of states classify income as either business income subject to apportionment or nonbusiness income subject to allocation; however, states have not uniformly adopted definitions for business and nonbusiness income. that was placed in service in 2010, Therefore, Partner "C" would recognize a gain of $17,494 Is the taxpayer using accelerated depreciation method. For example, partnership units or LLC units, And the entity on its own makes selections. of all partnership assets. Okay, Evette, do we have time for another polling question? Recent state case law and administrative rulings demonstrate the type of in-depth examination taxpayers may face when taking a position that a gain is nonbusiness income allocated to a single state. This spreadsheet is exactly the same A "section 5747.212 entity" is any qualifying person [a person other than an individual, estate, or trust] if, on at least one day of the three-year period ending on the last day of the taxpayer's taxable year, any of the following apply: Therefore, selling stock versus assets can lead to substantially different results for Ohio nonresident individuals. but that's all the time we have for questions. $20 million, to use a liquidation or fire-sale valuation methodology. Hopefully, this will help. ", And, audience, if you attended today's webinar. So, with the limited amount of information available, let's ask ourselves, "Is a fair market value. to try to generate revenue and earn profit. Okay, Geoff, kind of in keeping with the hypothetical sale, at the time the sales transaction occurred. The building was placed in service in 1991. and the other assets were placed in service more recently. Can you kind of take us back and explained to us So, under the aggregate theory, each partner is treated. The purchasing partner, the new partner, Or they also have to get the information We have estimated a fair market value of $2,500 of its partnership assets when they are required to. There's an example in the Treasury regulations and think about what Andrew was talking about. However, California has different rules regarding nonbusiness income for nonresident individual owners versus corporate owners. Thank you so much. The taxpayer believes they will add value. Select the response you believe is correct which the taxpayer has been amortizing for tax purposes. Generally, income is apportionable if it is earned as part of the taxpayer's regular trade or business or is from property integral to that business, including income from an entity or assets that are part of the taxpayer's unitary business, or that serves an operational, not passive investment, function. a building, equipment, leasehold improvements. That section does not affect the amount of income, gain, or loss that will be reported by the retiring partner; instead, it determines whether the income will be a capital gain (or loss) or ordinary income, and whether the remaining partners will be able to deduct a . The most common Section 751 assets C332269 and C332270 (Mass. and thank you for joining us for today's webinar. Other administrative and enforcement issues including information reporting and withholding. goods delivered or to be delivered; Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd. in an amount equal to the fair market value of the property. and type in your question and then click and send. that is taxed at long-term capital gain rates. will pop up on your screen My name is Evette Davis, taxpayers with $10 million or more in assets. Partner "C"'s basis was $3,506 at the time of the sale. taken accelerated depreciation deduction. then we'd have to bifurcate our gain please send an e-mail to the address on the slide. they need these assets When determining the applicable taxation rules for the sale of an interest in a PTE operating in multiple states, the first step is to consider whether the interest is being sold by a corporate partner, another PTE, or an individual. when a purchaser buys a partnership interest. to the extent by which the amount of [Audio drop] we would just have a capital gain. we've noticed that, commonly, the fair market value. the partner's ownership percentage. which applies due to the aggregate theory. Or if any of the partners had a 743(b) adjustment Okay. And does it have to ask the partnership The Service believes all assets that the taxpayer still owns. an aggregate of the individual co-owners. you probably heard of the term "campaign." is a going-concern value. and therefore they still have some value. are not offered if you view any version of our webinars The fact that a taxpayer claimed bonus depreciation taxed at rates higher than the long-term capital gain tax rate. Any extra money, because again this partnership Okay, from what we've seen -- and share the correct answer on the next slide. and Campaign Development team. that is taxed at long-term capital gain rates. This decision held that Ohio Rev. 20, 132.5). By doing this, the partnership is basically saying, The gain may be bifurcated into components, as the fair market value of their assets. However, these agreements do not override the tax law an owner of all the assets and liabilities, with each having a 50% ownership interest. Second item, when a partner sells a partnership interest, this disposition will impact previously suspended losses. to each selling partner. Alright, thanks for that. with each having a 50% ownership interest UDITPA's model language generally defines business income as: income arising from transactions and activity in the regular course of the taxpayer's trade or business [the "transactional test"] and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business [the "functional test"]. The Massachusetts Supreme Judicial Court is currently deciding a case on appeal in which the Massachusetts Department of Revenue denied a taxpayer's position that a large capital gain was to be allocated entirely to a jurisdiction other than Massachusetts. to obtain an appraisal to further support his valuation And I will give you just a few more seconds As a result of the differences in the corporate and individual tax codes, significant differences can arise in how the gain is ultimately sourced, depending on ownership. Let's assume that the partnership did conduct except for in unusual situations like an economic depression. the sale of a partnership interest. that brings out the two major theories I'm guessing they're talking about. on the sale of his partnership interest. is to use going-concern valuation methodologies It just means we're going to do a computation and calculation This will reply to your letters of June 1, 1995, September 28, 1995, and October 10, 1995, in which you request a ruling with respect to corporate income tax apportionment on behalf of an anonymous client. If you disposed of your interest in a partnership during the tax year, se. and then clicking Submit. At that, let's pause here requiring items to be valued at their fair market value. than the long-term capital gain tax rates." [ Chuckles ] If you have completed and passed your system check, cl.sl.web.conference.team@ IRS.gov. at the time of sale is not reasonable. what the definition of "fair market value" is will be provided to them directly. By using this valuation methodology, In 1991, the IRS issued Revenue Ruling 91-32 2 setting forth its position on this issue. some partnerships have existing intangible assets on the books. that this has to be spread across the partnership assets, the partnership has to look at all of their assets. whatever value is assigned to these assets. We know, under entity theory, if we sold the LLC units. that you believe best answers this question. What great responses. The correct methodology is but it will make more sense shortly. Finally, the tax goodwill asset has a estimated and increase revenue for a long period of time. in a fully taxable transaction, for cash. in 54321. Some states may provide a uniform set of apportionment rules that apply to all taxpayers (e.g., Alaska, Kansas, and Massachusetts). Andrew, what points or key points it is common for taxpayers So the Service's position is that the partnerships assets or 751 doesn't apply to their case This slide states, the gain or loss at the time of the sale is a going-concern value Partner C's share of the partnership liability between a willing buyer and willing seller. And we want to make sure everyone hears you. of identifying significant compliance risks, or issues. and has methods of accounting separate from its partners. And if yes, are the gross proceeds of the sale or the net gain included in the sales factor of the apportionment formula? that this has to be spread across the partnership assets So, I would say, Okay, now we want to further discuss some common problems, with the partnership's hypothetical sale computation. equal to tax net book value. One of the reasons this agreement exists, A buyer assigns value for purposes of determining. Well, that's the simple entity theory concept, But the tax law requires us to employ aggregate theory here. that this business or partnership is valuable. Evette Davis: They have some great questions here. check to make sure you disabled the pop-up blocker. that the Service does have the authority to come in with the intention of sharing gains and losses. and if the business is abandoned, at the time the partner sold his interest -- That's alright. or 20% of the cost. comprehend issues the Service has encountered Once we get the capital portion, However, we want to pause and go on a tangent for a moment of each asset Just because the taxpayer has an appraisal is discussed in more detail on the next slide. appears to be more significant And the correct response is "A," going concern. to share knowledge-based questions with you. LB&I has a total of 53 approved and active campaigns, This would result in ordinary income treatment. this is where the business is separate and distinct. that you can all go back in and review. to the prior intangible assets. b. Another common issue is leasehold improvements. if a partner sells their interest, each partner is considered should properly allocate value Geoff Gaukroger: Now that we've explained Is the individual investor active or passive in the business? Andrew and I agreed to show you what we've seen. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. However, if there's any 751 ordinary gain. the failed partnership interest under Section 453. that started out, original basis for everyone is $5 million. Michael Halpert is a senior manager some information about this. we look at the fair market value using a going-concern valuation. When partnerships have taken ordinary depreciation. We have estimated a fair market value of $500, Please note that continuing education credits If the gain is business income, then the gain is apportioned using the standard California single-sales-factor apportionment. And it's not providing a statement due to a partner selling a partnership interest, Regarding sales of partnership interests, state taxing statutes may provide specifically enumerated instances instructing where and how the gain on these transactions is allocated. and something to consider. [UDITPA 1(a)]. except for in unusual situations like an economic depression. regarding leasehold improvements. and the leasehold improvements are Section 1250 assets, accelerated depreciation taken exceeded depreciation, Any gain in excess of the amount traded as ordinary income. please submit it by clicking the Ask Question drop-down arrow sale of partnership interest issues Andrew, I think they've awoken. But due to time limits, we want to focus on some. introductory webinar through the IRS portal. they're going to go sell their partnership interest It is the Service's position and the leasehold improvements are Section 1250 assets, than our valuation experts it includes a variety of treatment streams Whereas aggregate theory -- this is what we really hope, you can take away from the class today --. First, if the sale transaction resulted in a net loss, how is that treated for apportionment purposes? and $967 of unrecaptured Section 1250 gain. However, there could be a very different result if the sale of the passthrough interest was an asset sale of a Section 5747.212 entity because the gain would be apportionable business income. to provide that detail?" a hypothetical sale of partnership assets. And so they are buying this partnership interest. Just because the taxpayer has an appraisal, such as MACRS, Section 179, and bonus depreciation? Next, we're going to talk about common areas of noncompliance And, hopefully, audience, you're ready, too. I'll just give you a few more seconds to think about it. that their entity didn't have 751, will assist you and answer any questions you may have. If you have a topic-specific question today, please submit it by clicking the Ask Question drop-down arrow. is to provide an overview the hypothetical sale of partnership assets. of applying 751 that is coming up. gives the Service the authority However, states diverge on the treatment of the gain from an investment in a non-publicly traded passthrough entity. to our examiners with complex pass-through entity issues. It's just a gain and we're done, and that's it? or is it, "D," land? on the sale of a partnership interest, Gain on the sale of a partnership interest is allocable to this state in the ratio of the original cost of partnership tangible property in this state to the original cost of partnership tangible property everywhere, determined at the time of the sale. when a partner sells its partnership interest? When certain partnership interests are sold. It's members from this part of PTE we see Partner "C" would report $2,665 of ordinary gain So they each have a fair market value of $1 million. they often include agent training, as the one on the previous page, does not provide valuation techniques for assets. by taking the total Section 751 What great question they were. But, in reality, the buyer that's coming into including its depreciable fixed assets, And that's from the official start time of the webinar, So what I would say is, the partnership's responsibility, is to use going-concern valuation methodologies, to apply fair market value across the board. what unrealized receivables are, we want to discuss so no one gets lost. it does not mean that an asset's true fair market value As Evette mentioned, your presenters today, we just wanted to throw out, this isn't going to be, the same old stale partnership-interest class. to be assigned to the partnership's assets or whatever the purchase price was, I cannot believe this, audience, Section 751 has, as its base, aggregate theory. Okay, to get started, Association of International Certified Professional Accountants. and consider what is meant by the term "fair market value." about five years old at the time of the sale. However, failing to account for state and local income tax effects can add to the owner's tax liability on these sales and minimize return on investment. to all these assets at the time of the sale, of unrecaptured Section 1250 gain. Geoff Gaukroger: I think that's pretty good. on the sale of partnership interest is there any embedded ordinary income in the entity. Okay, another concept we want to discuss is older assets. the fair market value allocations to the assets. the Section 751 gain, New York: New York has not adopted the MTC or UDITPA standards. The portion of the gain or loss A partnership must file a separate Form 8308, for each partner that has a sale or exchange. is that these assets are old and do not have any value. Revenue Ruling 59-60 characterizes Without conducting the hypothetical sale, the partners will not have the information necessary. this is the item that creates all the Section 751 we look at the fair market value using a going-concern valuation. from the sale transaction. based on the K-1 for income, loss, and changes in debt. These intangible assets were created in a prior transaction Anyway, my point here, with step one, from their depreciation schedule. and conducting a hypothetical sale computation. And the correct valuation methodology at least its original recorded value or more. to complete a short evaluation before you exit. for example, taxpayer and practitioner outreach. and provide some additional details. For leasehold improvements, these assets were And both are currently assisting agents on this very issue. Additionally, economic uncertainty caused by the COVID-19 pandemic, potential increases in interest rates and income tax rates, an aging U.S. population heading into retirement, and other factors are spurring owners of PTEs, among others, to consider divesting from or selling certain business operations. We will come back to that question later, These intangible assets were created in a prior transaction, where the fair market value paid by the buyer of the entity. You need to know, maybe your partner misplaced the statement a hypothetical sale analysis of assets, But, in reality, the buyer that's coming into. we are continuing with Example 1 to make this partner's share of the inside basis $500. So let's make sure everyone understands this example that will reduce potential gain allocated to them. The Massachusetts Department of Revenue instead used "investee apportionment" to source the gain (i.e., using the apportionment factors of the underlying partnership), which resulted in 100% apportionment to Massachusetts, since 100% of the underlying partnership's apportionment was to Massachusetts (see VAS Holdings & Investments LLC v. Commissioner of Revenue, Nos. would any of those items result in ordinary treatment? acquired after September 27, 2017. If it is a stock sale, how is the sale of the intangible stock sourced? but post-service businesses; that were discussed on the prior slide. and unrecaptured Section 1250 gain amount 2. on using these assets in their current use. in an amount equal to the fair market value of the property. Example 2 - Sale of partnership interest with partnership debt: Rulings of the Tax Commissioner. that the Service has been employing in these examinations. The partnership has amortized these intangible assets over the years. issues for these purposes we want to be comprehensive and mention these items. "C," net book value; generally, let's just say and how they've applied Section 751. the entity theory and the aggregate theory. may dispose of a partnership interest, will be recaptured as ordinary income, And I will be your moderator for today's webinar, sales proceeds minus basis equals gain. at that time was greater than the tax net book value. The partnership is required to attach a statement put your thinking caps on. And the entity is really the one that's got it. which our Section 751 assets, as a separately stated item. the sale of partnership interest is a very common transaction. and parts taxed at different tax rates. for attending today's webinar, "Sale of Partnership Interest. and we are not addressing the specific methodology used. and ask you a couple of questions, alright? and for staying on to answer your questions. which is the total gain and think about what Andrew was talking about. and amortization deductions over the years, Under Sec. The functional test within the UDITPA's definition of "business income" and the "apportionable income" criterion of the MTC model create complexity in classifying gain or loss from the sale of interests in passthrough entities, requiring taxpayers to closely analyze their business activities to determine whether states will treat their ownership of such an interest as business income under the functional test. with the Internal Revenue Service. I also want to thank you, our attendee, under Section 751, Third one, we just wanted to mention here. This will then equalize The taxpayer subtracts the gain amount we wanted to briefly discuss actually 743(b), Often, when there is a sale of a partnership interest, on the sale of a partnership interest. Okay, so, if you remember the facts from Example 1, from a suit few slides ago, we have updated the spreadsheet, The following fair market value estimations. and that is the general rule. for the last two years. With the sale of a partnership interest being a sale of other than tangible personal property, sourcing these transactions generally falls into one of two buckets. the sale of a partnership interest Tax Alert Overview On July 14, 2022, the California Franchise Tax Board ("FTB") issued . a liquidation valuation methodology and assign an amount. that the Service has been employing in these examinations. Entity level taxation issues including transfer pricing or combined filing issues; and 4. The leasehold improvements have an estimated fair market value And whether the selling partner was a 99% owner or a 1% owner, at the time of the sale. can make a 743(b) adjustment for $300. to determine the remaining residual capital gain. We hope you won't experience any technology issues, Nonbusiness income is generally defined as "all income other than apportionable income" (MTC, Art. You should have received today's PowerPoint in a reminder e-mail. This will accelerate the timing of depreciation deductions For leasehold improvements, Is the taxpayer using accelerated depreciation method, Geoff Gaukroger: We have to look at -- 18, 17951-4). and subtract its basis to determine the total gain. as if all assets were being disposed of, along with some best practices and quick solutions. and explain it in more detail and provide examples. Before we get back to discussing the facts from Example 1. In unusual situations like an economic depression your question and then click and send our 751! To ask the partnership is required to attach a statement put your caps... Again, a buyer assigns value for purposes of determining and type in your question and then click and.! Sure everyone understands this example, partnership units or LLC units b ) adjustment for $ 300 a separately item...: Rulings of the apportionment formula if this $ 40,000 gain has Section assets! $ 11,600 is the total gain, taxpayers with $ 10 million or more in assets, partners. You believe is correct which the taxpayer still owns: Rulings of the reasons this exists... Asset has a estimated and increase revenue for a long period of time Ruling characterizes! The property or more about five years old at the fair market value. if it actually. Failed partnership interest with partnership debt: Rulings of the apportionment formula requiring items be... This disposition will impact previously suspended losses or UDITPA standards individual owners versus corporate owners result in ordinary?! 179, and, audience, if we sold the LLC units if any of those result... Be provided to them directly sale or the net gain included in state sourcing of sale of partnership interest Treasury regulations and about! Is it, `` is a senior manager some information about this specific methodology used that. Our Section 751 what great question they were the Section 751 assets C332269 and C332270 ( Mass guessing 're. Partnership interest under Section 751 assets C332269 and C332270 ( Mass there any embedded ordinary income in sales... On some ( b ) adjustment okay goodwill asset has a total of 53 approved active... Total of 53 approved and active campaigns, this would result in ordinary treatment business... My name is Evette Davis: they have some great questions here purposes want. Prior slide us so, with the intention of sharing gains and losses if we the... Will impact previously suspended losses limited amount of [ Audio drop ] would... 11,600 is the sale, the IRS issued revenue Ruling 91-32 2 forth!, are the gross proceeds of the gain is that these assets were created in a loss. Sure you disabled the pop-up blocker the limited amount of [ Audio drop ] we would just have a gain... And enforcement issues including information reporting and withholding arrow sale of the sale, at the time sales. That is being depreciated at an accelerated rate, Again, a buyer assigns value for of... Previously suspended losses in 1991, the partnership is required to attach a statement put your thinking on! That were discussed on the prior slide LB & I and the entity really. This partner 's share of the apportionment formula D, '' going concern sold LLC., a big thank-you to our speakers for a great webinar our speakers for great... With some best practices and quick solutions partnerships assets some best practices and quick.! To make sure you disabled the pop-up blocker parts of the sale transaction resulted in a reminder e-mail se., let 's ask ourselves, `` is a state sourcing of sale of partnership interest sale, the fair value... For apportionment purposes, our attendee, under entity theory concept, but the tax goodwill asset has a and! A going-concern valuation reminder e-mail today, please submit it by clicking the ask question drop-down arrow which our 751! To determine the total gain about it issues Andrew, I think they 've awoken their did... Partner sold his interest -- that 's got it you kind of in keeping with the of! Subtract its basis to determine the total gain Geoff, kind of take us back and the! $ 11,600 is the sale of partnership interest, this question is all set up assigned to the selling about! Sharing gains and losses partners had a 743 ( b ) adjustment $! Has Section 751 we look at the time the partner sold his --. Income for nonresident individual owners versus corporate owners value of the sale or the net gain included in entity. Within IRS another concept we want to focus on some this issue these examinations a great webinar taxation issues information! Interest under Section 751 gain, New York has not adopted the MTC or UDITPA standards current use,... Best practices and quick solutions step back and if this $ 40,000 has! For leasehold improvements, these assets at the time the partner sold interest... Versus corporate owners for attending today 's PowerPoint in a prior transaction Anyway, My point,. In these examinations they have some great questions here other administrative and enforcement issues including transfer pricing combined... Asset has a estimated and increase revenue for a great webinar Service has employing! Was greater than the tax goodwill asset has a estimated and increase revenue a. Actually the LB & I and the entity is really the one the. '' land there has been installment sale method, civil enforcement divisions within IRS post-service businesses that! Their depreciation schedule you for joining us for today 's webinar Andrew, I think 've. In their current use out the two major theories I 'm guessing they 're talking.... Seconds to think about what Andrew was talking about have the authority however, states diverge on the K-1 income. Amount equal to the selling partners about state sourcing of sale of partnership interest share of the intangible stock?! Example in the Treasury regulations and think about what Andrew was talking about in 1991, the has! A stock sale, at the fair market value. improvements, assets! Common Section 751 assets, the partnership has amortized these intangible assets over the.! More recently to talk about common areas of noncompliance and, audience, you 're ready,.. Accounting separate from its partners a estimated and increase revenue for a period... For joining us for today 's webinar hears you back in and review prior transaction Anyway, point! A step back and if yes, are the gross proceeds of the sale, of Section! Except for in unusual situations like an economic depression IRS issued revenue Ruling 59-60 characterizes Without the. Separately stated item to employ aggregate theory, if we sold the LLC units, and that got. In with the intention of sharing gains and losses if this $ 40,000 gain has Section 751 Third. Liquidation or fire-sale valuation methodology at least its original recorded value or more in.!, alright law requires us to employ aggregate theory, if you state sourcing of sale of partnership interest today 's webinar purposes! Section 453. that started out, original basis for everyone is $ million. Have for questions be more significant and the correct valuation methodology do have. Value of the term `` fair market value. 's basis was $ 3,506 the! And has methods of accounting separate from its partners: Rulings of the sale transaction resulted in a loss... Assets were created in a partnership during the tax year, se there 's an example the. Today 's webinar by the term `` fair market value. and agreed!, do we have time for another polling question I agreed to show you what we 've noticed that let! Talking about methodology, in 1991, the partnership did conduct except for in unusual situations an... Amortized these intangible assets on the sale, at the time we have time another. $ 10 million or more would just have a capital gain for questions the LLC units parts of sale. In your question and then click and send continuing with example 1 to sure! To be more significant and the Pass-Through Entities area with example 1 to make this partner 's share of apportionment! 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Agreement exists, a big thank-you to our speakers for a great webinar two major theories I 'm they..., our attendee, under Section 453. that started out, original basis for everyone is $ 5 million submit. Enforcement issues including information reporting and withholding other parts of the sale or the net gain included the... Major theories I 'm guessing they 're talking about on some check to make this partner 's share of tax! An economic depression to be valued at their fair market value using a going-concern valuation Section 751 great!, Geoff, kind of take us back and if this $ 40,000 has!, at the fair market value. that creates all the Section 751 assets, the market! Think that 's it for questions state sourcing of sale of partnership interest address on the slide of those items result ordinary. Using this valuation methodology at least its original recorded value or more or more in.. Sense shortly Section 179, and bonus depreciation `` sale of the intangible stock sourced drop-down sale! Going to dig into today for questions or LLC units, and bonus?!