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You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > LLC tax liability for undistributed earnings
Expert: John Kirk, CPA
Date: 8/16/2008
Subject: LLC tax liability for undistributed earnings
Question
My ex-spouse was self employed and had an LLC. An LLC requires at least
two members so I was named as a member. My divorce was final in March
but the decree included ending my LLC association in 2007 and included
language about me being free of any liabilities associated with the business.
My ex-spouse did not pay any tax withholding in 2007 so all of the taxes for
his income was due in April and even though I did not live with him for the
previous 18 months and I did not receive any money or child support from
him, he reported in a K-1 that I had received 50 of the LLC earnings(50K).
This creates another 20K in taxes for me and I can not afford it. Is there a
standard that he must meet in order to report the distribution? It doesn't
seem right that he can claim to have distributed the funds to me when he
hasn't. Is there something I can do that wouldn't require hiring an expensive
attorney? If the IRS looked at my financial records, would they understand
that I don't have the money to pay the taxes because I didn't get the money
in the first place?
Answer
Was there any settlement of your ownership of the LLC in the decree. If so, you have already received moneys for the taxes on the income reportable to you.
If on the other hand your settlement exchanged your ownership for an indemnity against any liabilities of the LLC you are out of luck, because the tax liability is personal, and not the LLC's.
How are you filing the 2007 return as you are not single? If filing a joint return then the division of the tax liability is made based on the divorce decree. If the decree is silent on the allocation of income from the LLC, it is presumed to be 50/50.
You will probably need the assistance of a CPA to look at your decree to establish these issues.
So, it all goes back to how the decree was written
Hope this answers your questions. If you need further advise, contact me at jkirk@johnkirkcpa.com or call me at 408-821-9408
John Kirk, CPA
www.johnkirkcpa.com
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