Many people believe that one of the principal benefits of LLCs or partnerships is that a creditor’s charging lien makes the creditor liable for the debtor’s share of income tax associated with his LLC or partnership interest pursuant to Rev. Rul 77-137. I have never encountered a situation where a creditor holding a charging lien was responsible for the debtor’s income, and I have advised my clients not to rely on this aspect of charging lien protection. I have recently seen a report where this protection worked.
Attorney Jeffrey Verdon reported the tale of a debtor who owned part of a California LLC that, in turn, held significant real property. A judgment creditor obtained a charging lien against the debtor’s LLC interest. The debtor sent his LLC k-1-s to a judgment creditor citing Rev. Rul. 77-137. Years later, the LLC sold a property resulting in a $2.0+ income liability associated with the debtor’s LLC interest subject to the charging lien. The attorney reports that the judgment creditor strongly protested but thereafter the creditor settled the judgment for 10 cents on the dollar.
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