Have you ever seen this before; Sch C w/K-1

[AZ-Tax]

Client started his Sch C bus in 07 for which I prepared the return. Client sold business in mid 08 (for $170K in which $30K was for all depreciated assets) and client received a final (actual first and final) K-1 from new owners tax preparer. K-1 has a distribution in 19a.

On asset entry worksheet I disposed of the assets at the residual price of $30K the client received.

The K-1 worksheet wants to know the client's cost basis. I seem to be lost at this point.

[dsi]

Did your client form an S-corp or a PS during the year (prior to selling) with the buyer?

[AZ-Tax]

No, my client....

Did your client form an S-corp or a PS during the year (prior to selling) with the buyer?

No, he did not. My client was surprised when the new owners called him in late Mar 09 to notify him he is being issued a K-1. What I am guessing what happened is the LLC changed from one member (my client) to 2 additional members plus my client mid way thru 2008 when my client sold the business. As mentioned in the earlier post, its my clients first and final K-1 but once again I am lost on how to handle it. I know my client did not invest in this partnership because he did not know he was a GP of the partnership.
Any help would be appreciated.

[Jiggers]

Start with the sale

No, he did not. My client was surprised when the new owners called him in late Mar 09 to notify him he is being issued a K-1. What I am guessing what happened is the LLC changed from one member (my client) to 2 additional members plus my client mid way thru 2008 when my client sold the business. As mentioned in the earlier post, its my clients first and final K-1 but once again I am lost on how to handle it. I know my client did not invest in this partnership because he did not know he was a GP of the partnership.
Any help would be appreciated.

Get a copy of the legal documents regarding the sale.

This might need to be reviewed by his attorney.

Something doesn't sound correct.

[AZ-Tax]

I have the legal documents....

Get a copy of the legal documents regarding the sale.

This might need to be reviewed by his attorney.

Something doesn't sound correct.

Its a promissory note stating my client will recieve $1100 monthy with no interest until the $170K is paid in full. In the meantime my client will be manager of the business but NOT partner hence the reason he received a first and final K-1. The promissory note only mentions my client and the one of the current partners and does not mention anything about a S-Corp or PS, only LLC. My client tells me the sale date was June 1 but the promissory note is dated Sept 25th and goes on to state the sale includes all assets and liabilities.

Still lost on how to complete K-1 worksheet.

[erchess]

imputed interest

There is one thing I can tell you. On an installment sale there is always interest. When the sales contract does not specify a reasonable amount of interest then interest must be imputed.

[AZ-Tax]

How does one input interest when the

There is one thing I can tell you. On an installment sale there is always interest. When the sales contract does not specify a reasonable amount of interest then interest must be imputed.

Promissory note states NO interest?

[S T]

Sounds Like

When your taxpayer sold, he sold the LLC and all assets, therefore the K-1 ?? Have you talked with the Attorney/Accountant/Preparer that Prepared the K-1 formsor that was involved in the drafting of the sale documents. Wouldn't there also be a form 8594 required, sale of business Assets?

There does not seem to be an example of a sale of LLC - but there is one of Sale of Partnership starting on TTB page SB 13-10, so maybe that will assist you.

Seems odd, but then our clients seem to present us with new challenges everyday

Sandy

[Bees Knees]

One reason a K-1 would be issued is if your client is still considered a partner after the sale. If your client is to continue on as manager for a time, your client may still be considered a partner, unless your client is paid as a sub-contractor or employee for services rendered.

[Bees Knees]

Another Possibility

TTB, page SB4-7 talks about “closing the books.” Basically, when there is a sale or liquidation of a partner’s interest, the books are closed on the date of sale or liquidation. Thus, the selling or liquidating partner’s distributive share of partnership items is attributable only to the time the partner owned the partnership interest.

This means that the partnership cannot allocate income and expenses to the selling partner for any of the income or losses incurred after the sale.

In your client’s case, your client was a single member LLC prior to the sale. Thus, you would report all income and expenses incurred by your client prior to the sale on a Schedule C. No K-1 should be issued to your client after the sale since the LLC's business activity as a partnership occurs after the books have been closed.

There is an exception mentioned on page SB4-7 if all partners, including your client, agree not to close the books and pro-rate income for the entire year based on ownership percentages for the year. [Reg. §1.706-1(c)(2)(ii)]

You may want to ask your client if any such agreement was made, as that could explain why your client received a K-1.

[AZ-Tax]

The saga just keeps unraveling

I finally called the CPA who issued the K-1. He tells me my client brought in 2 partners June 1st. Then on Sept 2nd my client sold everything.

My client in an email, disagrees with the term of events the CPA gave me. My client says prior to June 1 he was the only member of the LLC and after June 1st he was no longer a member of the LLC.

So do I report the K-1 then back it out with 0's?

[Bees Knees]

You cannot zero out a K-1 on the return. I'd get it straight with the CPA first. By allocating income and expenses to your client on the K-1, the other partner's are allocated less accordingly.

If you disagree with the K-1, your only other option (other than getting the CPA to issue a corrected copy) is what is described in TTB on page 7-5:

Inconsistent treatment of Schedule K-1 information. If there
will be inconsistent treatment between the way an item is reported
by a pass-through entity on Schedule K-1 and the way the
item is reported on the taxpayer’s return, file Form 8082, Notice
of Inconsistent Treatment or Administrative Adjustment Request (AAR).
Form 8082 is filed by partners, S corporation shareholders, beneficiaries
of estates or trusts, owners of foreign trusts, or residual
interest holders in a real estate mortgage investment conduit
(REMIC).

I think you have a real mess on your hands. Either your client is not telling the truth, or the CPA is making things up. I think you need to figure this out first before filing any returns for your client.

[dsi]

Read the buy/sell agreement. What is the date of sale according to the agreement?