My brain is in a knot...

[TaxBird]

I have a client who was a member of an LLC. 2007 was the final year but he has yet to receive a final K-1. TP wants to get his filing in and amend later if necessary.

My question regards how to estimate what would be on the K-1?

Consider the following:
As of the 2006 year end, he had a small amount of suspended losses due to basis limitations.
He received a six-figure liquidating distribution which tells me the LLC got some $$ in their final year.

I am inclined to just report the liquidating distribution net of the suspended loss as a long term capital gain and then attach a statement indicating that we're filing based on an estimate and what the $$ amount represents.

However, I do know that the $$ into the LLC was not from operations (it was a lawsuit settlement - yes, another one!). Since the lawsuit $$ is taxable, (trying to envision the accounting) it would be reported in 2007 (net of CY expenses, etc) as ordinary income, yes?

My TP had no basis as of the end of last year. The $$ in would have restored basis and then his postion was liquidated.

This is the part where I lose my mind.

How do I report this? It can't be both ordinary income AND cap gains can it?

Any advise here on how I untangle my brain would be greatly appreciated!

[Kram BergGold]

What I would do

First have client contact person in charge of LLC for an estimate of when K-1 will be ready. If the response is too far in the future to suit client I would tell him tough wait till it comes. However if you are more obliging then I suggest you prepare the return without the K-1. Then amend and report all K-1 items. If you just make up numbers it might be confusing when it comes time to amend. Watch out though! If thsi K-1 dumps a lot of income on the client and he forgets to amend, then the CP2000 he will receive will include the 20% accuracy related penalty.

[S T]

In Agreement

I am in agreement with Kram, I would not file the t/p return without the K-1. We can second guess all day long, and then "bingo" surprise! Then we have "egg on our face" going back to the t/p and advising that more money is owed and then possible penalties and interest, not a position I want to be in as a tax preparer.

If the t/p is that anxious, he needs to be in charge of obtaining the K-1 form from the LLC.

Sandy

[erchess]

What is the Problem here?

I thought that there were financial penalties for not getting statements out when due? Has anyone asked the IRS to write a letter to the company?

[Snaggletooth]

No K-1

The problem is simple -- there is no K-1.

That's like saying if an uninsured motorist (broke, destitute, judgement-proof) gets drunk and runs in to you --

"No problem. We can beat him in court."

The fact that the IRS can lean on the issuer and make their life miserable does not by itself create a K-1.

[OtisMozzetti]

Client should estimate what he will owe

Since the client does have a figure for the liquidating distribution that he received, you and he can make up a reasonable estimate of what amount of income he will have. Apparently, it will be capital gain since his basis was zero and it liquidated his interest. You might need to cover the possibility that it will be ordinary income. Is he indeed very confident it will be a FINAL K-1?

The main thing I have to say is that you and your client might best come to an understanding that your client will be better off, avoiding interest and penalties, it he files with some assumed (estimated) amount of income shown, along with an explanation to the IRS that the K-1 has not yet been furnished.

If this had been a case of a K-1 expected to show some loss, then I would not say to file now, but since income is expected to be reported, I would say it is preferable to come forward now, rather than later, to the IRS.

Another possibility, perhaps better, would be to file a 4868 Request for Extension along with a payment for the anticipated amount due. I realize April 15 has already come and gone. I would attach an explanatory letter. The K-1 in all probability will arrive before October 15?

[joanmcq]

Erchess, the LLC likely filed an extension, and the K-1 is not due yet, so no penalties.

[S T]

Llc

Agree with Joan, if LLC is on extension, then the K-1's are extended as well. T/P needs to be patient. Obtain an estimate from the LLC if possible.

Also, agree with a few of the other posts except I would only file in estimated payments, not tax returns , if you have an "idea/inkling" of the income/loss that will be reported, why do the tax return twice and have to amend.

Prepay extensions/estimated payments, but don't file returns yet!

Sandy

[TaxBird]

The LLC return was extended so the K-1s are not late.

I already agreed to file his return with an estimate and amend later when the final is ready so that's a moot point as well.

My question was about how does one estimate the portion that would be capital gains vs what would be considered oridinary income. Seems to me there could be both in this situation. Running it through my mind I get stuck - he can't get hit for the same $$ twice so how to determine which would be considered oridinary income and which would be considered capital gains.

My simple reasoning isn't working for me here...The $$ comes in, goes against expenses (very little) and his % of what is left is ordinary income. At the same time, $$ are distributed that liquidate his position so capital gain. But which is it? Is it possible to be both or is it part of both?

My thinking is flawed somewhere. Any pointers on where I'm going wrong would be greatly appreciated.

[The preparer of the LLC is being a turd so I can't get a good bead on it from him - I don't think he knows which is why he's stalling - just my theory]

[JohnH]

Short answer from me to the client is I would refuse to complete the return using estimates. That's one of the reasons the IRS invented extensions in the first place. I know you said you already agreed to do it, but given the complexity of the situation there's no law saying you can't tell the client you changed your mind in light of the facts.

Having said all that, If I were inclined to prepare the return using estimates (against my better judgement), I'd insist that the client write down what he thinks the numbers are likely to be on the K-1. I'd also have the client put in writing that they understand that errors in the figures may cause penalties and interest, and that the client understands it will all be his responsibility. With that info in hand, and IF the estimates seem reasonable to me based on the info I do have, then I MIGHT prepare the return.

[Lion]

Tell her to ask

Tell your client to ask an officer of the LLC or the LLC's accountant for an amount that's likely to be ordinary income and an amount for capital gain. Then YOU are not the bad guy when you amend and he owes more tax. It's the OTHER tax preparer that was wrong. It's not your fault there's no K-1 yet, so don't take the responsibility for devining what could be on it. You're not his bookkeeper. You prepare his return with the numbers HE gives you, not numbers you make up. You have no right to an insider view of the LLC's accounting, but your client DOES. He must exercise his right.

[TaxBird]

Eureka!

I think I figured out where my flaw in thinking was.

Ok, the $$ comes in flows down to net income. Ordinary income.

This restores basis.

The portion of the distribution, if any, that exceeds basis is considered capital gains.

Whew!

Thanks to all who contributed and yes, I have read the riot act, etc on the pitfalls and problems of filing with estimates. Language to the effect is also built into my engagement letter which was signed up front.

[Davc]

And don't forget form 8082.