Investment K-1 Received with disbursed non cash assets that were not received until the following year?

[FLAnne]

Hi! My client received a K-1 from a fund that they had invested in.  The K-1 had a 19C Distribution noted.  This was a K-1 received in 2020.  Please note, this distribution was never made in 2020, and only occurred in 2021; as a non cash distribution of shares.  The amount noted on the K-1 was for the original cost of the shares.  I need some help better understanding 2 questions:

1. Should we have gotten a K-1 with this distribution noted even though it was not actually transacted until 2021? Should we be requested a revised K-1?

2. If in fact we should have received this K-1, would I put this as a cash receivable? Or, just a current asset? 

I am taking over a clients account and the CPA that had been working on it did some things I have never seen before, so I just want to be sure before I fire off any e-mails that I fully understand, and have clear and concise resources.

[tagteam]

This just involves a basis adjustment.

See https://www.irs.gov/instructions/i1065sk1#en_US_2020_publink11396nd0e3908

[FLAnne]

Hi! Thank you! I totally agree with the basis adjustment issue.  However, I am more confused with the offsetting account they used for the basis adjustment.  They put the basis adjustment of the Investment to a cash account, linked to the bank account as a sub account, and called it shares receivable.  I would think it should be put against just a basic AR current asset.  Especially since this was never a cash transaction, it was only a non cash, share transaction.

Also, the transaction did not occur until the following year, so I am wondering if the form was completed accurately?  I have seen plenty of K-1's, but never one where distributions are disclosed prior to occurance. 

[tagteam]

I will page @Rick19744 for the balance. He should respond sometime today, most likely.

[FLAnne]

I am so appreciative! Thank you! This has likely caused a couple of gray hairs because I like everything to be done precisely. 

[Rick19744]

I have a couple of follow-up questions:

• Did you receive a final K-1 as this was a liquidating distribution?
• Is this a PTP or just a private partnership?
• Was there some type of division of the partnership?
• Is your client an individual or a business?
  • Just trying to understand some basic details here
  • Has an outside basis schedule been maintained?

[FLAnne]

Hi Rick! Thank you for your help, my responses are as follows:

1. This was not a final K-1

2. From what I understand and know from my clients (my clients are a private partnership), the fund that issued the K-1 is a privately held partnership

3. There was no division that I am aware of, or that my clients are aware of

4. My client is a privately held partnership

5. No. This was simply a transaction that went as follows: 1. My clients were notified that they would be receiving a certain number of shares as a distribution (the notification came in December of 2020). 2. My clients received the distribution at the end of January 2021. 3. My client got a K-1 for Tax Year 2020 that had the cost basis reflected for the shares they got in 2021 (in box 19C). 

[Rick19744]

Ok.  So let me summarize what I believe to be the facts, and then have two questions:

• You have a client that is a partnership that has invested in another partnership
• Your client received a K-1 with an amount on line 19C
• This was not a liquidating distribution

Assuming I am interpreting your facts and responses correctly:

• You indicate that the investment partnership "distributed shares".
• Are you able to explain what the distributed shares were?
  • Shares / units in the same partnership that you are invested in?
  • Shares / units of an investment that the partnership was invested in and distributed those out?
• You didn't answer my question as to whether you have a good outside tax basis maintained

Wait........did you use the word simple (simply) in the same sentence as partnership tax question?

[FLAnne]

Hi. 

To answer your remaining questions:

1. Distributed Shares - Meaning this is an investment into a partnership that runs venture capital investments. We got back 2,778 back of over 10,000 shares initially purchased. The shares sent back to us were from the same fund we invested in, just at a higher FMV (what the K-1, line 19C shows is the cost at which we purchased the shares, not FMV).

2. Yes, there is a good outside tax basis maintained.  We have meticulous records maintaining all investments.

Agreed, nothing can be simple, unfortunately. 

[Rick19744]

Attempting to work through things of this nature on a forum such as this is difficult, vs a one on one.  So bear with me.

• Are you saying that when your clients partnership invested in another partnership they acquired 10,000 units?
• And now the partnership redeemed 2,778 units as reflected on line 19C
• So now you have 7,222 units in the partnership?
• But no cash?

Still trying to get an understanding of the facts:

• You indicate that you received the shares at a higher FMV, but your original facts indicate this was a non cash distribution
• Who's determining the FMV?
  • Typically when something like this occurs, there is cash involved
  • There's no benefit in saying the FMV has increased unless there is some type of transaction that validates the FMV.
• You indicate the original K-1 was for 2020.  What was done with the K-1 for 2020?
  • How was that reflected on your client's 2020 form 1065?
  • Do you have an account titled "investment" on the balance sheet of your client?
• I've handled a significant number of Private Equity Funds, so it's not like this is an area that I have not dealt with in the past.

[FLAnne]

Attempting to work through things of this nature on a forum such as this is difficult, vs a one on one.  So bear with me.

• Are you saying that when your clients partnership invested in another partnership they acquired 10,000 units? yes
• And now the partnership redeemed 2,778 units as reflected on line 19C - we did not redeem the units, the partnership we invested in released the units. Effectively, they are diversely invested in numerous startups, and they divested from one startup and released all of the shares related to that particular startup. Our portion of those shares amounted to 2,778.
• So now you have 7,222 units in the partnership? yes, but the remaining shares are all allocated to other investments within that partnerships portfolio of investments.
• But no cash? - never got any cash, at all. It all was transacted through our GS account, and came in as shares.  

Still trying to get an understanding of the facts:

• You indicate that you received the shares at a higher FMV, but your original facts indicate this was a non cash distribution. It was a non cash distribution. But we purchased at $18K (which is what the K-1, line 19C shows) and when we received the shares back, they were valued at $92K in our GS securities account.
• Who's determining the FMV? - so, while we are invested in a partnership that is not public, they take our investment, and put it into various companies. This includes one that went public. Therefore, the market determined the value of the shares that were redeemed by the partnership we are invested in.
• Typically when something like this occurs, there is cash involved
  • There's no benefit in saying the FMV has increased unless there is some type of transaction that validates the FMV. Understood - this would be within our GS securities account. However, since the shares were transferred to partnership, in non cash, just as shares, I do not believe there is any taxable event in terms of gains here.
• You indicate the original K-1 was for 2020.  What was done with the K-1 for 2020?
  • How was that reflected on your client's 2020 form 1065? It shows as distribution receivable - Schedule L - Other Current Assets
  • Do you have an account titled "investment" on the balance sheet of your client? we have MANY investments on the balance sheet.  This is one of many. Please keep in mind, i am stepping in a little after the fact here.  The CPA's took the K-1 and just put the cost of $18K as a receivable under our bank account, which means, in our QB file it shows as cash, which is so odd to me....  as it in fact was never and will never be cash. 
• I've handled a significant number of Private Equity Funds, so it's not like this is an area that I have not dealt with in the past.

[Rick19744]

So while I am still somewhat murky here, I believe the following should be taking place:

• It appears to me there was some sort of division (divesture), which is why you "received" back the 2,778 units / shares.
  • Not sure you technically received any shares back, but they are providing you with information as to how to split your basis; see bullet 4
• I don't think setting up a receivable makes sense if you are never going to receive the $18,000 in cash
• Do you know if this is a Series LLC that you invested in?
• At this point, with the limited facts that I know, I would set up a new investment for this noncash transaction
  • I believe your beginning balance should be the ratio of your current tax basis in the investment to the 2,778 / 10,000 original units.
  • Then as those are sold, you now have a cost basis to determine your eventual gain or loss of these GS securities

That's the best guidance I can provide based on this forum string.

[FLAnne]

Rick, thank you! This is great. I have to agree 100%, and I have no idea why they ever put it in a cash account (regardless of what you name it, it is not a cash asset); nor do I have any idea why they did this inconsistently with their previous accounting of things.  I did do some digging and looking at legacy filings, and even what they did here seems to be inconsistent with their previous work.  I am thinking they just were a bit less precise during the 2020 tax filing season (I should note, the actual tax paperwork looks correct, it is the accounting work that they put in and the balance sheet that is less accurate). 

I will ask some more questions based on what you have given me as information as well.  I appreciate everything. 

[Rick19744]

Welcome.

[FLAnne]

Rick, I have a question for you. If someone loans you money to invest in stock, the investment is made through a partnership. The partnership gets back the stock shares and distributes shares to each appropriate member/partner......  can the partner that borrowed money to get the shares in the first place liquidate the amount of shares needed to pay back the loan and avoid Capital Gains?  Effectively reducing the cost basis to $0? Or, would they still need to pay capital gains? This is something I have mulled over greatly, and I did not find any great documentation on it.