K-1 Presented on Economic Value Basis

[dascpa]

This is a new one for me.  K-1 capital account analysis, profit & loss sharing and capital percentages, and finally Item N partner's share of net unrecognized Section 704(c) gain are all shown at "economic value" not cost basis/tax basis.  This economic value was explained to me as theoretical liquidating value.  Finally, the ending balance is economic capital under the distribution waterfall.

Does anyone have a clue how to explain to my client who invested $7m and now shows $5.6m even though no distributions and taxable income.  Additionally he's a 1% owner but the capital percentages show 2+%.

I have a guess, but my guesses are typically wrong.

[TaxGuyBill]

I'm not good with Partnerships, but I'll take a stab at it ...

Why does it matter?  Did the client even look at it?

Capital accounts are basically from the Partnership point of view, not the Individual point of view, and do not directly affect the 1040.  If the taxpayer wants to know why the value went down, they should ask the Partnership.

If that number is the "theoretical liquidating value", it just means the value of his investment went down.  Just like stock, values could go up or down but don't really matter until it actually is sold (or in this case, liquidated).

[dascpa]

Yes the client looked at it.  He's the one who questioned me.  And rightfully so.  If I contribute X a non-tax person thinks it should show X on the K-1.

K-1 capital accounts are not changed to FMV each year.  They are prepared based upon cost, unless there is a step up or step down in value with a 704/754 situation.  And yes, I understand inside and outside basis.

But I've never heard of "theoretical liquidating value" as being the basis.  Effective 2020, capital accounts on K-1 have to be presented using the tax basis. 

And yes, we did ask the partnership.  That's when we were told of this "theoretical liquidating value".

Thank you anyways.

[TaxGuyBill]

---

@dascpa wrote:

Effective 2020, capital accounts on K-1 have to be presented using the tax basis

---

I forgot about that.  In that case, I suspect whoever prepared the Partnership return is not doing that.