Partnership basis / liquidating distributions

[Jeff1957]

This has got to be so simple, I hate to ask. Yet here I go:

Pretend for a moment that a partnership can have just one member. That is not the issue, but it makes it easier to explain. Also assume all of this takes place in one tax year. 

Sole partner buys membership interest for $400,000. Partnership uses that money to purchase real estate, which it then sells for $1,000,000. K-1 form shows gain of $600,000 which is distributed in full to the partner, and the partnership closed

Thinking about it from the partner's perspective, he or she invested $400,000 and received $600,000, a cash flow profit of $200,000. But the K-1 shows a gain of $600,000 which is the true profit that I believe should be taxed.

At liquidation, the partner's basis in the partnership interest is unchanged at $400,000 contributed plus $600,000 gain less $600,000 distribution = $400,000. If I deduct that basis against the $600,000 gain, then the net taxable is $200,000 which agrees to the cash flow profit above. But it's not the true taxable profit at the partnership level.

I realize the partner's basis is a capital asset, and may or may not be deductible within the same year as the K-1 is issued, but that's not the issue. 

I'm just missing one piece that is probably very simple.

Thanks in advance for any help! 

Jeff

[dkh]

From reading your information, I think you are not looking at this as two separate tax situations.

First is what happened when the Partnership was in business - the land sale.  The K-1 shows the gain. 
Enter the K1 to partners return accordingly.

Second is the liquidation of the Partnership.  Determine the partner's basis.  Determine the amount liquidated - was there anything after the land sale money was distributed?.  

Remember the land sale is a done deal on the K1.

[Dusty2]

You are double deducting the $400,000.  They sold the land for $1,000,000 with a basis of $400,000 making the profit of $600,000.  Since you said they fully distributed the money the basis is 0 ($400,000 was return of capital) so the full $600,000 is taxable.

Dusty

[qbteachmt]

"then the net taxable is $200,000 which agrees to the cash flow profit above."

Here's another way to spot your error:

The final distribution will be from cash on hand as $1m. That's because there was $400k into the real estate, $1m out, and unless you forgot to mention some other activity such as debt payoff, the final distributed Cash is $1m. The distribution that closes the entity is the entire cash. You did the math as $600k profit minus $400k basis, but it's $1m sale, so that is a Sum, not a Minus, event. It's either two parts as Profit and Basis, or it's two parts as Gross minus original investment, to get to the taxable amount.

It's all about perspective.

[Jeff1957]

Thank you all for your good input. Laying on the couch last night, the light bulb finally came on. At closing, there was enough money to pay back initial investments and disburse profits since there were no debts. So no one has a loss on liquidation and the final taxable income is as it should be. My client was adamant that he never got his investment back. That may be true, but if it is, it's an internal problem with the LLC, not a head scratcher tax problem. I knew it was simple, I was just stuck for a while. I think this account deserves a 20% aggravation surcharge fee this year!  

Thanks again to all and Happy 4th!