Did I make a mistake?

[BHoffman]

Mr. and Mrs. Smith are trustees of their husband and wife revocable living trust.

They formed an LLC in AZ (a community property state).

The members of the LLC are shown as:

Mr. Smith Trustee of the Mr. and Mrs. Smith Revocable Living Trust and Mrs. Smith Trustee of the Mr. and Mrs. Smith Revocable Living Trust.

They bought a commercial office building for their business and put it in the LLC in 2014.  It's a self rental but that doesn't matter....

I figured the Trust was the sole member of the LLC and reported the rental activity on their Schedule E in the 1040 form.  Did I make a mistake?

 

They want a loan.  The bank is asking for a tax return for the LLC.  I'm expecting they will want to see a form 1065.

Can I amend the 2014 form 1040 to remove the Schedule E and then prepare a (late) form 1065 listing the Husband and Wife trustees as multi-members if the bank insists? 

 

 

 

 

[fredazcpa]

In Arizona because of the community property laws , you are good to go

BUT you may need to educate the loan officer as to the tax treatment of a disregared eninty , the issue you will run into is the LLC name does not show up on the SchE, only the address.

lately, even being correct in your treatment, I have almost come to the conclusion to start filling partnership returns for these LLC's just for this reason, also if the partnership return is used, the all the other tax information from the 1040 does not need to be shown

not sure what state you are in, but most likely you are dealing with an underwriter that is not in a Community property state and dose not have the tax knowledge that you have

If he bank insists, ask them who is going to cover the fee to prepare, to fight with the IRS about the 4k plus penalty, or even pay the penalty.  I would show them the 1040 with the Sch E with an explantion of how the tax laws work

 

hope this helps

 

 

 

[jklcpa]

^ that is exactly what I was going to post.  It's explained fairly succinctly in Rev Proc 2002-69 that is only a couple of pages long. It clearly states that the IRS will accept filing by a H-W owned entity in community property as either a disregarded entity or a partnership.  You might have to explain that the ownership in the trust name is also disregarded while the grantor is alive. 

At this point I would not amend the return to accommodate the bank. The borrower may have to move this up to a higher level lending officer or loan committee, or find a lender that understands the law.

[rfassett]

I agree with both of the above responses.

[BHoffman]

Thank you everyone for the responses

[jklcpa]

Just to state the obvious, you should address this with a letter to the taxpayers that they can then provide to the lender. Do not communicate anything directly to the lender. You don't want that level of contact, and you don't want to open yourself up to the bank requesting a comfort letter that lenders so love to have in their files.

[BHoffman]

I avoid bankers and lawyers as a matter of principle. 

[Catherine]

36 minutes ago, BHoffman said:

I avoid bankers and lawyers as a matter of principle. 

But they do not have the courtesy to reciprocate.