Final 1065 for LLC

[Denne]

I have some real concerns about filing this final 1065. The first thing that seemed odd is that the "Final" box was check last year on the 1065. The two partners just couldn't get along and had already decided to close the business. Well....the remaining partner ended up with the equipment to pay off and did that this year. The equipment that they each brought into the business was just returned to both of them. The remaining partner paid for any bills that came up...out of his own pocket. The wife the that partner works for attorneys and they have told her that the 1065 must still be filed this year due to the fact that they were still paying for expenses. I am not sure if there is also a reason to keep it open for legal reasons since the remaining partner is suing the partner that abandoned the business. The remaining partner ended up paying off the $50,000 in debts out of his retirement account. I have done the 1065 and show only the remaining partner as an active individual and given him credit for the expenses he paid and let the depreciation carry forward on the equipment etc. since they just recently divided up their own equipment. Is there anything else that I should be concerned about? This is a first for me doing this... Thank You for your tips and tricks!

[Denne]

This court case is coming up soon and I just had an email that they need the tax returns next week.....not good news when I am not certain about things.....

[RitaB]

This court case is coming up soon and I just had an email that they need the tax returns next week.....not good news when I am not certain about things.....

This is why I never recommend that people form joint ventures.

My best off-the-cuff answer is that filing a final return last year was correct, cause when you're down to one "partner," there is no partnership. So, the 2007 transactions couldn't be partnership transactions, could they? Not even "unreimbursed partnership expenses." (Not to disagree with a lawyer, or anything.)

But, if 2007 really is the final year, you'd need to amend the 2006 to make it "not final," I'd think.

Basically, I have no idea on this one, unless the remaining dude continued in the business and can file a Sch C, which he apparently did not. Maybe the best he can do is capital loss?

I hope someone can help. Maybe more will read this Monday. Sorry, I know I am just thinking out loud on this one, and this is no help at all. I will try to do some reading after church.

[Denne]

Thanks for the ideas..... I am still not sure how to best handle this matter. Perhaps as a Capital Loss. The remaining partner will be starting things up again under his own sole proprietorship. He is pretty burned by the partnership history here. He just hasn't had any income for 2007. He went to work for someone else and will be opening in a portion of their building on a part time basis.

It makes sense that there can't be a partnership with only one remaining partner. I was just thinking about a Final K-1 form showing no distribution of income or loss to the long lost partner....

Thanks for your thoughts. Perhaps others will have some additional ideas too....

[Terry D EA]

What RCooper said makes some sense. The only different twist I can put on this is. The partnership ceased to exist when the one partner left. However, the final accounting and distribution of cash and fixed assets would all be part of "Winding Up of Business" and the previously return filed as "final" would need to be amended if it indeed 2006 wasn't the final year and the 2007 return would show the final transactions. I am curious to see others responses on this one as well.

Terry D.

[Denne]

Thanks for your reply. I don't feel so all alone in not knowing the best way to handle this matter. Of course the remaining client is anxious to have me find a way for him to write off his full payments....since he owes some taxes from the withdrawal from his retirement account. Perhaps we will get some addtional views on this.

[RitaB]

Thanks for your reply. I don't feel so all alone in not knowing the best way to handle this matter. Of course the remaining client is anxious to have me find a way for him to write off his full payments....since he owes some taxes from the withdrawal from his retirement account. Perhaps we will get some addtional views on this.

Yes, I hope some others will chime in. Too bad the lone "partner" didn't just stay in the business as a sole proprietor. He's going back to it, I think you said, so I'd be tempted to deduct expenses on Sch C. (Yeah, I know, that's not right, I said tempted, but since he has no other income from self-employment, the loss would only get deducted for income tax purposes, like a capital loss, only not limited to $3,000.)

I think Terry's idea that you might need to amend 2006 partnership to make it a "not final" might be what you wind up doing. Course, you don't want the runaway partner to get the benefit of the losses...

Anyway, they have known for a long time that there is a mess here, so don't let their problems become an emergency for you.

[jklcpa]

As others have pointed out, you can't have a ptnship of one. You also can't file 2 final returns. First you must decide in which year the operations ceased. Were documents formalized for the exiting of partners? And if you need to amend 2006 as not final, it'll take IRS time to get that into the system. So if you do need to file an 07 ptnship return, you'll need an extension for this return until things can be sorted out.

Here are a couple of additional things to think about. It sounds like as least part of those $50K in debts were or should have been recorded on the ptnship books already because it was a payoff of the equipment. Here are some basics regarding ptrship taxation: If exiting partners have negative capital accounts or were relieved of debt, they recognize income. The final remaining partner stuck with the liabilities possibly should've gotten a step-up in basis. This is an election that requiring attaching election to the return. I don't know if you could even do that now. Perhaps this is how your final "partner" should have gotten his "deduction" for the debts he paid off because he would've had a higher basis to report on his personal return.

I don't think you can just keep the depreciation going either. Isn't the equipment out of service if operations ceased?

Sorry for the ramblings, but you have a lot of issues to sort out. I just thought I'd throw some ideas out there.

[Denne]

To complicate things further.....like we needed that.....the attorney had them pay the annual LlC fee to the state to keep the LLC going.... Not sure what they are all thinking here, but sure does make for a complicated return. Would there be a reason that the ramaining partner can't have everything transferred to a Schedule C....including the equipment etc until it is sold? One reason I was concerned about that is because he didn't have income for 2007..... Suggestions??