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Cash basis partnership & settlement debt

Technical topics regarding tax preparation.
#1
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Dear all,

I have a client who runs on cash basis for its partnership. Unfortunately, they were sued and lost, so the court ordered the client in 2022 to pay out in the following year which would be in 2023.
For purpose of calculating basis according to section 752 in tax year 2022, can settlement cost used in calculating basis?
 

#2
Nilodop  
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By "used" do you mean expensed/deducted, or will it be capitalized? Not that the answer depends on that.

How, if at all, will it benefit the partners or the partnership if the liability is used in calculating basis?

Did the court specify that the payment needs to be in the following year?
 

#3
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Nilodop wrote:By "used" do you mean expensed/deducted, or will it be capitalized? Not that the answer depends on that.

How, if at all, will it benefit the partners or the partnership if the liability is used in calculating basis?

Did the court specify that the payment needs to be in the following year?

What I meant by "used" is if settlement cost can be treated like any other assumption of debt.
As for your 2nd question, wouldn't assumption of debt normally increase partner's basis?
Court did order the client to start the payment in 2023.
 

#4
Nilodop  
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I suppose if there is a formal court judgment, maybe that's tantamount to a liability that is in fact recognized even by a cash method taxpaye. I'd have to think about that.

But my more relevant point is, if you will, the other half of the entry. Asset? Probably not, but you need to tell us. Expense? Likely. Which if deductible completely offsets the 752 increas in basis for the capital accounts.
 

#5
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I see no reason why a judgment would affect books kept on a cash method. It's the same as an account payable.
Steve
 

#6
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gatortaxguy wrote:I see no reason why a judgment would affect books kept on a cash method. It's the same as an account payable.


I think the question is a good one. There is an argument that this is not an accrual, but a debt payable.
Debts payable to others for all kinds of things may be added to basis.
I'm not certain if there is any guidance about this particular liability, but I would think it will depend upon the terms of the settlement.
~Captcook
 

#7
Nilodop  
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I see no reason why a judgment would affect books kept on a cash method. It's the same as an account payable.
Or is it the same as a note payable or even account payable for, say, a backhoe? (In fond memory of Harry Boscoe).
 

#8
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We are missing something. We are assuming it is a monetary judgment. The significance of a monetary judgment is that the judgment creditor can use the power of the state to collect a certain amount. But this judgment says a payment must be made in the future, which is in the nature of specific performance, not a monetary judgment. Apparently, the settlement (agreement) has been reduced to a judgment. In any event, for accounting purposes, it is the agreement that matters, not the judgment.
Steve
 

#9
Nilodop  
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We are missing something.. Not being a lawyer, I cannot dispute what you say, and it sounds perfectly reasonable.

But we are missing something else. What was the complaint that got settled and caused the judgment to be issued? The debit side of the entry, to revert to bookkeeping. If an expense, what kind. If an asset, what kind?

And yes, it could be an asset. For insyance, and this is 100% made up, debtor/taxpayer/client had construction work done, contractor sued over unpaid portion, court favored contractor, taxpayer now owes $X in order to obtain clear title to whatever was built or improved.
 

#10
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I think you’re out of luck here. See Reg. Sec. 1.752-1(a)(4), which is the definition of a Liability. You do not have a Liability here (although you have an Obligation). I believe this definition of a liability (in the cited Reg) came into play in 2005. Prior to that time, there was RR 88-77. All of it is consistent, though, I’m pretty sure.

(Furthermore, I’m not even sure if you’d have a Liability on the accrual basis. There’s a rule in Sec 461 about torts, if that’s what OP is dealing with here).
 

#11
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It's an origin of the claim thing.

I think we've exhausted this subject without more facts.
Steve
 


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