Q: On Form 1040 at Line 17 reported income is much larger than the distributions on the Schedules K-1.  Why would Fritz Schumacher pay more tax on money that he did not actually receive?  Do you use the amounts at Line 17 or the Schedules K-1 distributions in constructing global cash flow?

A: Slide 29 pointed out that distributions and loans to owners were $2,263,636, while all of Schedule E income – reported at Line 17 on Form 1040 – was $750,674.  The sources of the $2,263,636 are provided in detail on Slide 31.  In effect, Fritz Schumacher paid taxes on vastly less income than he received in cash in the form of distributions and loans.

In computing global cash flow, we use the amount of cash received from the various related parties and not the accrual amount reported at line 17 on Form 1040.  Line 17 reflects the taxpayer’s pro-rata share of taxable income from the various companies in which that taxpayer has an ownership interest, which may be vastly different from the amount of cash the taxpayer received from those companies.  The cash is the sum of distributions and loans.  Distributions are reported on the Schedules K-1. The change in a Due from Owners account on the company balance sheet represents loans to owners.

As is customary in the industry, in constructing a global cash flow we began with Schumacher's massive cash flow surplus – largely driven by the $2,263,636 inflow from distributions and loans – but then ultimately we use his ready cash in completing our global cash flow assessment.

Q: What amount do we use if the amount reported at Line 17 on Form 1040 is larger than distributions reported on Schedule K-1?

A: Always use the cash numbers, i.e., the amounts reported as distributions on the Schedule K-1 and the amount of loans to owners reported on company balance sheets, and not the amount reported at Line 17 on Form 1040.

Q: How are you able to make the jump from the policy statement for “Loan Workouts” to applying it directly to acquisition financing?  The policy statement clearly states that it is “...guidance to assist examiners in evaluating institutions’ efforts to renew or restructure loans to credit worthy CRE borrowers...”

A: Under “Purpose” on Page 1, the document states that “…this guidance addresses supervisory expectations for an institution’s risk management elements for loan workout programs, loan workout arrangement, classification of loans, and regulatory reporting and accounting considerations…”   In follow-on explanations via teleconferences, the regulators stressed that the analytical process applies to renewals and restructured loans as well as to basic CRE underwriting for acquisition financing.  The analytical process does not change.