PTP K1 Canceled Debt

[Randall]

Canceled debt income of $29k showing on a K-1 from a publicly traded partnership.  Wow, how much was the total if my client's share is $29k.  Has anyone had this before?  The partner instructions say if he did not materially participate, it would be treated as passive income.  That's good because he has a lot of suspended rental losses he could use against it.  In ATX K-1 input sheet, if I enter it on the appropriate line, it automatically goes to 1040 page 1, line 21.  How do I get it to go to Sch E, page 2 as passive?

 

 

[Randall]

Friday's WSJ had an article about this very thing, MLPs.  They specifically  mentioned Linn Energy LP, which is the one my client had.  A billion dollar debt restructure, reported as cancellation of debt income on K-1.  My client's share was $29k.  Ouch.  Another $8k to be reported as ordinary income.  Ouch again.  He sold units at a big loss, reported as capital loss, limited to $3k.  Ouch a 3rd time.

[joanmcq]

That's the dark underside of PTPs the sales guys never tell clients about. 

[Randall]

Yes.  And apparently these PTPs are considered stand alone passive activities.  So income or loss from the PTP can only be used against income or loss from that same PTP.  Losses suspended until that PTP is disposed.  So to answer my own question in my original post, I won't be able to offset the cancellation of debt income against his suspended rental losses.

 

 

[MOO]

I have Linn Energy COD. I know I need to report it as income. However, i read in the IRS instruction for K-1 (1065) that one can elect to use COD to reduce the basis of depreciable property. It says to check form 982 for details.  Form 982 gives some reasons which doesn't in general apply to a limited partner of PTP. So is it possible to use this to reduce the basis of my units? This would be much better for me as I have already lost money on this stock.

[Lion EA]

Depreciable property.

[MOO]

Lion,  I do not understand your reply.  I am currently having to pay tax on cancelled debt income (from K-1)  from Linn Energy. Is there a way to use it to reduce the cost  basis of my stock rather than declaring it as part of my gross income, in which case I am having to pay tax on it as ordinary income.

[Lion EA]

You stated your research showed you can elect to use COD to reduce the basis of depreciable property.  I agree with that.  Depreciable property.

[jklcpa]

2 hours ago, MOO said:

Lion,  I do not understand your reply.  I am currently having to pay tax on cancelled debt income (from K-1)  from Linn Energy. Is there a way to use it to reduce the cost  basis of my stock rather than declaring it as part of my gross income, in which case I am having to pay tax on it as ordinary income.

@MOO, we do not help the general public with tax issues on this forum. You should hire a tax professional to prepare this return.

[Randall]

For the sake of the topic, what depreciable property?  Is he talking about reducing his basis in the 'stock' (LP units costs?  I wouldn't thing that's depreciable property.

 

[Lion EA]

Exactly.   That's what he himself said.  But, he did not understand what he said.

[jklcpa]

Yes, Lion nailed it. This is exactly why we shouldn't help the public with their questions. They sometimes ask questions that they are not informed enough to understand the question not to mention the answer. Also, often times they will not provide enough supporting information for us to begin to answer accurately.

[Christian]

As a former owner of Linn shares I had to pay tax on their canceled debt. What a bummer but it had already been reported in the financial media.

[Abby Normal]

Partners have to pay tax on the cancelled debt of the partnerships they're part of. That's not unfair. The value of their partnership goes up more or less by the amount of debt cancelled.

[Catherine]

1 hour ago, Abby Normal said:

Partners have to pay tax on the cancelled debt of the partnerships they're part of. That's not unfair. The value of their partnership goes up more or less by the amount of debt cancelled.

It also means you have to understand what you are investing in in ALL the ramifications.  If you didn't understand, invested anyway, and then got hit with something you were not expecting, whose fault is that?  

[Randall]

On ‎4‎/‎28‎/‎2016 at 11:55 AM, Catherine said:

It also means you have to understand what you are investing in in ALL the ramifications.  If you didn't understand, invested anyway, and then got hit with something you were not expecting, whose fault is that?  

Yes, but on the other hand, brokers can push these and they don't understand them anymore than the average person.  And of course, the industry got these laws passed thru to allow these things.  In the real sense, calling them 'partners' and receiving K-1s for this kind of thing seems absurd,  But as you said, the investor should look into these things more closely.

[FDNY]

3 hours ago, Randall said:

Yes, but on the other hand, brokers can push these and they don't understand them anymore than the average person.  And of course, the industry got these laws passed thru to allow these things.  In the real sense, calling them 'partners' and receiving K-1s for this kind of thing seems absurd,  But as you said, the investor should look into these things more closely.

All the brokers see is the 10% commission.  Investor is in the dark unless he asks, but they rarely do.

[Max W]

On 4/28/2016 at 7:15 AM, Abby Normal said:

Partners have to pay tax on the cancelled debt of the partnerships they're part of. That's not unfair. The value of their partnership goes up more or less by the amount of debt cancelled.

Exactly.  The COD becomes income and this is decided at the PTP level as how it is treated.  PTP's have a requirement that a certain amount of income (90%) be qualifying income - interest dividends, rents - otherwise it is taxed as a corp.  The IRS allows the option for COD to be used as qualifying income.  So, I think that at the partner's level, the only out on 982 would be insolvency.

[JohnH]

The main problem is trusting that the financial advisor knows what they are doing. (most don't)

Everything else falls under the heading of "Inevitable Consequences"