Intangible Drilling Costs

[LouD]

Not sure what the right answer is for IDC deductions in the first year and passive activity treatment. Client is LP in new 2008 O&G limited partnership and was allocated $22,500 in IDC on their K-1 and a small ordinary income allocation.

From everything I've researched, it appears that O&G working interests are excluded from the passive activity rules unless the entity limits the taxpayer's liability, which in this case, because the taxpayer is not a general partner, would mean they have limited liability.

So it would seem that all activity from this partnership (including the IDC) would fall under the passive activity rules which would mean my client couldn't deduct the losses due to his income level. Client was obviously sold on this investment because of the 1st year losses from IDC, so I want to make sure my analysis is correct before I drop the bomb on my client.

Thanks in advance for any help.

[GeneInAlabama]

The PDT would offset the BPD unless of course the the TAF divided by the AMI is greater than the EDI in which case you would use the PIB plus the YAD.

[GeneInAlabama]

Sorry, I couldn't resist.

[zeke]

Sorry, I couldn't resist.

Gene - OP uses 3 abbreviations. LP is spelled out as limited partner. IDC is spelled out as intangible drilling costs. We do have to think when he uses O&G. I kinda think that since we are drilling that O&G might be oil & gas.

z

[GeneInAlabama]

Thanks Zeke. Uh, what does OP mean? I should know that one, but sometimes I do well to remember yesterday, especially this time of year.

[Bart]

Thanks Zeke. Uh, what does OP mean? I should know that one, but sometimes I do well to remember yesterday, especially this time of year.

Original Posting or Original Poster

[GeneInAlabama]

Thanks Bart.

[Joel]

In the first year of investment in a oil & gas partnership the partners are general partners. Therefore the IDC can be deducted in the year of investment if desired or amortized over 60 months from the date of investment. In the second year most partnerships automatically change the partners to limited partners and the passive loss rules would then apply.

[LouD]

In the first year of investment in a oil & gas partnership the partners are general partners. Therefore the IDC can be deducted in the year of investment if desired or amortized over 60 months from the date of investment. In the second year most partnerships automatically change the partners to limited partners and the passive loss rules would then apply.

Hi Joel-

Thanks for the response. Does it make a difference that the K-1 has checked the "Limited Partner" box? From what you're saying, maybe it doesn't matter and I can treat him as General Partner regardless?

[Joel]

My first response would be that there is an error on the k-1. However the investor has the option when purchasing the O&G partnership to be treated as a limited partner from the beginning. If this was their choice then the only result is to have the passive loss rules apply suspending the loss until they have suitable income to be offset by the accumulated losses. Need to have your client look at their copies of the investment papers.

[LouD]

thank you very much Joel - much appreciated!