Limited Partnership - COD Income

[JohnH]

I would break into my usual rant about Limited Partnerships, but no sense preaching to the choir. This one has a twist I haven't seen before.

The Energy LP ceased operations in 2013, so now we get to use all those passive losses that have been sitting idle for the past 4-5 years. And hopefully the client has learned his lesson & won't throw more of his hard-earned money at another one of these losers. But in the meantime, we have to deal with a K-1 showing $16K of COD income on line 11 because the LP borrowed money during its dubious tenure. The COD income flows straight through to line 21 of the FORM 1040, as it should.

My question concerns basis. Do I add the $16K of COD income to the client's basis in calculating loss? (I would say "gain or loss", but since I've never seen one of these things show a gain, I'll just stick with "loss"). If anyone can provide some insight on how the COD income affects basis, I'd appreciate the confirmation.

[BOB W]

Yes, it gets added to basis as loans just as income, losses and distributions adjust basis. Your tax program should automatically do that in the Basis worksheet....??? Since it is listed on the K-1 I would assume the limited partner became liabile for the debt.

[JohnH]

The scenario got more and more convoluted as we worked through this. TP invested $60K in the LP and never got a penny out of it. No payouts of any kind in 6 years. Along the way, his K-1's showed interest, dividends, and royalties, which he dutifully reported on his tax return. Then it shut down. So now I'm thinking the interest, dividends, and royalties also get added to his basis, in addition to the COD income. So after the suspended losses are added up and washed through schedule E, it looks like there's also a schedule D to be prepared with a zero sales price. Wonder how likely this one is to be audited.