Basis limits on Publicly traded Partnership K-1

[KarenMM]

Good morning and please excuse my long post - I have been a lurker for years, and hope that I am including all info up front to support my questions. So here's the situation - A client has a PTP with a negative ending capital account under the "tax basis" on Part L of schedule K-1, from 2011 - the first year the ending basis was below zero. Losses in 2012 and 2013 created higher negative tax basis "ending capital account" in the respective years. More facts:
1. Client had no liabilities or contributions to increase his basis over any of the years of ownership
2. I have done the calculations from the beginning of his ownership (2007) and agree that his basis = the "tax basis capital account" Part L of the K-1
3. In each of 2011, 2012, and 2013, distributions were made: 2011 $5496 ; ending cap = -3646 ; 2012 $5820; ending cap -12,095; 2013 $6312; ending cap = -22,517.
4. No adjustments were made on 2011 or 2012 returns to bring the cap account to zero. (Form 4797, part 2, line 10 should have claimed ordinary income to bring the tax basis cap account to zero - or to claim some distribution amount as ordinary income - at respective year ends?)

So here are my questions:
1. I think the best course of action is to amend the personal returns for 2011 and 2012 (2013 is on extension now), but the situation is more complicated than just these facts, and it may not be able to happen... is there another way?
2. If amended, 2011 should show what amount of ordinary income 3646? or 5496? And is the 4797, part 2, line 10 really where it goes?
3. If I wait until 2013 to correct this, what amount should be claimed - I think it is the sum of the distributions - 5496+5820+6312 =17,628 - but that still does not give a zero or positive basis, either at year end 2012 or 2013
4. Because the basis is less than zero, I think all future losses are not deductible, unless the client contributes more $ to the PTP - and if he doesn't, carryforward losses will go away once he sells all of his PTP shares - so at risk limits and passive limits don't even apply for these years, correct?
5. If there are at-risk and/or passive losses which are suspended from years prior to 2011, they will be allowed at the time of sale, correct?

If you have slogged through this whole post, I thank you! And if you can help me with my questions, I will thank you even more.... I have a number of sources of information that I have been reading, but without a comprehensive example, I am getting lost in the theory and can't figure out how to apply what I have learned ....

[Bees Knees]

Well for starters, basis cannot go negative. So for each of those years, basis is zero, period, regardless of distributions received or the amount of the negative capital account balance.

Second, having said that, the only tax issue is when basis is zero, and there is a distribution, the distribution is taxable as a gain. No need to report anything more than the actual distribution received as gain, since, as I said before, basis cannot go negative. Thus, there is never any need to bring the capital account up to zero. Simply tax the total distributions received that exceed basis and let the capital account be whatever negative number it needs to be.

As to the type of gain reported (ordinary gain or capital gain), that depends. Distributions in excess of basis are general treated as capital gains, but there are several things that can cause a distribution to be treated as ordinary income, such as distributions that are in essence payments for services rendered, unrealized receivables, inventory, etc.

[Burke]

Is this a working interest in oil or gas?

[Kram BergGold]

Debt

Is there any debt? If so what kind? Recourse or Non Recourse?

[TXEA]

It would help if you provide a summary of the tax basis in the PTP. I am unable to tell from your post whether the losses incurred by the PTP were deducted in the respective tax years. Generally, PTP losses are not deductible except against income in future years from the same PTP.

Publicly Traded Partnerships are not treated like other passive activities. Excerpt below from Pub 925

---Publicly Traded Partnership

"You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP.

You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest.

For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively."

I am not sure if I am missing something from your post; however, the post seems focused on the distributions side (which is an issue as well). Please discuss the nature of income/loss from the PTP and how it was reported on the Form 1040 for each year.

I guess my question is: If the losses (assuming there were losses) from the PTP had been suspended (not deducted) would there be tax basis after the distributions?

[KarenMM]

Here are some of your questions answered:
It would help if you provide a summary of the tax basis in the PTP:

Here is the 2011 basis applicable lines:
Adjusted Basis from prior year (cannot be negative) 8,988.00
Cash (FMV) Contribution 2011 -
Ordinary Gain from line 1, sch K-1 356.00
Total Increases to basis 9,344.00
Distributions to partner during the year (cash+adj basis of property distributed 5,496.00
Ordinary loss from line 1, sck K-1 6,760.00 (SHOW ZERO? or ?)
Other Losses passed through to partner, including separately stated incom 734.00 (SHOW ZERO?)
Total Decreases in basis: 12,990.00

Partners Outside basis at year-end (cannot be less than zero) (3,646.00) (If I show zeros in the above amounts - this changes to +3848)

Please discuss the nature of income/loss from the PTP and how it was reported on the Form 1040 for each year.
Frankly, I have been in over my head on this, and had not been tracking basis until I noticed the negative basis on the 2013 K-1. Entering the info on my software has produced correct results in terms of at-risk, and passive activity limitations, I think, without first determining basis limits, since I wasn't tracking them. Before 2011, there were unallowed losses on worksheet 3 of form 8582, so the 2011 return has amounts from 2011 adding to the prior year amounts. I am not sure when the IRS interpretation came out on PTP's requiring losses of one PTP to be netted against gains in the SAME PTP, but in 2011, client had other passive gains that made small portion of this loss allowable, flowing to sch E.

Is this a working interest in oil or gas? Possibly - Some K-1 codes indicate oil and gas related income and expenses, but other posts to this board seem to say that as a non-material participant, limited partner, my client does not qualify for the oil/gas "perks". And having read the cites from those posts, I agree. Also - How do I know from just the K-1 info that I receive that it IS a working interest in oil and gas?
Is there any debt? If so what kind? Recourse or Non Recourse? - There was no debt reported until 2011, then it was reported as nonrecourse at 17,338. I am pretty sure that this debt doesn't add to basis, right?

I guess my question is: If the losses (assuming there were losses) from the PTP had been suspended (not deducted) would there be tax basis after the distributions?
I am not sure how to answer this one - if I change the calculations above to show ZERO in the loss line, instead of 6760 and 734, then yes, there is a positive basis that carries to 2012... is this what I should have done instead of showing any losses at all on the tax return in 2011 and forward? Following through with the idea, the 2012 ending basis is still negative - meaning that I would have to show a gain on the 2012 return.

As to the type of gain reported (ordinary gain or capital gain), that depends. Distributions in excess of basis are general treated as capital gains, but there are several things that can cause a distribution to be treated as ordinary income, such as distributions that are in essence payments for services rendered, unrealized receivables, inventory, etc.
How do I figure out what kind of gain this is - there were no services rendered - my client is a very hands off, limited partner in a PTP - wouldn't the company have to share on the K-1 somehow whether this was for unrealized receivables or inventory, etc.? I thought I read on another post here, that this type of distribution had to be considered ordinary? But the next question for me is where and how to report it, and how much? If I "zero out" the 2011 losses, and my basis is in fact +3848 at year end 2011, and then the following happens in 2012, what numbers do I report, and where?
Total Increases to basis 3848
Distributions to partner during the year (cash+adj basis of property distributed 5,820.00
Ordinary loss from line 1, sck K-1 2,168.00
Other Losses passed through to partner, including separately stated income 846.00
Section 179 deduction -
Non deductible partnership expenses (non-capital)
Other deductions from basis
Total Decreases in basis: 8,834.00

Doing the math, this would give me a negative 1587 basis at year end 2012 - so can I claim a loss of 581 (2168-1587) and come out with a basis of zero, and not claim any income on the distributions? Or do I claim income on the total distribution amount of 5820, or some portion of it?

THANKS for helping me through this - and if any of you have references for sources I can use for research, continuing ed, etc. on this topic, I would love to hear about them too...

[TXEA]

There is a lot going on here, but I suspect the problem with the basis refers back to losses from prior years taken as a deduction on the Form 1040. In thinking about this issue, it is best to think of a PTP as isolated in regards to the PAL rules.

Example:

Taxpayer has basis in PTP#1 of 1000.00

PTP#1 shows loss in year '13 of 100.00 (distribution of 50.00 received).

Taxpayer has income in year '13 from other passive activity of 200.00 (not a PTP)

PTP#2 has income in year '13 of 150.00

Assume no prior year PAL carryover from any of the activities.

The loss from PTP #1 is suspended to 2014 (no loss allowed - it can not be netted against the other passive activity or PTP#2 income). The basis in PTP#1 is 950.00 (1000 - 50 dist).

Schedule E reports 350.00 income from PTP #2 and the other passive activity.

Next year - 2014

PTP #1 reports 200.00 income and 150.00 distribution.

Reporting Schedule E - Income of 100 is reported for year '14 (200 Income '14 - 100 suspended loss for '13)

Basis - 1,050 - (2013 basis of 950 + '14 Income 100)


The gist of the example is to show that the income from the PTP stands on its own with regards to income reporting, deduction reporting, and credits.

It sounds like in your example that the PTP has been treated as a PAL not subject to the PTP reporting rules. This would mean that more than likely some prior year losses for the PTP has been netted against other PAL income.

I would recommend going back to the records you have and see what the basis should be had the PTP rules been followed, then evaluate whether you think amended returns should be filed to correct the income reporting and the basis in the activity.

It is possible that even with suspending the losses that the distributions have exceeded the tax basis in the activity. It is generally a capital gain and the gain brings the basis back to zero.

Let us know what you find.