MLP/PTP Issues - Again

[JohnH]

So in 8 months this client's new financial advisor bought (and in a few cases sold), a total of 10 Oil & Gas PTP's last year.. What a mess. Over $250K in activity churned for a grand total of $200 in capital losses. I'm still trying to sort out if theer was any actual cash income the client received from all these shenanigans. They were supposed to bring me this year's statements but they only have a few trade confirmations (new PTP's). In one case, the advisor bought the PTP one day and sold it the very next day. Can't wait to see how much churn there is at this point in the current year.

And when I counted up the number of states in which there were small-to-moderate amounts of profit or loss, there are 38 states involved. What do you PTP experts due here? Do you file returns in all states on the K-1, or only in certain states? And if only certain states, how do you decide which ones?

After our discussion today, the client said they are going to visit the financial advisor tomorrow and telling them to freeze everything in place. No trading of any kind until further notice. Their intent is to dump all the PTP's by year-end and move to something more conservative, which they understand better, and with a new financial advisor. It was the client's decision, but I hope I was correct in heartily endorsing this course of action. If I made a mistake or if I'm missing some high-finance strategy, somebody tell me.

[geekgirldany]

I haven't dealt with PTP very much but as far as reporting to each state.... there is an income requirement for each state before filing is required... I believe you could go on that on whether to report to each state or not.

[Roland Slugg]

What do you PTP experts due (sic "do") here?

Since these are PTP's, there is no federal reporting requirement until there is either: (1) accumulated income from a particular PTP, or (2) an overall net loss upon the complete disposition of one. All the states of which I am familiar follow the federal reporting requirements, but there may be some with different rules. When there is a gain to report, either because of a single year's taxable income or an overall gain upon disposition, I would always advise a client to file a return for each state when required. Many states do have a minimum filing threshold for non-residents, but it's pretty low in most cases. Also, there is often withholding remitted to various states, requiring the filing of a return to get it back (if it's economically realistic to do so) even if a state return would not otherwise be required.

How can there be 38 states but only 10 PTPs? Are you sure you counted them correctly, with no duplications? Even if some of the PTPs operate in multiple states, I didn't think there were 38 oil producing states in the country ... maybe 10 or 12.

You seem to have a negative and highly emotional attitude about that client investing in those PTPs. Why? It's his money and his decision. When my clients invest in things I think are foolish, I keep my mouth shut ... unless asked for an opinion ... and since I'm not a licensed investment adviser, I'm careful about expressing a strongly positive OR negative opinion even then. What good can come of it? If I were to urge a client to not invest in a particular company, or to get out of one he's already in, he wouldn't be very happy with me if that company ends up at the top of the "best performers of the year" (or decade) list. Just sayin'.

[JohnH]

Thanks Dany & Roland. I appreciate the reality check about my opinions as well. Long story, but in this case I do have more than a detached interest in what's going on. This client is being played, IMO. One of their family members raised some questions, and then at their urging I was asked for my opinion. Otherwise I would not have offered it. Initially, I did my usual thing - gave them my standard reprint of John Bogle's famous speech (The Dream of A Perfect Plan). This prompted the serious questions to begin.

Once I did some analysis of fees and other particulars, the client realized they were involved in something they had no clue about. They also realized they are paying through the nose and getting nothing in return but happy talk. I'm sure the investment advisor has all the properly signed CYA documentation. Nevertheless, there's no doubt in my mind that these are inappropriate investments for this individual.

[FEDUKE404]

State issues and reporting

I would tend to agree that, in most instances, you would not need to deal with multiple state returns until (when ALL the dust has settled) you compare the separate state income pieces to the minimum state filing requirements. Caveat: I've never been in a situation with either multiple MLPs/PTPs creating much more than chump change for the states. Second caveat: It might turn into a real challenge to see how each of those states handles, regardless of income/loss, MLPs/PTPs in the first place. Hopefully most follow the federal rules....but I simply do not know the answer to that.

Side observation: Re the comment "Since these are PTP's, there is no federal reporting requirement until. . ." I somewhat disagree as I seem to recall there were frequently some entries from the Schedules K-1 for the PTPs/MLPs that each year settled into such places as Schedule B or Schedule D or Schedule A, regardless of what did/did not show up on page 2 of Schedule E. Those might further complicate the correct answer as relates to the paragraph above.

Of course, the "cash" that the client receives (usually quarterly distributions) that shows up in the monthly brokerage statements, for all intents and purposes, has zilch to do with the preparation of the income tax return. It would behoove you to dig out all of the relevant details of the broker's Forms 1099-B, however. (You may well see similar trading information attached to the individual K-1s.)

It goes without saying that you will need to be sure you have ALL of the relevant K-1s for the partnerships in hand. It's been my experience that some come "automatically" and others might need a visit to the appropriate web site to download the PDF files.

I also did not quite understand that, since there were apparently ten entities involved, and of those "and in a few cases sold" you were able to come up with a reliable loss amount. Just as a reminder, for those PTPs/MLPs that were *not* sold, the only thing you can do with each loss from those is put them into one of Al Gore's lockboxes. You do, of course, have to report all (any?) positive income for each entity on page 2 of Schedule E but such has zero impact on losses from other PTPs/MLPs unless/until a disposition has occurred during 2013.

As I mentioned somewhere recently, you may find it best first to "think" through the answers for page 2 of Schedule E. Once you know the goal, there may be some angst checking/unchecking some of those little boxes along the way for your software to generate the same conclusion. (And the IRS verbiage for proper entry in the passive/nonpassive side of the Sch E page 2 can be . . . confusing. Passive is not always passive, being an example. Review carefully the IRS form/reporting instructions, if needed!)

What a bleeping mess!!! Hope you're not charging "by the form" on this one!!

FE

[mastertaxguy]

Oil Producing States/Multiple PTP's.

An earlier post asked:

"How can there be 38 states but only 10 PTPs? Are you sure you counted them correctly, with no duplications? Even if some of the PTPs operate in multiple states, I didn't think there were 38 oil producing states in the country ... maybe 10 or 12."

From an internet search (gateway was top oil producing states in US):

"Crude oil is produced in 31 states and two offshore federal regions—the Gulf of Mexico and the Pacific Coast. Of those 33 producing areas, 10 supply more than 90% of U.S. output. While 9 of those top 10 areas were also among the top 10 producers five years ago, their relative contributions have changed."

As for the tax issues, get paid, enter the data, don't make it your return, get paid, give to client to file and be sure to get paid. Or, if more than you want to handle, refer TP to someone else.

Be sure you deduct the investment expenses (if any).

[Kram BergGold]

Ptp

I have totally ignored all states on these. It is usually $1 here and $1 there. It would be cheaper for client to pay a penalty in most states than to pay my fee. I have advised clients to invest a minimum of $10,000 in each PTP. Also I have advised them to sell all PTP shares at once. Many brokers sell 25 then 50 then 37 etc. This type of activity drives my fee through the roof, as for each sale I have to adjust the capital gain to account for the ordinary income.

[Burke]

I agree. I usually ignore the non-resident states, depending on the amount required to be reported, as they are often losses and minimal profits, until the PTP is sold. Even if the PTP withheld a few dollars in state tax, it is cheaper to let the NR state have it, than pay a preparer to do the non-resident return with resulting out-of-state tax credits, etc. I will, however, take the state tax withheld as a deduction on Sche A if the TP can itemize. Look at the economic benefit to the taxpayer.

[JohnH]

Thanks for all the helpful replies. I had to lay this aside for a couple of days due to a vision scare (possible detached retina, but it turned out to be less serious than than). I wanted to tell the doc that the vision problem was caused by staring at K-1 forms, but I don't think he would have been amused. Anyhow, I'm blaming the entire vision problem on the broker who sold the client this stuff. That's my story and I'm stickin' to it.

Just as an FYI, my 35 states comment was correct - I went back and rechecked. Maybe that's because one or two the the MLP's were invested in pipeline infrastructure? It's a relief to know that the general practice seems to be ignoring the states with small amounts. Client wants to keep things simple as was not too happy when I suggested this could entail multiple state filings if it continues.

Yesterday the client met with the broker. Later the broker called to say he has halted trading until the client confers with their son, and he plans to "tax loss harvest" before the end of the year. I just told him to keep the client informed & follow their instructions - I'm just the tax scorekeeper. The client asked him to send me a detailed transcript of all transactions year-to-date. Instead, he emailed me a cheesy "quarterly summary" with no transaction detail, which only heightens my suspicion of him even more.

One question I'd like to throw out here. As a general rule, when pulling info from the K-1's, is it reasonable to assume that tax basis in these MLP's is increased by the interest, dividends, royalties, and capital gains, and decreased by capital losses and distributions on Box 19A?

[Kram BergGold]

Sales Schedule

When a PTP is sold there will be a sales schedule in the package. This, the original date of purchase and the cost is all you need. However, on all or almost all of these sales, basis will be reported to IRS. Since the basis reported will not be adjusted for the ins and outs over the years and the ordinary income or loss that is the product of the ins and outs you will need to adjust the basis on Form 8849.

[FEDUKE404]

Explain need for cost basis adjustment

When a PTP is sold there will be a sales schedule in the package. This, the original date of purchase and the cost is all you need. However, on all or almost all of these sales, basis will be reported to IRS. Since the basis reported will not be adjusted for the ins and outs over the years and the ordinary income or loss that is the product of the ins and outs you will need to adjust the basis on Form 8849.

Devil's advocate questions:

1 - Why would there be a cost basis adjustment issue for items which were (hopefully) provided via Schedules K-1 and already reported on prior (and even current?) tax returns during the ownership period via Schedule B, or Schedule D, or Schedule A, or even (perhaps) on Schedule E where allowable? All such numbers would have been shown on the annual Schedule K-1.

2 - Shouldn't the quasi-Form 8582 historical worksheets (each tracking the asset-specific PTP/MLP allowable amounts for annual Schedules E) essentially cover what was/was not allowed? Upon asset disposition, those "final" numbers should be reflected on page 2 of Schedule E as a "true" passive loss/gain, and could well involve amounts that then are allowed to flow to any necessary Form 8582 needed for the taxpayer's current income tax return.

I'm just not understanding how a Schedule D disposition should, in general, need any basis adjustments whenever proper reporting, over the years, of ordinary income and loss and proper calculation of allowable Schedule E numbers during the ownership period and the Schedule E numbers "cleaning the table upon disposition" has occurred.

It's a weak analogy, but compare disposition of a piece of rental property that has had its historical losses (reported on Schedule E) limited by Form 8582. Whenever the Form 8582 "problem" does go away, such as upon disposition, the adjustments specific to previously unallowed losses are essentially handled via the Schedule E bottom line, and not on Schedule D and/or Form 4797.

I must be missing something here . . . I will certainly defer to superior knowledge as others on this board possess . . . and, in the meantime, I fervently hope I never encounter a mess like JohnH currently has.

FE

[Gary2]

Thanks for all the helpful replies. I had to lay this aside for a couple of days due to a vision scare (possible detached retina, but it turned out to be less serious than than).

Lemme guess, detached vitreous humor? Scary, took me longer than the week the ophthalmologist said to go away completely, but it did go away.

Devil's advocate questions:

1 - Why would there be a cost basis adjustment issue for items which were (hopefully) provided via Schedules K-1 and already reported on prior (and even current?) tax returns during the ownership period via Schedule B, or Schedule D, or Schedule A, or even (perhaps) on Schedule E where allowable? All such numbers would have been shown on the annual Schedule K-1.

I interpret this as "Why can't the partnership/broker report the correct basis, since they have all the relevant information?" At least I think they do.

[Burke]

I interpret this as "Why can't the partnership/broker report the correct basis, since they have all the relevant information?" At least I think they do.

What they don't have, is whether the client was unable to take certain losses and which are currently suspended. This would adjust the basis.

[JohnH]

[QUOTE=Gary2;166280]Lemme guess, detached vitreous humor? Scary, took me longer than the week the ophthalmologist said to go away completely, but it did go away.

Exactly right - PVD syndrome.
Very scary, especially since it can't be distinguished form a detached retina except by a professional.
Sure makes one appreciate normal eyesight.

I'm still seeing the world through a faint cobweb in the right eye 5 days out, but as you said it is expected to go away.
(Although one can't completely dismiss the fact that PVD predisposes one to the more serious problem.)

[JohnH]

What I'm struggling with is the fact that MLP income & loss can't be offset against other MLP's or other passive investments.
Each MLP has to stay in its own lane until disposed of.

So part of me wants to ask why wouldn't the broker's statement reflect the actual gain/loss upon disposition?