MLP/PTP Issues - Again

[JON]

Adjusting basis and sale

You will get your "tax basis" on the PTP K-1s and it will be below the purchase price. The two things you have to adjust for (and there can be more than 2) is the ordinary recapture of intangibles and or depletion - goes to the 4797 and for sure any cash distributions you received while holding the PTP. You should reconcile the tax basis on the K-1 to the cost basis so you know, but I have never seen the tax basis on the sale match your purchase price unless it was a mistake and and was sold back immediately. I have never seen a PTP that does not pay out cash distributions. The PTPs are now very good at giving you the information on thr ordinary recaptures.

The states are a gaming process. The PTP's own wells in a bunch of states - all loses are passive and on sale can get a larger amount of recapture in 4797 and passive loss carryforward used on E. I have not filed in nonresident states, but I am awaiting letters on a couple and would be a task to go back to show loses carried forward and income on sales matching out. I think at some point I will be asked to do so. Some of the investments are big enough to may have a couple states end up with a few dollars.

[kamckinley]

State filing requirements revisited

I know this thread is a few months old, but it's very relevant to a situation I'm dealing with now, so thought it prudent to continue this thread rather than starting a new one.

I have a client with a PTP that was disposed of in 2014. Total gain was about $315 on the disposition. The sales schedule shows 11 states that the gain should be apportioned to, however, based on the percentages provided, only 4 states would have income of more than $5.

California has the highest amount of apportioned income at $40. When reviewing the CA non resident filing requirements, a nonresident must file if they have CA source income (which the gain on the sale of the PTP is, correct?) and if their income from all sources is greater than the amount based on the chart (ex: mfj under age 65 with more than $32,097). This client definitely has more income than the amount required to file.

So... the question is would you file a CA tax return in this example? Client's tax liability is likely to be around $4 in this example. For the remaining 3 states, likely no tax liability due to the small percentage apportioned to those states.

Just trying to get a better understanding of whether the state returns need to be filed or not, and if it is pragmatic to do so. Do you make the decision yourself or do you let the client decide?

Thanks for any insight on this!

[kamckinley]

Just reviewed the filing requirements for nonresidents in each state and all have a minimum amount of income that would be required to file EXCEPT for California and North Dakota. Both states require nonresidents to file if they have ANY state source income, regardless of the amount.

Back to my client, the source income would be $40 for CA and $7 for ND. Would you file the state returns or not?

Thanks again!

[DonB]

The broker statement 1099-B basis is not correct for PTPs. When sold, the PTP will provide a Sales Worksheet as Kram mentioned. A part of the gain / loss will be ordinary income and the basis for capital gain is adjusted. I have a MLP of my own that was merged and I have 37 states reported. I will ignore them. I have only seen a couple of clients with this and asked them if they wanted to file state returns. They said no.

[Lion]

It's my clients' decision. (Well, except for states I already file due to residency &/or earned income/commuters; I don't give clients a choice on those.) Very, very few have ever told me to file in far flung states with income a bit more than the filing requirements or with losses that could carryover. Compared to my prep fees for foreign states and the extra time they would wait for completed returns, few want to add more state returns.

[DonB]

Just trying to get a better understanding of whether the state returns need to be filed or not, and if it is pragmatic to do so. Do you make the decision yourself or do you let the client decide?

Thanks for any insight on this!

I let the client decide. IMO it would be ridiculous to file such a return.