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Richard
Richard, Tax Attorney
Category: Tax
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Experience:  29 years of experience as a tax, real estate, and business attorney.
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How do you report IRC section 731a partnership income

Customer Question

How do you report IRC section 731a partnership income?
Submitted: 3 years ago via Cornell Legal Info Institute.
Category: Tax
Expert:  Richard replied 3 years ago.

Good afternoon. This will be reported on Form 1065 ...which is an information return the partnership files and then each partner is issued a K-1 indicating each partner's allocable share of each Partnership item. The K-1 will specify for each item where to report this item on your Form 1040 or one of its accompanying schedules.

 

 

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The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.

Customer: replied 3 years ago.
I have owned Kinder Morgan Energy LP for several years. This year my ending capital account went negative. My beginning capital account was + 2,546. I received 1,728 in distributions and Kinder adjusted my capital account by -1,938. My ending capital account is negative 1,120. They say to contact a tax specialist on how to report my IRC section 731a income because of my negative capital account. My K-1 gives no other information about this. Thank you.
Expert:  Richard replied 3 years ago.
Does the LP have any non-recourse indebtedness?
Customer: replied 3 years ago.
The only information I have is my K-1 part 2 section K Partners share of liabilities at year end. The three lines Nonrecourse, Qualified nonrecourse financing, and Recourse are all blank as they have been for all K-1s I have recieved since 2005. I hope this answers your question.
Expert:  Richard replied 3 years ago.
You need do nothing special other than taking the K-1 amounts and putting them where indicated on your 1040. If you were not entitled to the loss due to it lacking substantial economic effect, that would take place at the partnership level. If capital accounts are being kept as they should be, at some point you will be allocated income equal to the negative capital account, but that will be done at the partnership level.
Customer: replied 3 years ago.
I am confused ! Here is what the information I received with my K-1 says " Unitholders receiving distributions that exceed the adjusted basis of their partnership interest must recognize gain under IRC section 731a. Gain or loss recognized under Section 731a is a capital gain and should be reported on form 1040, schedule D. You may have to recognize 731a gain if your capital account on your K-1 is negative (mine is). Please consult your personal tax advisor for the appropriate tax treatment and calculation of these capital gains."
Expert:  Richard replied 3 years ago.

Wow! Typically, what happens is they give the distributions and reduce the capital accounts; then they allocate loss after those adjustments so they don't allocate loss that would take you negative. But, this actually works in your favor because you get to take the ordinary loss and get capital gain treatment on your gain. Since they have done it this way..report the negative basis amount on Schedule D. But, if you do this, you will then need to request that the partnership make a Section 754 election so that your outside basis equals your inside basis.

Customer: replied 3 years ago.
 This question deals with taxes of a limited partner in partnerships such as KMP,ETP, etc that are listed on the NYSE. The information I received with my K-1states "unitholders receiving distributions that exceed the adjusted basis of their partnership interest must recognize gain under IRC section 731a. Gain or loss recognized under Section 731a is a capital gain and should be reported on Form 1040, schedule D. You may have to recognize 731a gain if the capital account on your schedule K-1 is negative. Please consult your personal tax advisor for the appropriate tax treatment and calculation of these capital gains."  My schedule K-1 reports a negative ending capital account (part 2 line L). How do I calculate and report these capital gains?

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