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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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PARTNERSHIP - MLP Tax Year 2014 Tax Question - Sale of MLP

Customer Question

PARTNERSHIP - MLP Tax Year 2014 Tax Question - Sale of MLP Units ; calulation of Taxable Gain or Loss : A. Ordinary Income - B. Capital Gain or Loss - The following Table is provided by the MLP General Partner showing the appropriate basis of the 1,477
Units sold. NOTE: The calculations in the gain (loss) process are based upon deemed sale calculations using information from December 31, 2014. The section 751 deemed sale calculations do not include depreciation taken in tax year 2015.  Units Sold Sales Proceeds
Purchase Amount Cumulative Adjustments to Basis Total Gain/Loss Ordinary Gain 1,477 49,922.60 26,491.20 -46,263.80 69,695.20 51,412.50 Capital Gain/Loss AMT Adjustment 18,282.70 -2,644.70 1,477 SHS X 33.8 = 49,922.60 Original Purchase Price ( 2012 ) 26,491.20
------------------ Unadjusted Gain 23,431.40 Plus : CUMULATIVE ADJ. To Basis. 46,263.80 ------------------ Toal Gain 69,695.20 ******** Is it fair to say the Cumulative Adjustment to Basis, is the amount the basis was reduced in excess of the original purchase
price amount Plus any increases to the basis? At the beginning of 2014 Tax Year I had an Outside Partnership Tax Basis of Zero: 0.00 Please Note: For all previous years the partnership my outside tax basis had a positive balance. 2014 - Partnership Ordinary
Losses - -11,032.00 2014 - Partnership Ordinary Losses - Net Section 1231 Gain ( Loss ) -113.00 ------------------ 2014 - Total Partnership Loss - -11,145.00 ******** Question: It is expected that the partnership will continue running an ordinary loss, for
the next couple of years, resulting in the outside Partnership tax basis to continue to zero. Therefore is it correct that the 2014 - Total Partnership of Loss is Suspended and can not be used until the Partnership either produces additional Net Income or
I sale the 1,477, units. ******** If I sell the units as shown above, where and how do I off set the Suspended Loss of -11,145.00. ???? Is this the ideal? Ordinary Income = ( 51,412.5 less 11,032.00 ) = 40,380.50 1231 Net Gain = ( 18,282.70 less 113.00 ) =
18,169.70 How do I show this on the tax form? ******** If you will notice on the above schedule, the ordinary gain is 75%, of the total gain of 69,695.20. The capital gain is the remaining 25%. Incredible!!!! I thought the sale of a partnership interest was
a capital gain. They indicated they have adjusted for my share of 751 assets, that would be treated as ordinary income. It could not be that much to produce 75%, as ordinary income??? Could it?? The MLP partnership is in the oil & Gas business which is Capital
intensive. Then I heard something about having to recapture depreciation and treat it as ordinary income. If this true, could you please clarify this recapture as to how this works? Are we talking about 1245 & 1250, depreciation recapture, or some other provision?
Is it fair to say that that the amount of ordinary income as shown above in the amount of $51,412.50, is primarily due to depreciation recapture? Does this mean that my share of 1245 & 1250, assets, that I sold are subject to my share of depreciation recapture.
Any comments on the above mentioned questions is most appreciative!!!!
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
Units Sold Sales Proceeds Purchase Amount Cumulative Adjustments to Basis Total Gain/Loss Ordinary Gain
1,477 49,922.60 26,491.20 46,263.80 69,695.20 51,412.50
Capital Gain / Loss AMT Adjustment
18,282.70 -2,644.70
Customer: replied 1 year ago.
Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Customer: replied 1 year ago.
How long does it take to get an answer?
Expert:  Stephen G. replied 1 year ago.

OK, I've read through your original questions and I will answer them if you still want them analyzed.

I do have one question:

Did you actually sell the 1,477 units & was that your complete interest in the MLP? It appears that is the case, but, you indicated:

Question: It is expected that the partnership will continue running an ordinary loss, for the next couple of years, resulting in the outside Partnership tax basis to continue to zero. AND

If I sell the units as shown above, where and how do I off set the Suspended Loss of -11,145.00. ????

You say "If I sell"

******************

As an aside, I apologize for the delay in responding. I think what the problem was is that with all the background numbers you provided, the data/question looks ominous, so at first glance it looks like something we don't want to deal with.........in the future you might consider just attaching whatever data you have the questions about & it would be easier on you & us in terms of reviewing the information..................

****************

OK, let me run through your questions now.

Expert:  Stephen G. replied 1 year ago.

Is it fair to say the Cumulative Adjustment to Basis, is the amount the basis was reduced in excess of the original purchase price amount Plus any increases to the basis?

Basically Yes, except I would say that the Cumulative Adjustment to Basis is just the "net" amount the basis was reduced. It isn't in excess of the original purchase price, otherwise it would speak to the "Adjusted Basis itself", not the "Cumulative Adjustments".

Expert:  Stephen G. replied 1 year ago.

Question: It is expected that the partnership will continue running an ordinary loss, for the next couple of years, resulting in the outside Partnership tax basis to continue to zero. Therefore is it correct that the 2014 - Total Partnership of Loss is Suspended and can not be used until the Partnership either produces additional Net Income or I sale (sic) the 1,477, units.

Yes, that is correct.

Expert:  Stephen G. replied 1 year ago.

If I sell the units as shown above, where and how do I off set the Suspended Loss of -11,145.00. ???? Is this the ideal?

Any suspended losses at the time of sale would be reflected on a separate line on Schedule E, where you would note that "Prior Suspended Losses of MLP Partnership (Indicate ID #)" - they would be ordinary losses. It should be the ideal given the ordinary income recapture involved.

Expert:  Stephen G. replied 1 year ago.

Ordinary Income = ( 51,412.5 less 11,032.00 ) = 40,380.50 1231 Net Gain = ( 18,282.70 less 113.00 ) = 18,169.70 How do I show this on the tax form?

When the units are sold, the reporting of the transaction begins on Form 4797 and carries through to Page 1 of Form 1040 (reflecting the ordinary income part of the transaction) and to Schedule D and through to Page 1 of Form 1040 also. (It may be necessary to use the Schedule D sub-schedule also, Form 8949). It just depends upon how the transaction is stated when the actual sale is made.

Expert:  Stephen G. replied 1 year ago.

They indicated they have adjusted for my share of 751 assets, that would be treated as ordinary income. It could not be that much to produce 75%, as ordinary income??? Could it??

There would be other factors reflected in the 75% / 25% split besides the 751 adjustments; depreciation recapture, possibly treatment of intangible drilling costs (amortization); hard to say exactly without more information that they never provide.

Expert:  Stephen G. replied 1 year ago.

If this true, could you please clarify this recapture as to how this works? Are we talking about 1245 & 1250, depreciation recapture, or some other provision? Is it fair to say that that the amount of ordinary income as shown above in the amount of $51,412.50, is primarily due to depreciation recapture? Does this mean that my share of 1245 & 1250, assets, that I sold are subject to my share of depreciation recapture.

Depreciation recapture is simply your share of the amount of depreciation previously deducted (probably included in the Suspended Losses) that is "recaptured" when the property (your units) are sold. It is limited by the amount of the gain on disposition. So, basically the answer to all of these questions is "YES, you are correct.

Expert:  Stephen G. replied 1 year ago.

Any comments on the above mentioned questions is most appreciative!!!!

I really don't have any other comments re: oil & gas partnerships; generally what I've found over the years is the benefits that are touted when these deals are sold seldom turn out the way the investor anticipates. It seems that the brokers are usually the ones who come out ahead as their up front commissions are pretty high. 8% is not atypical.

Expert:  Stephen G. replied 1 year ago.

If you still feel that you want to communicate via a phone call, I'd be happy to accommodate you. Just let Customer Service know & we can proceed to do that. If you have any follow-up questions, please ask. If (when) you are satisfied with my response, please remember to rate my response as that is the only way we receive credit for our work.

Thanks for using JustAnswer.com

Steve G.

Expert:  Stephen G. replied 1 year ago.

I see that you have had a chance to see my comments an hour or so ago. Do you have any additional questions?

If not, please remember to rate my response as that is the only way we receive credit for our work.

Customer: replied 1 year ago.
Is there any way I can e - mail you?
I can not get the response in this box.
Customer: replied 1 year ago.
Nov 17, 2015Mr. Stephen G,Thank you very much for your response. It is very helpful!
To answer your question; No! I have not sold the units. I am
just trying to figure out what I am up against if I were to sale the units.
What I am shocked about is the amount of ordinary income That would be taxed
at a higher ordinary rate. You will go broke paying the tax!
That's why I the question I did.
I tried to make the question as legible as possible on your screen.
It would go from a work - sheet type format to a narrative type report
that is hard to understand.
If you get the e - mail, I have attached the original question that might
make it a little more legible.Just to clarify the response :Question 1.
Is it fair to say the Cumulative Adjustment to Basis, is the amount the basis was reduced in excess of the original purchase price amount Plus any increases to the basis?
Basically Yes, except I would say that the Cumulative Adjustment to Basis is just the "net" amount the basis was reduced. It isn't in excess of the original purchase price, otherwise it would speak to the "Adjusted Basis itself", not the "Cumulative Adjustments".
If the MLP continues to have losses, this amount is not necessarily a part
of the Cumulative Adjustment amount? This cumulative Adjustment to basis is a little vague. What ever it is, it increases the total gain from the sale.
Question 2:
Question: It is expected that the partnership will continue running an ordinary loss, for the next couple of years, resulting in the outside Partnership tax basis to continue to zero. Therefore is it correct that the 2014 - Total Partnership of Loss is Suspended and can not be used until the Partnership either produces additional Net Income or I sale (sic) the 1,477, units.
Yes, that is correct.
Since I have no positive tax basis, the loss is suspend. To clarify this
for the past periods when I did a positive tax basis, those losses reduced
my tax basis and they will never be considered suspended losses.
Question 3 :
If I sell the units as shown above, where and how do I off set the Suspended Loss of -11,145.00. ???? Is this the ideal?
Any suspended losses at the time of sale would be reflected on a separate line on Schedule E, where you would note that "Prior Suspended Losses of MLP Partnership (Indicate ID #)" - they would be ordinary losses. It should be the ideal given the ordinary income recapture involved.
This is clear! Meaning both ordinary business losses and 1231 losses retain
their original character .
Question 4 :
rdinary Income = ( 51,412.5 less 11,032.00 ) = 40,380.50 1231 Net Gain = ( 18,282.70 less 113.00 ) = 18,169.70 How do I show this on the tax form?
When the units are sold, the reporting of the transaction begins on Form 4797 and carries through to Page 1 of Form 1040 (reflecting the ordinary income part of the transaction) and to Schedule D and through to Page 1 of Form 1040 also. (It may be necessary to use the Schedule D sub-schedule also, Form 8949). It just depends upon how the transaction is stated when the actual sale is made.
I think I got it. Ordinary losses, Schedule E and Net 1231 Gain 4797.
Question 5:
They indicated they have adjusted for my share of 751 assets, that would be treated as ordinary income. It could not be that much to produce 75%, as ordinary income??? Could it??
There would be other factors reflected in the 75% / 25% split besides the 751 adjustments; depreciation recapture, possibly treatment of intangible drilling costs (amortization); hard to say exactly without more information that they never provide.
I think I got it! This deals with how they split the total gain between ordinary income
and capital gain. I would assume most of it involves recaptureing
expenses of one type or another. I suppose it's determined by tax regulations.
Question 6:
If this true, could you please clarify this recapture as to how this works? Are we talking about 1245 & 1250, depreciation recapture, or some other provision? Is it fair to say that that the amount of ordinary income as shown above in the amount of $51,412.50, is primarily due to depreciation recapture? Does this mean that my share of 1245 & 1250, assets, that I sold are subject to my share of depreciation recapture.
Depreciation recapture is simply your share of the amount of depreciation previously deducted (probably included in the Suspended Losses) that is "recaptured" when the property (your units) are sold. It is limited by the amount of the gain on disposition. So, basically the answer to all of these questions is "YES, you are correct.
Very Clear - Thank You!
Final Comment :
Any comments on the above mentioned questions is most appreciative!!!!
I really don't have any other comments re: oil & gas partnerships; generally what I've found over the years is the benefits that are touted when these deals are sold seldom turn out the way the investor anticipates. It seems that the brokers are usually the ones who come out ahead as
Customer: replied 1 year ago.
ahead as their up front commissions are pretty high. 8% is not atypical.
Your comments have been very helpful!
The MLP has recently merged with another C - Corp. They have talked
about dropping new assets into the MLP. This would help to increase my basis.
Also it would help to start reporting a profit that would increase basis and
use the suspended losses.
It cost too much to sale!Also, one other question. If the MLP had Qualified Non - Recourse liability,
would that amount increase my tax basis for loss deduction?Stephen G - you really helped me on the last conversation we had a couple
months back! It got me out of potential trouble.
Any final comments, I would appreciate!
I hope the attached W/S is legible!
No Hurry.
Customer: replied 1 year ago.
I am unable to send the attached W/s.
Expert:  Stephen G. replied 1 year ago.

Sorry for the delay in responding, I was off yesterday (Wednesday); I'll go over your responses in detail within the hour; let's say by 12:30 PM today (Thursday). I don't need the W/S, I was able to determine what your questions were & I'll address your follow-ups shortly. No need for the worksheet. I was just pointing out that your original question seemed "ominous" at first, but once I broke it apart it was fine & the questions were logical. Unless you have a few hundred thousand $ to invest in Oil & Gas Partnerships, I would not recommend investing in these deals for a variety of reasons; to spread the risk & the Private Placements are much better alternatives with negotiable commissions; I've visited some of these operations & if you saw what some of them entailed, particularly out in the hills of Appalachia or the Wilds of West Texas or even Oklahoma you would be amazed. More soon.

Steve G.

Expert:  Stephen G. replied 1 year ago.

As far as your question re emailing me............JustAnswer.com doesn't allow us to contact each other directly unless we are in the "additional services" mode which allows direct phone contact. If you wish to do that at some point, you can ask Customer Service & they will contact me with your request which I honor for regular customers only, as you are. Now to your follow-up questions:

If the MLP continues to have losses, this amount is not necessarily a part of the Cumulative Adjustment amount?

I think we are just dealing with semantics here. The "Cumulative adjustments to basis" deals with the "net" adjustments, not the excess of anything. The "Adjusted Basis" would include the "Original Basis" plus or minus the "Cumulative Adjustments to Basis". Of course, the "Outside Basis" doesn't normally go below zero (unless their were distributions in excess of passed through income); but let's not get into more than is relevant to your original question. I only mention that because once some investors grasp that their "Outside Basis" doesn't (normally) go below zero, they don't realize that it is in fact possible for that to happen.

Expert:  Stephen G. replied 1 year ago.

To clarify this for the past periods when I did a positive tax basis, those losses reduced my tax basis and they will never be considered suspended losses.

That is correct, if the losses were properly used to offset ordinary income in prior periods, it is correct that they would never be considered "Suspended Losses".

Expert:  Stephen G. replied 1 year ago.

This deals with how they split the total gain between ordinary income and capital gain. I would assume most of it involves recaptureing expenses of one type or another. I suppose it's determined by tax regulations.

Yes that is correct. There may not specific regulations for each offset; however there would really be no other way to treat these items.

Expert:  Stephen G. replied 1 year ago.

Also, one other question. If the MLP had Qualified Non - Recourse liability, would that amount increase my tax basis for loss deduction?

No. Non-Recourse liabilities doesn't increase your basis as it is just what it says, it is NON-RECOURSE obviously meaning you aren't responsible to making good on these liabilities in case of default. Some people ask, is there an understandable example of a "Non-Recourse Liability?". The best example I can think of, (which has had a great deal of relevance over the past 10 years, actually) is that in California if you have a mortgage on your principal residence, and are unable to make the payments, the loan itself is "Non-Recourse" as to your personal obligations in excess of your home. Since there was a steep decline in the Fair Market Value of real property in California, there were many, many properties "under water" and in those cases, in California, the mortgagors are not personally liable for the unpaid loans in excess of the realized value of the foreclosed homes.

Expert:  Stephen G. replied 1 year ago.

Stephen G - you really helped me on the last conversation we had a couple months back! It got me out of potential trouble.

Thanks for the "pat on the back". Everyone needs one of those once in awhile! I really don't have any additional comments beyond the ones already made. Thanks again for using JustAnswer.com & please remember to rate my response as that is the only way we receive credit for our work. It has been a pleasure working with you & if I can assist in the future don't hesitate to ask for me; just ask for "Steve G" at the beginning of your tax or financial questions....................Steve G.

Expert:  Stephen G. replied 1 year ago.

Just checking in..........are you having a problem with the rating system? If so let me know & just indicate your rating in words here, OK, Good or Excellent. Otherwise, please remember to rate my response as that is the only way we receive credit for our work.

Thanks again for using JustAnswer.com

Steve G.