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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I was wondering what happens if I'm short an MLP. Do I

Customer Question

I was wondering what happens if I'm short an MLP. Do I still get a K-1 at the end of the year with a bunch of negative numbers in it for any distributions that were made? As a related question, if I'm long an MLP and my broker lends out my shares, do I receive a K-1 for those shares or does the guy that the short seller sold them to get "my" K-1?
Submitted: 8 months ago.
Category: Tax
Expert:  Lev replied 8 months ago.

You would only receive K1 if you a current partner - means you OWN units in MPL.
If you short on MPL units - you would not receive K1 for that period.

Customer: replied 8 months ago.
what happens if I'm long and my broker lends out my shares for someone to sell short? Do I still get a K-1 or does the guy that bought them from the short seller get "my" K-1? If he does, what do I get? If he doesn't, then what does he get?
Expert:  Lev replied 8 months ago.

If you are taking a long position - you are listed as an owner of the partnership interest (partner) and regardless if you lend that interest to someone - you are still the owner - and you will be getting K1 for the time you are listed as an owner.

Only the owner (partner) will get K1 statement.

Customer: replied 8 months ago.
what happens to the guy who bought them from the short seller? He's an owner too... In fact, when I bought the shares I could have bought them from a short seller. Which one of us owns the shares? It can't be both of us because that would be more shares than actually exist.
Expert:  Lev replied 8 months ago.

When the SAME units (which are representing the ownership interest in the partnership) are SOLD - the ownership is charged - and the person who purchased them - becomes the owner from THAT date.
You would be only listed as an owner up to the date the unit is sold.

Customer: replied 8 months ago.
you're saying that if I buy these shares and my broker lends them to someone to sell short and he does sell them short, the person that bought them from him is now the owner. So that new owner now gets the K-1? What do I get? Nothing?
Customer: replied 8 months ago.
As an example, say there's a publicly traded MLP that only has 1 share. Person A owns it. He lends it to person B who short sells it to person C. So A and C are long, B is short. Does A or C get a K-1? And what does the other guy get?
Expert:  Lev replied 8 months ago.

The issue is that the partnership is keeping a record of partners and issue K1 to each partner based on the ownership percentage and length that person or an entity was a partner.
The partnership in MLP is measured in units - whoever owns the units - that is a partner.
Thus - when you owned the unit - you was a partner - and when the same unit is SOLD - you do not own it anymore - and there is a different owner.
So - you will receive K1 for the time you owned the unit, and another buyer will receive K1 for the time he owns that unit.

That is based on ownership report that the MLP keeps.

Customer: replied 8 months ago.
OK, so if I'm reading this right, when my shares are lent out to someone to sell them short, the person who buys those is now the owner of the shares. Say he owns them for the whole tax year to keep it simple. How do I then receive distributions from the company? And how do I report income and losses from the partnership if I don't get a K-1?
Expert:  Lev replied 8 months ago.

We are talking about units - correct?
These units represent the ownership.
The ownership is reported by the MLP.
Distributions are made during the tax year based on the ownership records on specified days - so whoever owned THAT unit on that specific day - receives distribution and K1.

If you are not an owner of the record of the MLP - you would not receive any distribution and would not receive K1 - while you might have the ownership recorded with your broker.

The critical point is that each unit has assigned the ownership recorded by the MLP - and that is used for distributions and K1.

Customer: replied 8 months ago.
In my 3 person example - who is the owner of the shares? It sounds like you're saying that person C is the owner of record. Is that correct? But both persons A and C are long, they're both going to get a distribution when one is made. Only one of them is going to be the holder of record as far as the company is concerned though and so he's going to get that distribution on his K-1. What does the other guy get?
Expert:  Lev replied 8 months ago.

In your example
person A owns the unit.
then person A lend the unit to person B - but for MLP records - the person A is still an owner.
Then person B sold the unit to the person C - on THAT date the ownership was changed and must be recorded with MLP.
So - before that sale date - person A was an owner of records, and after that sale date - the person C becomes the owner of records.
Thus - for distributions before the sale date - they would be issued to the person A, and for distributions after the sale date - to the person C.

If the sale date is in the middle of the year - it is possible that both - person A and person C would receive K1 statements.

Customer: replied 8 months ago.
Say person B sold them to person C more than a year ago. So person C gets the K-1 from the company. What does person A get? How does he report the distribution he got? How does person B report the distribution he paid to A?
Customer: replied 8 months ago.
A has to get something - he's still long and still entitled to receive distributions
Expert:  Lev replied 8 months ago.

Regarding distributions...

Distributions and K1 reporting are done by the MLP and based on their ownership records.

If the sale is RECORDED by the MLP and the person C is the owner of the records - that person will have all distribution and all K1 reporting.

Regarding reporting the sale transaction - that is a different issue

Person A still is the owner according to the broker and the sale is not reported to the IRS.

But the person B sold the unit - and that is reported to the IRS - so the person B will need to report the sale transaction on the tax return.

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