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I own stock in Liinn energy in the form of a K-1

Customer Question

I own stock in Liinn energy in the form of a K-1 Partnership. The stock is only worth about $600. I received from Linn a Schedule K-1 (Form 1065). When I add the information on this form I have to add information in box 11. The code is E in box 11 and the amount is $17546. This translates to $17546 income , which I never received, and I have to pay about $4000 additional income tax. Can you help.
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

A partnership is a flow-through entity. It means that the profit is not taxed as partnership income but it flow through the K1 to partners. Partnership return is only informational return, partnership never pay taxes.

The amount in box 11 with code E is actually not partnership profit or income, it is canceled debt. It means that the partnership didn't pay some of its obligations (credit card, mortgage, and such) and the financial institution cancelled the remaining debt. Because the partnership cannot claim the canceled debt as income, it flow trough the K1 to be reported on the partner's returns instead.

Unless you were insolvent at the time the debt was canceled (your total asset was less than your total liability), you will have to include it in your income.