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taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 627
Experience:  Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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I have a question on Cancellation of Debt through a k-1

Customer Question

Hello. I have a question on Cancellation of Debt through a k-1 statement.
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: A taxpayer had an investment through a partnership that liquidated. That resulted in a COD of over $40K on the K-1 with no cash incoming. It was the partner's portion of the partnership's debt. So an investment of $300K resulted in a return of basically 0 over 10 years. There are lawsuits regarding fraud. I know that there could be a capital loss here but that doesn't help offset the $40K of taxable income.
JA: Is there anything else the Accountant should be aware of?
Customer: I think that is it.
Submitted: 9 months ago.
Category: Tax
Expert:  taxmanrog replied 9 months ago.

Welcome to Just Answer! Thank you for giving me the opportunity to assist you! I will do my best to help!

Unfortunately, this is taxable COD income to the partner. I researched this at length for a client who had invested in a large oil & gas PTP that restructured and had hundreds of millions of COD income that was at the partnership level. The income was allocated to all partners, who had to pick it up as income. COD income at a partnership level for a passive activity is passive income to the partner, even if the debt itself was related to an active business. In most cases, the losses that have occurred over the years have been suspended, so this COD income can be offset by prior suspended losses.

Additionally any suspended losses that exceed the COD income can be allowed as the partnership has been fully disposed of through the liquidation process.

I hope this answers your questions! If you have any more, please feel free to ask, and I will be happy to answer.

Thanks! Have a great weekend!


Expert:  taxmanrog replied 9 months ago.

Hi! I was just following up to see if you have any questions. This question is still on my "open" list because you have not rated me yet. If you were satisfied with my services, please rate me highly. This will not change the fees that you paid, but it will close the question for me.