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I made an investment in an Oil & Gas partnership in 2012…

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I made an investment...

I made an investment in an Oil & Gas partnership in 2012 through a personal self-directed IRA account for $12,500. It did not pay off and went under and I just received a Schedule K-1 for 2017 showing a net long-term capital loss for $12,036. Should it be listed on a Schedule D as such for the full amount (and list it on Line 13 of my 1040) or was I supposed to allocate over the 5 years. I never received any distributions or reported any loss in any prior year.

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

Not that I can think of

Submitted: 3 months ago.Category: Tax
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3/31/2018
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago
Cole Parker
Cole Parker, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 113
Experience: Certified Public Accountant
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Hello, my name is***** have reviewed your question.

The long-term capital loss will flow onto Schedule D but you are limited to a net capital loss of $3,000 per year until used up.

Does this make sense? If not, please let me know and I'd be happy to provide further insight! :-)

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Customer reply replied 3 months ago
that makes sense; my only other question is whether it's treated any differently since it was invested through an IRA? Thanks
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

Was the IRA the partner or was it you?

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Customer reply replied 3 months ago
The IRA was in my name personally
Customer reply replied 3 months ago
The IRA was in my name personally.
Customer reply replied 3 months ago
IRA is in my name personally
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago
Ok, let me paraphrase to make sure I’m following...
you took a $12,500 distribution out of your personal IRA, then invested in an oil and gas company and now the investment is not paying off and the K1 is showing a LT capital loss.
If all the information I have paraphrased is accurate, then the IRA should have no effect.
However, I do have one more question, does the K1 show your social security number?
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Customer reply replied 3 months ago
Actually the principals of the LLC invested in were sued and litigated and page 2 of the K-1 indicates it is now an "uncollectible receivable" (they did not have any viable assets) and my complete investment (except $463) is listed as a loss ("Tax Basis"). It shows the Partnership's EIN in Part 1 and my SSN in Part II. Part III shows the remaining amount of $12,036 as a Net Long-Term Capital Loss in box 9a.
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

Ahhh, I see! What I believe you have now (without verifying) is a worthless security/investment.

The deduction for a worthless security must be claimed in the tax year in which the securities are deemed to have become completely worthless. As the taxpayer, you are responsible for making this determination. To help you determine worthlessness-- results from an identifiable event, such as bankruptcy, liquidation, or termination of business activities.

I have located the following in my Quickfinder Handbook that should help you... "Stock losses from the sale or worthlessness of small business stock are ordinary losses up to $50,000 ($100,000 MFJ) (per year) and are not subject to capital loss limits ($3,000/$1,500 per year). The ordinary loss is claimed on Part II of Form 4797. This applies to individuals or partnerships."

Does this make some sense? :-)

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Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

Take a look at the attachment also...

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Customer reply replied 3 months ago
Thanks, ***** ***** to make sense under the facts as presented and thus would indicate I need to take the full amount of the loss for tax year 2017 by filing Form 4797 with my 1040 form, correct? Thanks.
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

That is correct! I believe that given your circumstances you should be able to claim the loss.

Is there anything else that I can help clarify...?

Also, may I ask you to please rate my service at the top of your screen...? I'd so greatly appreciate it!

I'll still be hanging around if you need or have further questions...

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Customer reply replied 3 months ago
Appreciate it,thanks.
Customer reply replied 3 months ago
Appreciate it, thanks.
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

No worries! I hope you have a super week!

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Customer reply replied 3 months ago
You've been a great help, but one last question after reading the attachment you provided (too much information is a dangerous thing) - if I need to file the 4797 with my return, that is in lieu of the Schedule D (i.e., it is not being treated as a Long-Term Capital Loss subject to the annual limit, but as an outright loss), correct?
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

Before I solidify my answer, was the K-1 marked as final and you sold your interest back for $0....?

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Customer reply replied 3 months ago
No it was marked "uncollectible receivable", but I have not sold back my interest (not given an opportunity to do so.
Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

If a partnership interest becomes worthless, a sale may not be possible. The partner must then determine the year abandonment or worthlessness should be reported and the nature of any loss allowed. An abandonment loss should be claimed in the year of (1) an affirmative intent to abandon the partnership interest; (2) an affirmative act of abandonment; and (3) both the intent and the affirmative act of abandonment were made apparent to interested parties.

The character of a loss incurred on the abandonment or worthlessness of a partnership interest is determined by applying Rev. Rul. 93-80. Ordinary loss treatment applies if the partner receives nothing in exchange for his or her partnership interest and is not relieved of any allocable partnership liabilities.

The abandonment or worthlessness of a partnership interest may give rise to a loss deductible under section 165(a) of the IRC. Whether a loss from the abandonment or worthlessness of a partnership interest is capital or ordinary depends on whether or not the loss results from the sale or exchange of a capital asset.

So... depending on how much you now about the LP, may help you to determine if your loss is ordinary or capital. I'm still leaning to ordinary, but that decision has to be made by you, the taxpayer, and you have to be able to show that it was worthless if ever questioned.

Once you feel comfortable with your conclusion, you will then report as necessary on the forms. To answer your question about Sch D and Form 4797-- when you use 4797, it should actually flow from the 4797 (if used) to the Sch D, but I'm going to double check that just to make certain for you.

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Tax Professional: Cole Parker, Certified Public Accountant (CPA) replied 3 months ago

Sorry that took so long. The 4797 can be used in conjunction with the Schedule D or the 4797 goes directly to Line 14 on the 1040. Of course if it hits Schedule D, it is then treated as a capital gain/loss.

I hope all this is making sense.

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