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IRS Tax Question: Client sold 2 PTPs in 2017, but their

IRS Tax Question: Client sold 2...
IRS Tax Question:
Client sold 2 PTPs in 2017, but their prior year taxes don't have an 8582 and they don't have all the K-1s that show losses on the PTPs never taken that I believe they can take the year of sale. This is for Oneok and Enterprise (available on tax package support).
1. The client can take all these suspended losses at the year of sale, correct?
2. Are these losses treated as ordinary?
3. What's the best way to do this calculation to determine the loss? The client is having a hard time getting K-1s going back to 2008 and it's not on the tax return.
Please provide ample IRS references.Thanks!
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Answered in 1 hour by:
6/24/2018
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,486
Experience: Former IRS Revenue Agent
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Welcome. I am reviewing your question and will respond soon. Fiona Chen, CPA, MPA, Ph.D., ABV, CFF, CITP, IMTA, Former IRS Revenue Agent

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Customer reply replied 1 month ago
Awesome. Thank you!

Dear Customer,

1. This belongs to the passive activity loss rule.

When we click the final K-1, the software should automatically calculate all the carry over loss into the K-1 to first page of 1040 under line 17.

"Disposition of Entire Interest

  • Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity."
  • https://www.irs.gov/taxtopics/tc425
  • 2) Sorry about the format. I have to use the bullets now since it was the last format used here.
  • For the K-1 you cannot find, there are two ways to locate them. One if you trust the last K-1, it has the adjustments we need to make on the Schedule D for the sale, you can use that amounts of adjustment to the basis, the purchase price. But personally I feel less comfortable about his approach. We almost have to compare the K-1 to tax return for each year to get to the final numbers to use.
  • If the disallowed loss is regular income/loss, Form 1065, K-1, Part III, line 1, when now your client takes the whole amount of loss, it is regular loss.
  • The other way to locate the K-1 is to ask the IRS to give you the wage and income transcript for each year. 2008 may still be available before 2018 shows up. The income and wage transcript should have all the W-2, 1099 and K-1s.
  • Also, you can call the partnership accounting department, they may be able to regenerate K-1s for all the back years for your client.
  • Regards, Fiona
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Customer reply replied 1 month ago
Thanks!

p.s. Law source.

https://www.law.cornell.edu/uscode/text/26/469

26 U.S. Code § 469 - Passive activity losses and credits limited

"(g) Dispositions of entire interest in passive activityIf during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply: (1) Fully taxable transaction

(A) In generalIf all gain or loss realized on such disposition is recognized, the excess of—(i)

any loss from such activity for such taxable year (determined after the application of subsection (b)), over

(ii)

any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),

shall be treated as a loss which is not from a passive activity."

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Customer reply replied 1 month ago
The wage and income transcript won’t tell me if any sold, but will give a loss amount. Do you think this is sufficient?

Dear Customer,

If it is a final K-1, the income and wage transcript of the K-1 should have marked final k-1. -- I think.

What proof you will need to show that the loss was carried forward and not taken in certain years. So, we need to compare to the tax returns.

Regards,

Fiona

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Customer reply replied 1 month ago
The problem is like with enterprise they sold some and bought some during these years. Were they then supposed to take some of the prior year suspended losses?
Customer reply replied 1 month ago
I’m trying to make sure not to double dip

Dear Customer,

The clue is how good their prior accountant is.

Each final K-1 should have a statement to show us how to adjust from the final sales basis. That K-1 is tailored only to the shares sold. This amount usually is likely to be correct to trace the previous distributions taken and not the loss not taken.

However, we really don't know how the prior accountant or the software has carried forward the loss or whether the losses have been taken on the tax return previously against some of the passive gain.

So, we have to trace back and do the analysis to the best as we can. That is not only we need this partnership's K-1, we need all of them including the tax return.

The rule is if we cannot find the basis -- or losses carried forward untaken -- we have to assume there is none.

Your posting's point is maybe we cannot go back to 2008 but only to the last shares sold.

Well, we will have to trace each pool of shares bought and sold from the beginning -- 2008? until now.

Can you contact the prior accountant to see whether the person can generate you the K-1 carry over amounts throughout the years? A good accountant or a good software should have printed all the K-1 related schedules out and attach them to the tax returns.

Regards,

Fiona

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Customer reply replied 1 month ago
The prior accountant died

Dear Customer,

What a punch line. This is the fear of any similarly situated accountant. Should I choose to work until I die.

Can you find his software and colleagues?

Well, we can only do the best as we can. If there is no prior Form 8582, and the tax returns are prepared by hand or typed and not by software, there is a more likely possibility which is that all the losses have been taken.

We can test by the previous, say several years of wage and income transcripts and compare how those K-1s are treated on the tax returns and see how we may derive at the conclusion on how the losses were treated.

Regards,

Fiona

Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,486
Experience: Former IRS Revenue Agent
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