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John D. Thomason  

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  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, WmHilger1,

    Thanks much for the kind words. As always when I put out an article, I learned a few things as well from reader's comments. Right now I'm swamped with other endeavors, but later on I plan to follow up on some of the questions raised by readers, one being transfers of MLP units from an IRA to a regular account. I was surprised this was even possible. Incidentally, what I'm swamped with is studying for an IRS Certification exam. I have as my goal to continue to advance as a tax preparer, focusing on investment topics. As I continue to read and study, in the back of my mind, I'm thinking "if I ever really understand this stuff, I hope to heck I can explain it better than what I'm reading". The jury is still out, but be advised I am working on it, we'll see if I can live up to that goal.

    Thanks again.

    John D. Thomason
    Jul 29, 2015. 09:23 PM | 1 Like Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    No. When distributions are received and basis is zero, they are considered capital gains, as you note. There is no further impact from the distributions thus reported.

    John D. Thomason
    Jul 28, 2015. 10:57 PM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, usiah,

    I'm not sure this would even be allowed, and the only part I am pretty sure of is it would be a taxable distribution from the IRA, subject to penalty if no exception applies, such as participant over age 59 1/2. I can only guess that it would be valued as of the closing price on the transfer date. Considering all that goes into determining basis for an MLP in a taxable account, I cannot fathom how such a transfer would be treated once in the regular account. I would be surprised that an IRA custodian would make such a transfer, I would think the MLP units would have to be sold inside the IRA, and then the proceeds withdrawn or transferred as cash. If the custodian makes such a transfer, I would say look to them for direction on how to handle it. Sorry, I'm not much help here - this situation is definitely not covered any "MLP Owner's Manual" that I have seen. Maybe someone in the SA readership can provide information.

    John D Thomason
    Jun 10, 2015. 05:29 PM | 1 Like Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, jaymarx,

    Determining when basis has gone to zero and thus reporting distributions in excess of basis is best facilitated by the partner calculating basis annually from the K-1 instead of depending on the partnership's sales schedule. That way, the partner will be aware when basis has declined enough to make distributions potentially reportable. See the article section on sequencing of adjustments to basis. Following those steps, one will see what the basis is just before considering the year's distributions' adjustment to basis, and thus the extent that distributions for that year exceeds basis can be determined.

    John D. Thomason
    Jun 10, 2015. 09:06 AM | 1 Like Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, gup1936,

    I'm not sure what you're asking, but both passive and non-passive income, losses, and expenses affect basis as they occur each year, as indicated on the K-1 Part 3 boxes 1 through 20. As far as net passive losses are concerned, they are suspended, and are not reported currently on Schedule E / Form 4797, but they do reduce basis. That is, the fact that the losses are suspended from being reported currently does not mean they don't reduce basis as they occur.

    John D. Thomason
    May 24, 2015. 09:41 PM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, GD,

    I had written an article on this topic that came out at about the same time as the Reel Ken article referenced above. Go to my list of articles at my SA Profile to see it. My initial view, as expressed in my article, was that for small investors, the likelihood of exceeding $1000 of UBTI in an IRA was minimal, and worth the risk. While I still more or less subscribe to that view, after digesting (as best I could) Reel Ken's article and the many comments, I later updated my article via Seeking Alpha's corrections policy to reference the Reel Ken article, and conceded that he made a valid point. The key issue is whether or not the sale of MLP units inside an IRA could trigger a significant release of UBTI, which could put even a small investor over the $1000 threshhold. I believe it could, but in is unclear just how this would become known to the IRS. Presently, the UBTI reported in K-1 Box 20 Code V only seems to be UBTI from continuing operations, which would be unlikely to exceed $1000 for a small investor. It seems to me that at this time, UBTI generated by a sale of units, if indeed UBTI is generated by the sale event, is not being reported on the K-1, nor elsewhere, to either the partner nor the IRS. But I cannot say that this will not be the case in the future - in fact, I cannot say with certainty that it is not available to the IRS currently, being at least derivable from the sales schedule. The IRS is on an ongoing quest to increase accountability and tax collections from all sources, especially investors, as evidenced by the introduction of Form 8949 and new basis reporting requirements, beginning in 2011. It is entirely possible that Reel Ken's view is correct, that sale of units inside an IRA should result in significant UBTI being generated, and that this will be required to be reported explicitly in the future to the partner and the IRS when units are sold, probably on the K-1. Also, right now, reporting sales of MLP units properly in regular (non-IRA) accounts, including the ordinary income component from depreciation recapture, is frequently mishandled, especially by small investors attempting to do their own taxes. The IRS may someday tighten up reporting and enforcement significantly for PTPs, both in IRAs and regular accounts, with much better integration between the partnerships and brokerages being required to properly report basis and income resulting from sales. Holders of significant positions in MLPs in IRAs are betting this won't happen. My view of this is like everything else related to investing - anything is possible! One cannot count on the future always being just like the past - things can change.

    John D Thomason
    May 23, 2015. 11:41 AM | 1 Like Like |Link to Comment
  • Stocks, Options, Taxes: Part III - Capital Gains And Losses - Basics [View article]
    Hi, KCN,

    I finally came out with an article on MLPs and K-1s. I have come a long way as a tax preparer in the past two years. I had not seen any comment from you on the new article, but be assured your encouragement was a factor in motivating me to write it!

    John D. Thomason
    May 18, 2015. 11:44 PM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Yes, the prospectus verbiage which states "we anticipate accruing and making the guaranteed payment distributions monthly." says it all - the payments are only guaranteed to be paid if all goes well. Elsewhere, it is clearly stated that the preferreds are senior to the regular partnership units but are subordinate to debt holders. But to answer the basic question Grant18m had, it is clear from the prospectus that the income from the preferreds is not like partner distributions, but rather is reportable immediately as ordinary income, and does not reduce basis, and that upon sale of the preferreds, there would be no ordinary income from recapture of depreciation, amortization, or depletion. Just getting confirmation of those particulars from the prospectus provides some relief from anxiety of how to handle from a tax perspective.

    John D Thomason
    May 17, 2015. 09:42 PM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, marooned,

    Distributions are not normally reported; they reduce basis, and thus a recovery of sorts occurs when you sell, since you will have a larger gain to report at that time. An exception to the preceding is if the units have been held for some time and basis goes to zero, any distributions in excess of basis are reported, as capital gains. The "informational filing" characterization of the K-1 is incorrect. Any "portfolio income" items are reported immediately on the tax return. An example would be interest from Box 5 of the K-1, or dividends from boxes 6a and / or 6b. Net positive passive income is reportable currently as well. I lay all this out in the article in the best English I can muster. I suggest you present the article to your tax preparer, and if he says he doesn't understand it, find a new tax preparer.

    John D Thomason
    May 17, 2015. 09:21 PM | 1 Like Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Only if the payment was for services. The payment is for capital. I really don't agree with the position that the LLC has taken, treating the preferred holder as a limited partner and reporting what is essentially preferred stock dividends as "guaranteed payments", but as long as the recipient treats the monies received as ordinary, taxable income, I don't see any problem for the recipient.

    This is definitely an odd situation.

    John D Thomason
    May 15, 2015. 11:58 AM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Update on Situation Brought Up by Grant18m,

    After receiving some info from reader Grant18m, I was able to find out more about this case, and I responded to him separately. In the interest of sharing knowledge gained to all, here is what was learned:

    The MLP is an LLC that has selected partnership taxation, VNR. The LLC has preferreds associated with it, VNRPB. After Grant18m shared this info, I was able to go to my favorite resource for preferreds, Quantumonline, an excellent resource for preferreds:

    http://bit.ly/T5zbpY

    The VNRBP has the info on tax treatment in the prospectus, which Quantum provides a link to. To get there:

    Once at the Quantum Home Page, Type in VNR, then select “Find All related Securities for VNR”, then select VNRBP.

    The Description has the following statement imbedded:

    “Holders of Series B Preferred Units will receive specific tax information from the company, including a Schedule K-1 which generally would be expected to provide a single income item equal to the preferred return.”

    Then below the description, click on “Link to IPO Prospectus”

    Deep down in that document, there is a section on Tax Treatment for the Series B Preferreds, which sheds some light on what the holders can expect:

    “Treatment of distributions on our Series B Preferred Units as guaranteed payments for the use of capital creates a different tax treatment for the holders of our Series B Preferred Units than the holders of our common units.

    The tax treatment of distributions on our Series B Preferred Units is uncertain. We will treat the holders of Series B Preferred Units as partners for tax purposes and will treat distributions on the Series B Preferred Units as guaranteed payments for the use of capital that will generally be taxable to the holders of Series B Preferred Units as ordinary income. Although a holder of Series B Preferred Units could recognize taxable income from the accrual of such a guaranteed payment even in the absence of a contemporaneous distribution, we anticipate accruing and making the guaranteed payment distributions monthly. Otherwise, the holders of Series B Preferred Units are generally not anticipated to share in our items of income, gain, loss or deduction. Nor will we allocate any share of our nonrecourse liabilities to the holders of Series B Preferred Units. If the Series B Preferred Units were treated as indebtedness for tax purposes, rather than as guaranteed payments for the use of capital, distributions likely would be treated as payments of interest by us to the holders of Series B Preferred Units.

    A holder of Series B Preferred Units will be required to recognize gain or loss on a sale of units equal to the difference between the unitholder’s amount realized and tax basis in the units sold. The amount realized generally will equal the sum of the cash and the fair market value of other property such holder receives in exchange for such Series B Preferred Units. Subject to general rules requiring a blended basis among multiple partnership interests, [JT Note: I believe this means as long as no regular units in the LLC are owned, the basis of the Preferreds does not change. End JT Note] the tax basis of a Series B Preferred Unit will generally be equal to the sum of the cash and the fair market value of other property paid by the unitholder to acquire such Series B Preferred Unit. Gain or loss recognized by a unitholder on the sale or exchange of a Series B Preferred Unit held for more than one year generally will be taxable as long-term capital gain or loss. Because holders of Series B Preferred Units will not be allocated a share of our items of depreciation, depletion or amortization, it is not anticipated that such holders would be required to recharacterize any portion of their gain as ordinary income as a result of the recapture rules.”

    Thus, the K-1 is just a convenient way for the VNR to report the income to the holder of the preferred units. For all other purposes, the preferreds are treated the same as any other preferred. I believe the “guaranteed payments” is non-passive income, and reportable the same as any other preferred, as dividend income, not qualified dividends. An alternative would be to report the income on Schedule E as nonpassive income. The tax consequence will be the same either way, with the income being reported as ordinary income on the 1040. The basis is not affected by the income received, it is handled the same as any other preferred, it remains the initial cost. Gain / loss upon sale is calculated the same as any other preferred, it is the net proceeds minus the purchase cost.

    I believe this unravels the mystery. It was quite a curve-ball. I keep thinking I've seen it all on MLPs, and I keep finding out that "wait, there's more"!

    John D Thomason
    May 15, 2015. 11:23 AM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    It looks like you did well. WPZ has pulled back since then. Yes, I couldn't help but notice that whereas I had 100 units of WPZ before the ACMP merger, I only had 86 units afterwards, trading at about the same price. It escapes me how that deal could have been viewed so positively, as touted in the press releases.
    May 13, 2015. 12:48 PM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    It looks like WMB is copying the KMI strategy. I own WPZ. It looks like a win-win at this point - take the money & run or hold on for dividends to come. Tough decision.

    John D Thomason
    May 13, 2015. 09:56 AM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    Hi, Philipsonh,

    Even so, it is helpful to the CPA if the client knows a little about the challenges of MLPs, and keeps all K-1s and "tax packages" received, making them available to the CPA. Not to mention refraining from creating nightmare tax situations, such as frequently trading in and out of positions in these entities.

    John D Thomason
    May 12, 2015. 03:04 PM | Likes Like |Link to Comment
  • Publicly Traded Partnerships - U.S. Taxation For Limited Partners [View article]
    The reference refers to the ability of a taxpayer to deduct up to $25000 of rental losses on rental property "with active participation" by the taxpayer from other income, which begins to phase out as modified AGI exceeds $100,000, and is eliminated entirely if it exceeds $150,000. Rental losses on properties for which the taxpayer has no "active participation" are not eligible for the (up to) $25000 deduction against other income, so it is moot in that case.

    John D Thomason
    May 12, 2015. 08:58 AM | Likes Like |Link to Comment
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