Trying to understand K1

[mainhoon]

So I purchased a stock in 2015, which went into bankruptcy and became a penny stock.. Along the way they also became a MLP (master limited partnership - publicly traded partnership) and now I am getting this K1. I had no idea what this K1 was about.. It has some small amount of income indicated -which I never got really.. Apparently I am a unit holder of this company.. But I don't see anything come my way..

I wanted to ask the experts here about how do I realize this K1 income? I am looking to stop this dance and sell off the stock - basically dispose it all at a loss. I seem to be spending more time figuring out what to do with K1 than the $15 market value this investment has left.. More like 0..

Let me know

[nexchap]

The previous answer explains the K-1, but as far as getting money, think of the K-1 as nothing more than a means to change your purchase cost for eventual 1099-B reporting:

- When you sell, you report a capital gain / loss for tax purposes.

- The cost you use to calculate the capital gain changes with K-1's -- virtually every number on the K-1 eventually gets added or subtracted from your original purchase cost, changing your net profit/loss.  That's how you finally turn all those allocated entries into actual cash in your pocket.

Reporting taxes on the sale of a partnership is complicated too, but at least you only have to do it once.

[mainhoon]

Thanks for your answer. So I got into this entity because I bought stock in it first, which is now worth 0. So when you say "sell", I assume you are referring to when I sell or get rid of this 0.01 (penny) stock? Essentially I will have to ask the broker to remove this "worthless investment". At that point the K1 #s come into action when calculating profit (well loss really in this case).. But I still miss something.. In terms of cash transaction - I paid X upfront to buy stock, there is no transaction done after that - the K1#s really are not coming into my bank - then how come at the end when I sell, suddenly they become part of the action..

Normally I would have had X as loss and used that to write off other cap gains.. But now what happens, I can't do that? If eventually after taking into account the K1#s I end up with a loss of Y, I assume I can use it to offset other gains.. This is so fishy or at least flying over my head..

[nexchap]

However you managed to become a unitholder, and regardless of the value of the MLP, from the IRS's perspective you're still a partner in an on-going legal entity.  So when I say "sell" I mean end your participation in whatever way has the partnership stop sending you K-1's.

As for the tax accounting, you still get to declare a capital gain (or in this case loss) from getting out of the partnership.  It's just that in this case, you'll have to go through a bunch of gymnastics to figure out what your loss is.

For example, let's say your K-1 showed you "getting" $100 on line 1 even though you got no cash.  And when you fill out your taxes, you find that you have a bill for $15 on that $100.  Despite the fact that that just feels wrong and unfair (you got nothing, and actually paid $15), here's how it works out:  let's say you originally paid $200 for this.  You "sell" it for $0.  When you go to calculate your loss, it won't be ($200).  It will be ($300).  The $100 you were forced to recognize even though you never got it is added to your purchase price.  You tell the IRS you paid $300, not $200, for this and get a bigger capital loss.

So in the end, the X you would have used to offset other capital gains becomes Y, just like you said.  But there's nothing fishy -- the difference between X and Y showed up on the K-1s AND you paid tax on that difference.  Now you're just getting it back in this final sale.

[mainhoon]

Thanks again. I am sure you are right and if re-read it a few times it will sink in. What gets me more is that this partnership was forced upon me 🙂 and the company is bankrupt. So really there is nothing coming my way via distributions or anything else.. And I probably will have to shell out $ to an accountant to just play with numbers like 10, 15, 100 in K1 to get it all done.. Thanks anyway

[nexchap]

Don't think of it as a "forced partnership".  Consider it a "bonus cocktail party story".  Either way, don't feel bad about having difficulties sorting partnerships out.  A partnership is complicated enough.  Adding in tax aspects is just mean.  I've had MLPs for years, and still have a tough time keeping things straight.

[Rick19744]

Since the structure is now a MLP, you can sell your interest and move on.
Determining your gain or loss is explained above.

[mainhoon]

Interestingly, since the company is bankrupt and the stock is worth nothing.. Really there is nothing to "sell" to anyone.. I guess I just need to inform the broker that they remove it from my holdings.. The ticker is BBEPQ in case you wanted to look it up..

[Rick19744]

This entity is now a publicly traded entity so there is a market.  Agree it may not be the value you think it should be, but in order to close your transaction and claim any loss, you would need to sell it on the market.

[nexchap]

Agree.  Over 5M shares traded just today.  Even though they're in bankruptcy, there's a tiny, tiny chance that they could emerge without wiping out existing partners.  That's why people are willing to gamble a penny/unit.  Its a lottery ticket.  You sell your units to one of them, and next year will record a complete disposition on your taxes, settling all the tax ramifications once and for all.

[Rick19744]

And make sure you start your basis schedule and keep it up to date until you sell the units.  This is critical.  Without this you will not be able to accurately determine your final gain or loss on this investment.

See page 2 of the IRS K-1 instructions for some guidance on maintaining your basis schedule:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf">https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf</a>

[mainhoon]

Thanks for note. I am not sure which ticker you are looking at, but BBEPQ is not at 5M volume. If you read the news, the bankruptcy court has already decided that common equity is worth 0. And at this time it costs more (trading fee) than the value of what I have! I will check with broker on what the right way to get rid of this is..

[Rick19744]

In reading some recent news it doesn't sound real good.  I would sell immediately.  Looks like the bankruptcy court may approve the latest proposal, but the commentary said that common unit holders (not sure what you are) will receive no recovery AND have some significant income recognition from cancellation of debt.
Good luck in getting out of this.

[mainhoon]

Yes very much a common unit holder I am 🙂 Its worthless really.. And I had gotten rid of such worthless securities before (unfortunately), but this time this also has this whole K1 complication.. Thanks for looking into it!

[mainhoon]

If I can ask you.. what does this mean "significant income recognition from cancellation of debt".. Can it then be worse than if the case where I just lost my initial investment? Does the K1 thing make it even worse given what is going with this company?

I am calling the broker to see how to sell out of this thing..