K-1 discrepancies

[evil_shenanigans]

I was a member of a flying club (i.e., shared ownership of an airplane) from 2013 - 2017. To join the club, I bought in for $2500; when I left in 2018, I got my $2500 back. At no other time did I pay in or receive any money from the club.

The club was handled as a Schedule K-1 business for tax purposes, so I received five total K-1s, for tax years 2013 - 2017. On some of those K-1s I showed a net business loss; on others, a profit. The trouble is, when I total up the profit and loss over the full course of my membership (including passive loss carryover), I end up with a total net gain of $386. To clarify: my losses on the final K-1 in 2017 exceed the total amount I ever paid tax on, so the net impact on my taxes, over the five years, is to declare $386 of phantom losses I never actually experienced.

The root cause of the discrepancy seems to be that there were capital account adjustments in several years, meaning, for instance, that the ending capital account for 2013 does not match the beginning capital account for 2014. Obviously, that's strange. Unfortunately, I'm no longer able to get in touch with the accountant who prepared those returns or anyone else who can explain that.

Since I got back my initial contribution when I left and no other "real" money ever changed hands here, it seems to me that my net tax impact should be $0 over the lifetime of my membership in the club. I can't understand how it can be otherwise. Therefore I'm assuming that one or more of my K-1s was just plain wrong.

Questions:

1. Am I right that at least one of my K-1s must be wrong, or are there some circumstances where it might make actually sense that my net tax impact would be nonzero?
2. If I'm right that my final K-1 essentially gives me a spurious loss of $386, what would be the proper way to handle that on my end, given that all those K-1s (including at least one erroneous one) have already been reported to the IRS as-is? I.e., how should I account for it on my 2017 return? (For several reasons, including this, I haven't yet filed my 2017 taxes.)

[tagteam · Accepted solution]

You will have to raise the discrepancy on the consecutive K-1s with the Partnership Representative.

Regardless, any suspended passive losses should be released upon the disposal of your interest in the partnership.

Beyond that, your outside basis would be increased by net income passed through to you on your K-1s over the years and decreased by net losses.

[Rick19744]

Here is my take on your issue / questions:

• I am not sure that a flying club is a true trade or business.  While the facts are limited, any club that I am aware of is generally for personal enjoyment and not a trade or business.  Yes, there are investment "clubs", but those group $$ to be invested and the gains and losses are capital in nature; not a trade or business.
• You don't indicate how the capital account is accounted for on your K-1; tax, GAAP, other?
• Regardless of what box is marked on your K-1's in Section L, you apparently have the information to determine your overall gain or loss.
• You need to determine your basis.  This begins with your initial capital contribution and is adjusted annually for the applicable lines on your K-1; which may be line 1 in your case.  Your basis gets adjusted regardless of whether the activity is passive or active.
• You cannot take losses in excess of your economic stake in the investment (at-risk).
• As @tagteam noted, should you have suspended losses, then you would be able to take those in the final year of the K-1, but always limited to your overall at-risk; this in your case, based on your facts is the $2,500.
• You will determine your overall gain or loss as follows:  Determine your basis BEFORE any final distribution (the $2,500).  Once this is determined, subtract the $2,500.  If you have a negative amount, the negative amount represents a long-term capital gain.  If you have basis remaining, this represents a long-term capital loss.  Regardless, both will be reported on Sch D.
• I will just reiterate, that while the amounts are not significant, should you win the audit lottery, be prepared to explain how this venture qualifies as a trade or business.
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