Limited Partnership Bankruptcy with no Final K-1

[sehoffma]

I was a minor investor in a Limited Partnership.  This partnership lasted 11 1/2 years and eventually went bankrupt in 2020.  This partnership never returned any capital  to me.  The partnership also promised, in writing, 8% interest cumulative annualized on the capital invested until the investors were paid back in full.  Unfortunately, not only did I not receive 8% interest  for any of the 11 1/2 years, I also lost 100% of their capital.  

During the first 5 years, I was able to write off part of the loss because I was an active partner.  For the years remaining I was passive and not able to write off any losses.

The partnership never filed a K-1 since 2018 and the partnership went bankrupt on 2/29/2020.  I now want to write off the remaining capital for the passive activity plus all the 8% interest promised on the unpaid capital.  For the entire 11 1/2 years.

The question is, can I write off any/all that interest on my 2020 return? Also, when switching from active to passive participation is there anything that needs to be noted on form1065, or can I write off the remaining capital loss?

[Mike9241]

During the first 5 years, I was able to write off part of the loss because I was an active partner. For the years remaining I was passive and not able to write off any losses.

ok. mark 2020 as final and that sold or disposed of your entire interest. when it asks you for sales price use 0 but you'll need to know your remaining tax basis. any suspended passive losses are allowed on total disposition.  if you believe that you'll receive no further info or cash from the partnership, 2020 is the right year to write it off.  I must warn you that the IRS could challenge this unless you can prove your interest is totally worthless. 

plus all the 8% interest promised on the unpaid capital. For the entire 11 1/2 years.

this you don't get to write off. in effect since you never reported this as income you have $0 basis in it so there's nothing to write off.  besides, I don't think the 8% was really meant to be interest income but a preferred distribution 

is there anything that needs to be noted on form1065, or can I write off the remaining capital loss?

why are you referring to in regards to form 1065.  you state there was no 1065 since 2018. a partnership files form 1065 and issues k-1's to the partners.  you may not want to have anything to do with the partnership return.  the IRS penalty for failure to file each year is about $2400 ($200/mo for a maximum of 12 months)  per partner so for 3 tears that's about $7200 per partner.  

[Rick19744]

A number of things to address:

1. Hopefully you have maintained your tax basis in this investment.  You will need this in order to determine your overall gain or loss.
2. Your tax basis should have been adjusted regardless of whether any losses were suspended.
3. While you may have been promised the 8% return, you cannot write off a loss for something that you never picked up in income.  So nothing available here; no economic loss.
4. The tax code allows for a worthless investment deduction, however, in order to do so the taxpayer must be able to support that the investment is in fact worthless and the deduction must be taken in the appropriate tax year.  This is a facts and circumstances test.
5. No K-1 for 2019 and possibly none for 2020 is a factor in your favor.
6. You also need to look at what assets the partnership has remaining.  What are the odds that you as a limited partner will receive any.  Certainly having the partnership in bankruptcy is in your favor, but once again, is there any chance you will receive anything down the road; this doesn't mean in 2020, but in fact any chance in 2021 or 2022 when everything is finalized in bankruptcy court.
7. If you determine you can support a worthless investment deduction in 2020, then you will have the following to account for in your 2020 tax return:
   1. Determine your overall gain or loss.  This is essentially the remaining tax basis that you have since you will be taking the position that you will not be receiving any liquidating distributions.  Based on the length of time you held the partnership interest, this will be a capital loss assuming that you in fact have tax basis remaining.
   2. Since this will be deemed a disposition, you will also be able to take any suspended losses that have accumulated.
8. The key here is knowing your tax basis (or being able to compute it if you have all prior K-1's) and based on your particular facts believe 2020 is in fact the year your investment became worthless.

[sehoffma]

Thank you Mike!

I  do not know why I mentioned 1065, I am the limited partner and only received the K-1s.  Thank you for all your help!!

[sehoffma]

Thank you Rick!! This is very helpful!!

[sehoffma]

Hi Rick,

I have another question about the tax basis.  When I started with this partnership I actively participated, which allowed me to write off the losses up to 2014.  After 2014 I became passive and stayed passive the remainder of the partnership.  Because the activity was passive I did not include the K1 from 2015 through 2019.  Now that the partnership is bankrupt, I want to write off that existing capital from 2015-2020.  Since this is the final K-1 I will be filing with my 2020 return.   The partnership was very poorly managed, and also missed the K1 for 2015 completely, then sent the partners K1s each year from 2016-2018.  The company is now out of business due to going bankrupt.  Is this going to be a problem because I did not include the K-1s from those previous passive years? 

[Rick19744 · Accepted solution]

Let's analyze what we have here:

1. You contributed capital to the partnership which is the beginning figure for you tax basis.
2. Up through 2014 you indicate that since you were active / material participant, you utilized any losses that were reflected on your K-1.  These amounts (and any other applicable items on the K-1) impact your tax basis.
3. Post 2014, you indicate you became passive, and as such, you did not include anything on your return.  Had you been using a software program such as TT, the software would have tracked these suspended losses.  As noted in my earlier response, even though losses are suspended, they still impact your tax basis.
4. While I don't have any information as to what else may be flowing through your Schedule E (other activities) that may have allowed some of the losses to be used, you need to look at this.  If you have no other Schedule E activity other than this one K-1, then I would total up all losses post 2014 and reflect those in TT as suspended losses.  This will allow TT to flow those into your return.  But once again, make sure you adjust your tax basis for these suspended losses.
5. Minimal exposure in number 4 especially if you have no other Schedule E activity.

[sehoffma]

I have been using TurboTax since the 1990's.  However, I had to file amended returns because the K-1s were sent out to me always a year and sometimes more than a year for the Tax year that was due.  I probably either did not load the amended return to start one of the tax years following or I inadvertently deleted the K-1 during my passive activity along the way and therefore the data was never carried over.  I was able to find my remaining basis and have all my previous returns and supporting data for that tax basis. 

Thank you for all your detailed help with this K-1 and the bankruptcy.  

[RICH81]

How do you file if the LLC is bankrupt and they don't provide a K-1? 

For example - no K-1 received for 2021 and LLC simply ends business with no K-1 for 2021 or 2022.

TT shows suspended losses through 2020 but not sure how to indicate no K-1 for 2021 on return, then of course how to handle the closure/loss in 2022 next year.

[Mike9241]

there is a difference between bankrupt and worthless. the IRS position is that an investment has to be worthless to allow a write-off of your investment.  

for 2021 you merely leave all the current year info blank.  there is no way to report you did not receive a k-1. however, if no return was filed the IRS does not have a k-1 for you either so the current year numbers will match - nothing

if worthless in 2022 you would as you go through check the boxes Final K-1 and Partnership Discontinued in 2022. this should free up the suspended loss.  you should be able to determine your remaining tax basis from the 2020 k-1 Part II schedule L  - capital account. the tax rules for that year stated it had to be on the tax basis.  so if it's positive that balance would be written off as a capital loss. if it's negative there will be reporting issues. that negative basis could be ordinary income, capital gain or a mixture. 

[RICH81]

Thank you very much.  That makes sense.

Rich