Sold all MLP units. In "Sales Schedule Breakout" statement the Ordinary Gain (Recapture) far exceeds sum of "Cash Distributions" received. Is this possible?

[100919wlee]

Disposed entirely of MLP units, held over several years.   In “Sales Close Out” statement, the ordinary income (recapture ordinary income) amount  far exceeds the sum of "cash distributions" I have received during those years.

I suspect this is an error since a recapture should not be greater than “cash distributions.” Otherwise, I would be paying taxes on money I did not get.

Called MMP tax support center and told me they could not help because they simply distribute K-1s.

Any help will be appreciated.

[nexchap · Accepted solution]

Its definitely possible, and highly likely.  The 'Ordinary Gains' have nothing to do with the distributions you received.  But you're not paying tax on cash you didn't get.  That's because the total tax you pay shows up in at least 4 places, spread over all the years you own the MLP:

1) The Ordinary Gains reported on the Sales Schedule.  This goes to Form 4797, and is closely related to the losses you've been seeing in Box 1 of the K-1 each year.

2) All the suspended losses that have been building from prior years are now released on Sched E.  Those losses help offset the Ordinary Gains.

3) Certain items on the K-1, like interest and dividends, have been taxed each year they show up (TT transfers them to the appropriate forms).  Also, certain deductions (like charitable donations made by the PTP) are also transferred.

4) Finally, there's the actual Cap Gain/Loss.  That's calculated using the K-1 Sales Schedule and is adjusted for everything above.  So your reported Cap Gain/Loss is further reduced by whatever shows up as Ordinary Gain.

It is definitely complicated, but if you've been entering everything into TT over the years it is taxed correctly.

[100919wlee]

1st of Several (due to length limitation)

First of all, thanks for your thorough answer.  Having had an experience of a 1099-B with a large capital loss, when it should have been a gain, due to (+/-) switching error, I wanted to have my suspicion confirmed or refuted by some expert.

I understood your points in  the #2 and #3.

Since my issue is lack of a proper understanding, I would to present you my chains of thoughts, for you to pinpoint my failure in logic or knowledge.

My understanding are as follows:
U-1- “Ordinary Business Income (Loss), K-1, Part III, Line 1, is
a- net of “Income” minus “expenses, cash or non-cash or depreciation. ,
b- taxed on the year earned.

U-2-  “Cash distributed”, K-1, Part III, Line 19-A, cash distributed from the company’s cash flow and it is not taxed on the year distributed.

U-3-  “Adjustment to Cost Basis”
a- is “roughly” equal to sum of (-) of “Cash distributed”, and  (+) of “Ordinary Income”.  
b- CD above OI, would be considered as having come out from cost basis, thereby lowering it.

U-4-  Depreciations are recaptured as ordinary income at the disposition of the units.

U-5-  Annual K-1 shows “Adjustment to CB” but not “Depreciation Amount”.

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[100919wlee]

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2nd of 3  (due to length limitation)

Questions:
Q-1-Is there a way to figure out Depreciation amount from annual K-1?  If Companies are the only source, can we trust them? Can we appeal their results?
Q-2-What happens to the “Net Income before depreciation”? Should not ALL of  it  end up in the hands of partners? In my case it appears that was not the case.
(a) I sold all units of MMP after 9 years, and got the following:
- Sum of Cash distribution in annual K-1s = +1,171,
- Ordinary (box 1) income in annual K-1s  = +535
- Original basis = +893
- Cummulative adj basis on "Sale Schedule Breakout"  = -628, which is 93 above the sum of "box 1 income of annual K-1s"
- Adj basis on "Sale Schedule Breakout" = +265
- Recapture on "Sale Schedule Breakout" = +1,233 = depreciation

[nexchap]

I'll try to address a couple specifics, that might help you understand all the rest:
U-1: its taxed on the year earned, unless its a loss, in which case its suspended until you realize an actual gain at some point in the future (or sell all shares).
U-3: the adjustment to cost basis has nothing to do with cash.  Its tied to what you've actually been taxed on.  If you look at all your K-1s for each year of ownership:  the cumulative adjustment will equal the sum of all the values in box 1-11 (because those are all income items that are taxed), less the sum of all values for anything that is a deduction (for example, 13A/B/H/J/W, Foreign Taxes paid or accrued, 18A/B/C).
U-4: after your basis has been adjusted for all the stuff in U-3, you compute your total gain (proceeds minus basis).  But the IRS wants to tax part of that at capital gain rates, and part at ordinary income rates.  So the 'ordinary gain' value is just how they want it split.  The total of the Ordinary Gain on 4797 and the Cap Gain on Sched D is still just your proceeds less your basis.
U-5: Ordinary Gains can be more than depreciation.  Its any 'hot asset', as spelled out in the tax code.
Q-1:  Depreciation, at an aggregate level, should be in the companies annual report or 10-K.  It won't be on the K-1.
Q-2:  Net income is not the same as cash.  Income is affected by many non-cash events other than depreciation.  MLPs distribute most of their cash.

Hope this helps.  Its a very complex subject,

[100919wlee]

They have block the third part of my question, because they thought that I was inputs phone numbers and social security numbers.  I hope let post again.

[100919wlee]

Here is the third and last part of my question

(b)  If my understanding #1 is correct, the “Net Income before depreciation” should have been = 535 plus 1,233  equal to 1,768

(c) - Out of 1768, I got only 1,171 in cash distribution. So what happened to the difference  equal to 597?  This is why I am asking how come that "Depreciation" can be larger than "Cash Distribution".  Where is the rest of the beef?!
(d) Was it used up for any capital investment? If so, should it not have shown up on CB?, rather total of adjustment to CB is greater than total of Box 1 income.

Thanks in advance for your reply.

[u711]

My MLP converted from a MLP to a C corporation.  My total investment in the company came to slightly more than $255K.  When each unit of the old MLP was "swapped" for shares in the new C corporation, my investment fell by around $50K.

So I have 2 questions: 

1) Will I have to pay income tax on the distributions I received when the MLP paid distributions which were tax exempt, and

2) Will I be able to write off the decline in the value of the shares I was given in the new C corporation for the units I had in the MLP, or will my questions all be included in the last K-1 that will be issued in January for old MLP?

[u711]

I am sorry but I got lost in the post which you put on the board re: distributions, taxes, etc.   Please see my most recent post asking questions on whether I will have to pay income taxes on all the previous year's distributions I received before the MLP converted to a C corporation and when the swap for each unit of the MLP was for 1.16 shares in the new C corporation formed to replace the MLP.  And, I  invested $250K for the MLP units, but after the conversion to the C corp the value of my investment lost money and was worth $40K less.  Do I count this loss this year or when I actually sale my shares in the new C corp and adjust for the capital loss at that time?

Thanks..

[u711]

I am still confused (and lost).  Bottom line if in year 1 of owning the MLP units I received $20K in distributions, year 2 $22K in distributions all the way to year 10 of me owning the MLP units and receiving the distributions totaling about $240K, when they then converted the MLP to a C corp.  Will the IRS go back and tax me on all the non-taxable distributions from the following years or was the tax paid by the MLP and after all their other mathematical tax gyrations am I liable for the previous years distributions that I received tax free and have to pay back taxes on this amount.  Common sense is telling me no, because this would be an ex post facto imposition of an income tax, that if I understand correctly from all the boxes you mentioned the income tax on the distributions was paid by the MLP, and now that it is a C corp I am responsible for paying taxes on the dividends I receive.  

Thanks,