Sale of MLP with suspended PALs in non-conforming state (NY)

[kstheory]

@nexchapI saw your post about a related question about a MLP final sale from last year: How do I make an Adjustment for a Publicly Traded MLP sale for a Non-Conforming State (California)? Thanks ahead of time for looking at it. Of course, if anybody could clarify this for me, I'd appreciate it.

Even after adjusting out the bonus depreciation (I am in NY, a non-conforming state), my MLP typically posts passive-activity losses which I have been separately tracking for my NY records as a suspended loss. (TT does nothing to track this at the state level). So it makes sense to me that on the final disposition of the MLP, according to the sales schedules provided by the MLP, the cumulative adjustments to basis are less for the state than the federal. Both the "total gain" and the "ordinary gain" are less for the state than for the federal.

Here's my first question: just like TT allows the federal suspended PAL on the final disposition, should I be "allowing" my NY suspended PAL that I've been tracking (which would be effected by a simple addition to income on the NY return to reflect the lower suspended PAL amount). But doesn't the difference between the state and federal suspended PALs recognized on final disposition exactly reflect the cumulative effect of the disallowed bonus depreciation? And isn't this also the difference between the state and federal "cumulative adjustments to basis", "total gain," and "ordinary gain" on the sale? In other words, if both the state "ordinary gain" on the final sale and the state allowed PAL loss (also ordinary) are both less than their federal equivalents by the same amount, the net effect is zero. What am I missing? Is my scenario here just a special case where there was no point in tracking suspended losses and calculating state gains separately. 

[nexchap · Accepted solution]

@kstheory:  You're correct that a "net effect of 0" is the most likely outcome of all this non-conforming state stuff.  Each year, you record lower losses.  And then on final disposition, you record lower ordinary gain.  And when you add it up, they offset.  So its a bunch of hassle that you basically go through because we follow the rules.  But also because its possible that you're state taxes might actually change in a given year as a result.  For example, if the Fed losses were $100, with $300 in disallowed bonus depreciation, then your state tax would actually show a $200 profit that year and you'd pay tax.  That's why I believe states impose this restriction.

As to the question about taking those suspended state losses to offset your state gains on a complete disposition, absolutely.  I don't know how to do that in TT for NY, but you definitely are allowed to.

[kstheory]

@nexchap  Thanks for your reply and your reassurance that these are all just messy side-effects related to depreciation timing differences. Am I correct in thinking that by the final disposition, the total of all these should be equal for federal and state: (a) the cumulative total through the holding period of all net income/loss (K-1 for federal and manually tracked for state); plus (b) total gains I calculate using the provided sales schedules on any partial sales; plus (c) total gain on final sale. Is that correct? Any differences between federal and state that show up in (a) should be offset by the differences that show up in (b) and (c). Capital contributions, distributions/withdrawals and the K-1 other increases/decreases to capital should be the same for federal and state.

[nexchap]

@kstheory-- I'm not sure I can precisely follow your a, b,  and c below, but let me try this:

• Your total capital gain / loss for both Fed and State should match in any year you have a sale
• Ordinary Income, reported on Fed form 4792 and State form {IHaveNoIdea} will not match for non-conforming states.  But if you compare the amount reported over the years for Fed vs State, the difference between them ought to match the difference you show for
• Suspended losses you get to report on Fed Sched E and State form {whosonfirst}.

So, net net, the amount of actual income you pay tax on ought to match for Fed and State.

Note that the bullets above assume the usual MLP scenario of suspending losses each year, and only having taxable events (excluding int/divs) when you make a sale (it should work in every case -- I just haven't gone through those weird corner cases to test it out). 

And I should also add, this is not legal or otherwise useful-in-an-audit advice!  Just my best read after digging through everything for my personal non-conforming state.  Its also the way my taxes have worked out when I've gone through sales and done the reconciliation.

[kstheory]

I see how the a, b and c breakdown can read confusingly with the parentheses! Thanks for the quick reply. I think what you're describing is the same as what I was trying to say.

Total ordinary gains on federal 4797 over the years will definitely differ from the state based on the different cumulative adjustments to basis figure provided by on the sales schedule. This difference over the years should also be the difference in the federal-v-state suspended loss. In a way, NY makes it "easy" because there are no specific forms, just areas to enter "additions" and "subtractions." Since my MLP always had federal and state ordinary losses that just kept being suspended, it seemed a bit silly that in the year of the disposition there should be a state "addition" and "subtraction" that exactly offset each other.