I had never bought an MLP before this year but saw an opportunity to make some money trading them. I was under the impression that if you didn't receive the distribution then you wouldn't receive a K-1. Ha ha on me! I now have K-1's from BBEP, LINE, EPD, TPP and EVEP. The K-1's from EPD, TPP and BBEP had no "income producing" event but EVEP (sold in 1/2009) and LINE had "income" in box 1. The question I have is how do I compensate for the "ordinary business income" I "receive" from the entity? Is there an offset for the "income?" I never received any "real" income from holding the MLP so am I actually supposed to report it as income only or can I offset the "income" by increasing my purchase basis? I can't believe that I am expected to pay income tax on income I never received? Any assistance would be appreciated.
Andy, "speculation" wasn't intended as a pejorative, just an adjective meaning a composite of your "assumption, conclusion, guess, expectation, thought, idea, notion, belief".
Your "speculations" are typically well-considered.
That is what part of the 754 election is supposed to do. Its application is reportedly a bit intricate.
But imagine all the units that were issued at prices far in excess of current prices. Most of those were for asset deals so those prices went mostly to asset values. Today's market price doesn't reflect the asset cost for the most part. So today's buyer may be getting assets which have a higher inside basis than would be indicated by the purchase price paid for the assets.
You can see intuitively why the differences in inside basis and outside basis might make for misaligned allocations of deductions like depreciation or depletion.
I recently chatted over hors d'oeuvres with a CPA who had been involved in a 754 basis adjustment for a large partnership -- I didn't pay enough attention I'm afraid -- I wasn't thinking about how it affected me and the three glasses of wine I had consumed made me not care.
GAAP accounting and tax accounting are clearly different beasts.
The LEH thing is a possible example. At the time of the LEH default, the value of the LEH position (based on the replacement with another counterparty) was in the $60 million area. But the fact that the position was worth $60 million doesn't mean that there was a taxable loss. If, as is not unusual, the position was some form of "costless" position -- a swap or a costless collar -- LINE would have had no tax basis to write off. If that were the case, when they paid $60 million to the new counterparty, they had a tax basis to apply to the replaced positions, but that "loss" will probably come over time for tax purposes as LINE settles the hedges and for tax purposes setoff the hedge cost against settlement to report net income or loss on the hedges.
The unrealized hedge gains and losses are not tax gains and losses, just GAAP accounting gains and losses. The tax gains and losses come from hedge settlement payments.
GAAP would probably require capitalizing IDC and depreciating it. Of course, for tax purposes it gets allocated to unitholders who then deduct or amortize it.
Lots of differences in tax accounting and GAAP. We don't see the differences in the financials as you would with a corporation because the partnership has no accrued tax liability and no prepaid tax asset accounts to account for the timing differences in tax liability between GAAP and tax accounting.
"I was surprised there was large 1231 gains in both K-1s. When did those sales close? I'm also surprised there were large Box 1 earniongs for the first K-1 (Jan-Aug) and negative for the second."
They sold properties in the Marcellus to XTO, in W TX to someone else, (I forget), and then they had that "$80M "thing" with Lehman Bros..
I don't think they made the numbers up...
BUT...if you look at GAAP results in the 10-Q's you'll really be faked out. As I recall they were wildly negative for the first 2 qtrs, and then wildly positive for the last 2 qtrs.
Let's see...we have partnership accounting, partner's accounting, financial accounting and tax accounting...did I miss anything?
I do wish I could correlate partnership accounting and financial accounting - it could provide an "early warning system"
"your speculation may be right."
Of course it is just a speculation, and it is based on the information I was given this AM. Once I understood that changes, as I wanted to make, in the partner's capital account had no impact on the values on the K-1, the rest was simple.
Just another "guess", but I'll bet they figure the unit values monthly. I once shared a hallway with our CFO, I remember what incredible effort he and his group went through to "close the books". I don't see doing that every week or even semi-monthly or bi-monthly...monthly seems about right, especially as we are on a quarterly cycle - 'cause it gives the operations folks input that is timely and yet minimizes effort in data collection and display.
I was surprised there was large 1231 gains in both K-1s. When did those sales close? I'm also surprised there were large Box 1 earniongs for the first K-1 (Jan-Aug) and negative for the second. You know, we're never going to figure this out..............
Andy,your point is right on. The question is how often allocations are made and for what periods. I have wondered about capital gain transactions -- they tend to be date specific, and therefore could be (maybe should be) allocated based on date of occurrence.
Did the company allocate the gains from sales of Appalachia, Verden, etc. to unitholders as of the closing date or did it make some allocation across the entire year?
Did it allocate operating results over the whole year or was it period specific?
And then we had the deemed partnership termination which resulted in two K-1 forms this year. That apparently caused an accounting and allocation to be done at that point in time.
We could ask management if we were ambitious.
Andy, your speculation may be right. There is no doubt that a partnership's books can be very different from a partner's -- witness the inside versus outside basis situation with respect to a partnership's basis in assets versus the partner's basis in the investment.
Perhaps I didn't make my point clearly.
What I am hypothesizing is that partnership units are "homogenized during any particular reporting period" and your share of the partnership results are a function of how many units you owned as a pct of the total number of units during that time period.
For example, let's say you bought units on January 1 and July 1 of the same year, and suppose the partnership did an accounting ONLY once a year, on December 31. Then the most important numbers to you would be the number of units you owned on Dec 31, and the total number of units in the partnership as of that date.
However, if the partnership does their accounting twice a year, then the values accrued to the units you bought on Jan 1 will have different values assigned to them then will those you purchased on July 1.
As the number of periods that the partnership calculates results increases and the timing of your purchases changes and you will get increasingly different values for each of the units you own, but during any one period, each unit is treated a part of the whole.
Does that make it simpler to understand what I am suggesting or more complicated? I think I've made it more complicated. Perhaps I should have been an attorney and not an engineer...