If your tax basis has been reduced to ZERO than your distributions are taxed as long term capital gains. But what MLP has had $10,000 in losses and NO distributions?
I bought 200 shs of KMP in Dec 2008 and have unallowed losses of $5000,(not counting 2012 losses) distribtions of $3300 (thru Aug) and unless I purchase additional shs of KMP will then have to report the distributions as LT Cap Gains when taxes are done next year for 2012.
You are wrong. Read IRC Reg. 1.704, on partnership distributive share, and IRC section 731, extent of gain or loss on distribution. Then read Intructions to Form 1965, page 2 worksheet for determining basis, line 3: increase basis for your SHARE OF OR assumption (probably haven't assumed any) partnership liabilities as shown on item K of your K-1.
If you can't handle this then speak with a qualified CPA or tax attorney, one who has filed tax returns with zero basis and handled IRS audits.
Dealer, the instructions to line 3 of page 2 of the Form 1065 worksheet couldn't possibly be referring specifically to limited partners in an MLP. The MLP itself has to include the limited partners share of liabilities in the partner's basis in order to allow the partner to receive the full depreciation deduction for the portion of the MLP assets that are financed by debt. I suppose the limited partner would count his share of the debt if he was trying to figure out how his K-1 capital account balance was determined.
For most MLP investors trying to tie to or figure out how the K-1 capital account is calculated is a waste of time. The investor plans to run his balance to zero anyway. The investor just needs to keep track of the non-taxable cash distributions that he receives. Its only these distributions that reduce the investor's basis. The investor's share of ordinary losses does not reduce the unit holders basis. This was your original concern. So your answer is, it will never happen. Ordinary losses alone will not reduce your tax basis one penney. You just keep track of them, hold them in suspense, and apply them against future ordinary income.
Its not clear to me that cash distributions received after the basis reaches zero are always taxed as long-term capital gains. Logically, that wouldn't happen until all the depreciation recapture has been recaptured. Its amazing how much conflicting info there is on the internet.
Dealer, you are just starting out owning (I assume you are owning) MLPs. So keep an open mind. As the years go by, the answers become apparent to you. Don't dismiss out of hand the conflicting feedback that you are getting, like the airplane pilot who doesn't believe his gages while flying at night.
There are simple ways to handle MLPs for investors in MLPs like KMP that only generate losses (for most unit holders) and who intend to hold for the rest of their lives. Keep all the K-1s neatly in a shoe box and work up more specific calculations if it ever becomes necessary.
KMP had NO debt in 2009 or 2010. Minor amount of non-recourse debt in 2011. If your CPA is telling you that as a limited partner you can add Non-Recourse debt to your capital account, it is time for a new CPA, or for to listen more closely to what he/she is saying.
What I don't understand is if you are so sure your CPA is right, why are you trolling these boards for answers that YOU already have.