Distributions from a zero basis MLP are taxable. Is this the tax basis per the MLP which has been reduced by losses for most of which I have received no tax benefit because they are suspended? Or is the tax basis for my account reduced only for those losses for which I have received a tax benefit?
Yes. Some of the "losses" acquired from depreciation and other things were used to reduce the taxabilty of items from the company others were not and those were "suspended". Those suspended losses can be deducted when you sell ALL your units. A partial sale does not release the suspended amounts. You can find the suspended amount by asking you tax preparer or if you use TTax it is in the worksheets or shows during the inverview if you go back to last year's taxes.
My concern is not with the sale of units but the taxability of distributions when the tax basis falls to zero. A simple example: I invest $10,000 in an MLP which subsequently has no distributions and reports on my K-1 $10,000 of losses and a capital account reduced to zero.
Instructions to the K-1 appear to indicated that this zero basis capital account will require that any future distributions are taxable. However, I have never received any tax benefit from the losses because they are suspended in my tax return. Granted I will get to deduct these losses when I sell my shares but not before.
If this is correct then the shares should be sold for no capital gain and no ordinary income ( write off of $10,000 suspended losses equal recapture of $10,000 ordinary income).
If I were to sell 6% of the shares of a C coproration which had no appreciation I would have zero tax. If the stock had appreciated 50% I would be taxed on 1/3rd of proceeds or 2% of total value would be taxable. In the case of LINE with a zero basis all of the distributions are taxable. Note that I have zero tax basis for purpose of this distribution but about 50% basis for determining gain on sale because losses have been suspended. In effect I am at zero basis for this distribution taxability test when I have recovered in cash only about have of my initial cosi.
The moral to this story: try to avoid MLP's with large as they accelerate the deline to zeor basis. Ideally, select MLP's with littlle income or little losses.