Determining Net Gain
for PTP passive activities of a limited partner:
Two Examples are given on p. 4 column 2 of 2012 Instr. for Sch. K-1(f.1065) about a PTP & passive activities for a limited partner(LP).
Ex. 1 involves Sch. E income(current tax year) and an un-allowed sale-of-business-property(f. 4797) loss of prior year carried forward. There is net gain and passive income.
Ex. 2 involves a Sch. E loss(current year + prior year carried forward) and only a sale-of-business-property(f. 4797) gain for the current year. There is no net gain or passive income.
For these cases, the IRS requires the individual to determine net gain which would be non-passive income. What is important is how the f. 4797 gain (loss) affects the calculation. Other Ex. in Pub. 925 & 541, and Inst. 8582 are appreciated, but I would like to pose a variation to the forum hoping to learn what the IRS would see as correct.
Mr. X is a U.S. individual who buys on January 1, 2012 with his cash 150 units of a PTP which operates as a Master Limited Partnership. He receives his Sch. K-1(Form 1065) for the calendar year 2012. He is a LP whose activities are passive as defined by IRS guidelines.
From Part III of his K-1, he learns that he has ordinary business income of $50 (box 1) and Net section 1231 gain of $75 (box 10). Limiting the case to this set of circumstances with no complicating factors, which approach, a) or b), should Mr. X use to report his K-1 data? If neither, what would be acceptable to the IRS?
a) Box 1 income + box 10 gain = net gain which would be non-passive income reported on Sch. E and still report the 1231 gain on Sch. 4797. There is no passive income. or
b) Box 1 income is net gain. Report it on Sch. E as non-passive income. Report the 1231 gain on Sch. 4797. Again, there is no passive income.
Two Examples are given on p. 4 column 2 of 2012 Instr. for Sch. K-1(f.1065) about a PTP & passive activities for a limited partner(LP).
Ex. 1 involves Sch. E income(current tax year) and an un-allowed sale-of-business-property(f. 4797) loss of prior year carried forward. There is net gain and passive income.
Ex. 2 involves a Sch. E loss(current year + prior year carried forward) and only a sale-of-business-property(f. 4797) gain for the current year. There is no net gain or passive income.
For these cases, the IRS requires the individual to determine net gain which would be non-passive income. What is important is how the f. 4797 gain (loss) affects the calculation. Other Ex. in Pub. 925 & 541, and Inst. 8582 are appreciated, but I would like to pose a variation to the forum hoping to learn what the IRS would see as correct.
Mr. X is a U.S. individual who buys on January 1, 2012 with his cash 150 units of a PTP which operates as a Master Limited Partnership. He receives his Sch. K-1(Form 1065) for the calendar year 2012. He is a LP whose activities are passive as defined by IRS guidelines.
From Part III of his K-1, he learns that he has ordinary business income of $50 (box 1) and Net section 1231 gain of $75 (box 10). Limiting the case to this set of circumstances with no complicating factors, which approach, a) or b), should Mr. X use to report his K-1 data? If neither, what would be acceptable to the IRS?
a) Box 1 income + box 10 gain = net gain which would be non-passive income reported on Sch. E and still report the 1231 gain on Sch. 4797. There is no passive income. or
b) Box 1 income is net gain. Report it on Sch. E as non-passive income. Report the 1231 gain on Sch. 4797. Again, there is no passive income.
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