Our club had a Five Year Capital Gain. It is listed on the
Capital Gains and Losses Report available after the yearly
distribution.
This number does not show up on the 1065 or on the
individual K-1s as a Qualified 5 year gain on line 4e(3).
Why not ?
Thanks, Ilze

Ilze G Oredson wrote:
> This number does not show up on the 1065 or on the
> individual K-1s as a Qualified 5 year gain on line 4e(3).
> Why not ?
 
I agree that this is confusing. Although you may have an entry shown
as a Five Year Capital gain on the club's Capital Gains and Losses
report, we are combining this value with Long Term Capital gain for
2001 taxes.
 
Our interpretation of the IRS rules for Five Year gains is that the
partnership must take a special election for investments purchased
prior to 2001. The election involves reporting the gains for the
investment as if you sold it and re-purchased it on Jan. 2 2001. You
can find more information about Five Year gains and the special
election here:
 
http://www.fairmark.com/capgain/fiveyear.htm
http://www.fairmark.com/capgain/dstop.htm
 
If your club is interested in making the election, please contact
support@bivio.com and we can give you the steps required to enter the
transactions in bivio.
 
Our software release this weekend should clear up the confusion by
removing the Five Year gain from the Capital Gains and Losses report,
except for the case where the amounts were received as a cash or
reinvested distribution from a fund in which case they are fully
qualified.
 
Paul Moeller
bivio, Inc.

Paul:
I find the fiveyear.htm URL applicable to what I am
questioning. The dstop.htm is not what our club did or
wishes to do, i.e. no interest in "making the election"...

> http://www.fairmark.com/capgain/fiveyear.htm
> http://www.fairmark.com/capgain/dstop.htm

We acquired Home Depot stock on 8/29/1996 and sold it on
12/11/2001. That is longer than 5 years.

The 2001 U.S. Return of Partnership IncomePackage 1065
state on p.23, left hand column, most of the way down...
"Enter on line 4e(3) the gains (not losses) from the
disposition of assets (...) held more than 5 years that are
portfolio income included on line 12 of Schedule D."

According to the fiveyear.htm URL article you cite,
different tax rates would be applied to the capital gain
depending upon each partner's tax situation.

Have you had a tax accountant look at this. Or have you
asked the IRS ?

Thank you,
~Ilze

Ilze G Oredson writes:
> The 2001 U.S. Return of Partnership IncomePackage 1065
> state on p.23, left hand column, most of the way down...
> "Enter on line 4e(3) the gains (not losses) from the
> disposition of assets (...) held more than 5 years that are
> portfolio income included on line 12 of Schedule D."

The schedule D the instructions are more explicit:

http://ftp.fedworld.gov/pub/irs-pdf/f1065sd.pdf

"Partnerships may elect to treat certain assets held on January 1,
2001, as having been sold and then reacquired on the same date. The
purpose of the election is to make future gain on the asset eligible
for an 18% (instead of 20%) capital gain tax rate at the
partner level. The 18% rate is applicable to the extent to gain would
otherwise be taxed to the partner at 20% if the holding period of the
asset begins after December 31, 2000, and the asset is held more than
five years."

In other words, the partnership cannot take advantage of the five-year
capital gain rate until 2006. More importantly, the partnership must
enter a deemed sale this year for assets which it wishes to be
eligible for the 18% rate at the partner level. You may not enter
deemed sale for a loss. You may enter the deemed sales yourself, and
bivio will calculate your schedule D correctly. However, according to
the scheduled D instructions you must "attach a statement to the
return stating that the partnership is making an election under
section 311 of the Taxpayer Relief Act of 1997 and listing the assets
for which the election is being made." Please see the document for
details on how to enter deemed sales and other restrictions including
filing dates.

I think part of the confusion is that the entity (investment club)
must make the election, not the partner.

> Have you had a tax accountant look at this. Or have you
> asked the IRS ?

We have discussed this at length with a tax accountant.

Cheers,
Rob Nagler
bivio Inc.

Disclaimer: statements are opinions expressed by bivio Customer
Support and are not official statements from the IRS. These
statements are not intended to replace professional tax or
accounting advice. When in doubt, follow the advice of your
local tax advisor or accountant who is familiar with your
particular circumstances.

Paul,

You are handling this wrong, because you are addressing the
wrong issue. This is not a deemed sale situation. The 5-year
reduced capital gains rates apply NOW to any 5 year capital
gain generated in 2001 which would normally be taxed at 10%
(8% at reduced rate). The deemed sale election is only
necessary to reset the holding period for potential 5-year
capital gains which would be taxed at 20%. Partners who have
not "filled" their 15% income bracket with regular income
and who have 5-year capital gains through a partnership are
entitled to an 8% capital gain rate up to the point their
15% bracket is filled. Their "qualifying" 5-year capital
gains are to be reported on Sch K-1 line 4(e)3. This is not
a partnership-level election.

Ira Smilovitz
Lakshmi Investments, LLC

Paul Moeller wrote:
> Ilze G Oredson wrote:
> > This number does not show up on the 1065 or on the
> > individual K-1s as a Qualified 5 year gain on line 4e(3).
> > Why not ?
>
> I agree that this is confusing. Although you may have an entry shown
> as a Five Year Capital gain on the club's Capital Gains and Losses
> report, we are combining this value with Long Term Capital gain for
> 2001 taxes.
>
> Our interpretation of the IRS rules for Five Year gains is that the
> partnership must take a special election for investments purchased
> prior to 2001. The election involves reporting the gains for the
> investment as if you sold it and re-purchased it on Jan. 2 2001. You
> can find more information about Five Year gains and the special
> election here:
>
> http://www.fairmark.com/capgain/fiveyear.htm
> http://www.fairmark.com/capgain/dstop.htm
>
> If your club is interested in making the election, please contact
> support@bivio.com and we can give you the steps required to enter the
> transactions in bivio.
>
> Our software release this weekend should clear up the confusion by
> removing the Five Year gain from the Capital Gains and Losses report,
> except for the case where the amounts were received as a cash or
> reinvested distribution from a fund in which case they are fully
> qualified.
>
> Paul Moeller
> bivio, Inc.

Ilze,

You are absolutely correct. Your sale of HD "qualifies" for
5 year treatment. Whether it is taxed at 8% or 20% depends
entirely on the specifics of each partner's individual tax
return. The proportionate share of the 5-year gain should be
shown on Sch. K-1, (but not segregated on Form 1065 Sch D).
When each partner completes her/his Form 1040 Sch D, s/he
will determine the appropriate tax rate through the various
worksheets and tax tables.

If the bivio generated Form 1065 and schedules don't reflect
this then they are in error.

Ira Smilovitz
Lakshmi Investments, LLC

Ilze G Oredson wrote:
> Paul:
> I find the fiveyear.htm URL applicable to what I am
> questioning. The dstop.htm is not what our club did or
> wishes to do, i.e. no interest in "making the election"...
>
> > http://www.fairmark.com/capgain/fiveyear.htm
> > http://www.fairmark.com/capgain/dstop.htm
>
> We acquired Home Depot stock on 8/29/1996 and sold it on
> 12/11/2001. That is longer than 5 years.
>
> The 2001 U.S. Return of Partnership IncomePackage 1065
> state on p.23, left hand column, most of the way down...
> "Enter on line 4e(3) the gains (not losses) from the
> disposition of assets (...) held more than 5 years that are
> portfolio income included on line 12 of Schedule D."
>
> According to the fiveyear.htm URL article you cite,
> different tax rates would be applied to the capital gain
> depending upon each partner's tax situation.
>
> Have you had a tax accountant look at this. Or have you
> asked the IRS ?
>
> Thank you,
> ~Ilze

Ira Smilovitz wrote:

> Ilze,
>
> You are absolutely correct. Your sale of HD "qualifies" for
> 5 year treatment.
>
> If the bivio generated Form 1065 and schedules don't reflect
> this then they are in error.
>

At this time I totally agree with Ira Smilovitz.
I do not agree with Paul Moeller and Ron Nagler. I do not
think they are understanding the defined problem. Thus I
will say that the currently generated Bivio Form 1065 and
K-1s are incorrect for our club's 2001 tax year.

Ilze Oredson

Rob,

You're addressing the wrong issue. 5-year capital gains
rates are a reality NOW for taxpayers in the 15% tax
bracket. It's only taxpayers in higher brackets who have to
wait until 2006 and who need to consider the deemed sale
election. The only way for 15% bracket taxpayers to know
that they have qualifying gains is through the use of line
4(e)3 on Schedule K-1.

Why the IRS has chosen not to segregate 5-year gains on
Schedule D is beyond me, but it's not the only stupid thing
they've done this year on Schedule D and the related
Schedule K-1 instructions. If you read the sentence in the
Schedule K-1 instructions just before the one Ilze quoted,
you are instructed to include on line 4(e)2 [28% gains] both
line 11 from Sch. D and any 28% gain on Sch. D line 12. If
you read the instructions for Sch. D columns (f) and (g) --
col (f) contains all long-term gains/losses. Col (g)
contains those long-term gains which are subject to 28%
capital gains tax. The instructions for Sch. K/K-1 would
have you double-count the 28% gains. I've communicated this
to the IRS and they acknowledge the potential confusion.

If the bivio generated Form 1065 Sch K/K-1 is not reporting
5-year capital gains on line 4(e)3, I would suggest you get
your programmers back to work. They're not done yet.

Ira Smilovitz
Lakshmi Investments, LLC

Rob Nagler wrote:
> Ilze G Oredson writes:
> > The 2001 U.S. Return of Partnership IncomePackage 1065
> > state on p.23, left hand column, most of the way down...
> > "Enter on line 4e(3) the gains (not losses) from the
> > disposition of assets (...) held more than 5 years that are
> > portfolio income included on line 12 of Schedule D."
>
> The schedule D the instructions are more explicit:
>
> http://ftp.fedworld.gov/pub/irs-pdf/f1065sd.pdf
>
> "Partnerships may elect to treat certain assets held on January 1,
> 2001, as having been sold and then reacquired on the same date. The
> purpose of the election is to make future gain on the asset eligible
> for an 18% (instead of 20%) capital gain tax rate at the
> partner level. The 18% rate is applicable to the extent to gain would
> otherwise be taxed to the partner at 20% if the holding period of the
> asset begins after December 31, 2000, and the asset is held more than
> five years."
>
> In other words, the partnership cannot take advantage of the five-year
> capital gain rate until 2006. More importantly, the partnership must
> enter a deemed sale this year for assets which it wishes to be
> eligible for the 18% rate at the partner level. You may not enter
> deemed sale for a loss. You may enter the deemed sales yourself, and
> bivio will calculate your schedule D correctly. However, according to
> the scheduled D instructions you must "attach a statement to the
> return stating that the partnership is making an election under
> section 311 of the Taxpayer Relief Act of 1997 and listing the assets
> for which the election is being made." Please see the document for
> details on how to enter deemed sales and other restrictions including
> filing dates.
>
> I think part of the confusion is that the entity (investment club)
> must make the election, not the partner.
>
> > Have you had a tax accountant look at this. Or have you
> > asked the IRS ?
>
> We have discussed this at length with a tax accountant.
>
> Cheers,
> Rob Nagler
> bivio Inc.
>
> Disclaimer: statements are opinions expressed by bivio Customer
> Support and are not official statements from the IRS. These
> statements are not intended to replace professional tax or
> accounting advice. When in doubt, follow the advice of your
> local tax advisor or accountant who is familiar with your
> particular circumstances.

Ira Smilovitz writes:
> return. The proportionate share of the 5-year gain should be
> shown on Sch. K-1, (but not segregated on Form 1065 Sch D).
> When each partner completes her/his Form 1040 Sch D, s/he
> will determine the appropriate tax rate through the various
> worksheets and tax tables.


To be clear, the returns we're generating are perfectly legal. We've
taken a conservative approach after consultation with our tax
accountant.

We are discussing this internally. We will keep you posted via this
message board.

Cheers,
Rob Nagler
bivio Inc.

Rob,

If I've implied in any way that the current returns are
illegal, please accept my apology. That was certainly not my
intention. I believe the returns are wrong, but not illegal.
At worst, some partners may pay more tax than they are
required to pay.

Ira Smilovitz
Lakshmi Investments, LLC

Rob Nagler wrote:
> Ira Smilovitz writes:
> > return. The proportionate share of the 5-year gain should be
> > shown on Sch. K-1, (but not segregated on Form 1065 Sch D).
> > When each partner completes her/his Form 1040 Sch D, s/he
> > will determine the appropriate tax rate through the various
> > worksheets and tax tables.
>
>
> To be clear, the returns we're generating are perfectly legal. We've
> taken a conservative approach after consultation with our tax
> accountant.
>
> We are discussing this internally. We will keep you posted via this
> message board.
>
> Cheers,
> Rob Nagler
> bivio Inc.

We will be fixing the five-year capital gains problem this week.
There will be a midweek release to correct problem.

I apologize to Ilze and Ira. You are correct. The five-year capital
gains should always be reported on the K1s.

The 1040 schedule D worksheet automatically excludes the gains for
anybody in the higher brackets. We originally were concerned that
club members (most of whom do not qualify for five-year gains) would
report the gains, and end up with potential audit problems.

It is also important for clubs which wish to take advantage of
qualified five-year capital gains for all members in 2006 to enter
deemed sales this year before they file their taxes. Please read the
previous post on the subject:

http://www.bivio.com/club_cafe/mail-msg?t=23828500003

Again, thank you Ira and Ilze for your persistence in helping us
understand the problem.

Cheers,
Rob Nagler
bivio Inc.

Just wanted to clarify Rob's post.

If your club had a 5+ year capital gain, AND, one or more of
your club members is in the 15% or lower tax bracket, then
you should use the corrected bivio forms when they become
available.

Otherwise, the current forms are just fine.

--Ion

Thank you Bivio for fixing the reporting of "five-year
capital gains" on the K-1s. Some years there have been mid
length capital gains ! This year there are five+ year
gains. Who knows what there may be next year. Tax laws
keep changing and thus READING and filling out, as correctly
as possible, the forms is a requirement for least possible
tax consequences. Thus the following paragraph does not
sit well. As I am the one who is signing my name to the
1065 for our club, I want to be able to explain, and
believe, that what is on the forms is correct.

Rob Nagler wrote:
>
>The 1040 schedule D worksheet automatically excludes the gains for
>anybody in the higher brackets. We originally were concerned that
>club members (most of whom do not qualify for five-year gains) would
>report the gains, and end up with potential audit problems.
>

----------

Ion Yadigaroglu wrote:
>
> If your club had a 5+ year capital gain, AND, one or more of
> your club members is in the 15% or lower tax bracket, then
> you should use the corrected bivio forms when they become
> available.
>

Our club has 20 members in various economic stratas -
retired, working, part time etc. I do not care to ask them
what their tax brackets are. Correctly filled out K-1 forms
solve the problem.

Guess I'm a hard core perfectionist....
Keep up the good work Bivio !!!
Ilze Oredson