Disposal of a Partnership Interest
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Disposal of a Partnership Interest Jim Thomas has been holding my feet to the flames
in connection with reporting requirements for a member who experiences a
complete withdrawal from an investment club. I thought the exchange of emails
might be of interest to others. Jim's comments are bolded and italicized. He
raises a point about bivio's withdrawal statement.
I'm also curious about the "Gain/(Loss) Realized on Withdrawal (B)-(A)" item in the [bivio] withdrawal reports. Later in the report it says "Note- any gain/loss realized on withdrawal must be reported by the member on Schedule D of the 1040.", but this value does not show up anywhere on Sched K-1. Shouldn't everything that needs to be reported to the IRS appear somewhere on the K-1? And I respond.........
The k-1 is designed to report a member's
distributive share of partnership income. The gain/loss that a member realizes
from his/her disposal of a partnership interest appears nowhere on the
partnership return, but must be reported by the withdrawing partner on Schedule
D of his/her 1040. The purpose of the Member Withdrawal Statement is to provide
the necessary figures for this.
It should also be noted that, in addition to reporting the
sale on Schedule D, the member should record all the k-1 items on his/her
individual tax return. These k-1 items will have been added/deducted from the
basis for the partnership interest as reported on the Member Withdrawal
Statement.
Back to Jim.......
It's hard to believe there is no
requirement that the partnership report this gain to the IRS (perhaps on one of
the various types of 1099, or even on line 25 of the
K-1).
Can you give me a reference in an IRS
publication that discusses this topic (something more specific than just
Publication XXX).
And I respond...........
An investment in a partnership is akin to an
investment in a security. With a security, the broker may or may not keep track
of the investor's cost basis. The broker will report the gross amount of any
sale to the IRS.
The partnership does report the gross amount of any
distributions to a partner on line 22 of the k-1. The partnership may not be in
a position to know the gain/loss that should be reported. This would happen if
one partner bought the interest of another partner. If this happens outside the
partnership, the club has no record of the transaction. It is for this reason
that I always recommend that any buy out be done through the partnership. That
is to say, have the club redeem the units and have the new partners put in funds
to buy new units. If it is done in this manner, the club will know the gain/loss
on withdrawal, and thus is able to generate the withdrawal
statement.
Since the partnership may have no means of knowing
what the gain is, there can be no requirement on them to report the gain to the
IRS. Therefore, I can't give you a reference, since it is impossible to document
a non-requirement.
Back to Jim..............
Thanks for the detailed
explaination. It makes sense now.
BTW ... how *would* I describe this on
Schedule D? As a sale of "xxx units of YYY partnership"? Would it be
important to mention on Schedule D that it was a "full" (or "partial")
withdrawal?
And I...............
If it was a full withdrawal, I would call it
'Disposal of Partnership Interest'. If a partial, I would refer to it as
Partnership withdrawal in excess of basis. And Jim.........
In my NCA manual (v1.02, also over 5
years old) there is more detail (pg 16-34). Interestingly the Withdrawal
Earnings Report described there has a section (gone from the v1.04 report)
titled Value Appreciation where the capital gain associated with the withdrawal
*is* broken down into ST and LT gains (" ... based upon when the units being
withdrawn were purchased.). You said previously that the entire gain was
LT if the partner had been a member of the club for over 1 year. Have the
rules on this changed since 1995?
My answer [with the remarks about the tax expertise at
NAIC headquarters slightly toned down <g>]
......................
The rules have not changed! Each member of an investment
club holds an undivided interest. The holding period of this interest starts
with the date of the first contribution. NAIC [and the NCA software] used to
allocate the gain on withdrawal between long-term and short-term on the basis of
the dates for the units held. This was wrong, and they both have now
changed.
If it needs saying, I really appreciate the give and take
with someone like Jim. It keeps me on my toes, and provides good information for
other users.
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