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Tax Law (Questions About Taxes)/Cost Basis of Limited Partnership Shares

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Question
My mother owned units/shares in a publicly traded limited partnership energy company that issues a K-1. As I understand it, the annual partnership distributions are not taxable but affect the cost basis when shares are sold. The parent company did a merger deal buying up all the limited partnership units.

Unitholders received shares in the parent company as well as cash per unit. My question is how to determine the cost basis of the units sold and the cost basis of the newly acquired parent company shares.

Say she bought a unit/share for $50 five years ago. If it was $100 a unit/share when it sold as part of the merger deal how do you allocate the cost basis.

For every limited partnership unit she received two shares of common stock worth about $40 per share and $10 cash. So her brokerage account shows the units being sold for $10 per unit/share. For tax purposes how does she allocate the cost basis between the units sold and the new shares of common stock acquired in the deal?

In addition, its my understanding that the cost basis of the limited partnership units must be adjusted by adding reported income and subtracting reported expenses from annual K-1's and subtracting partnership distributions for every year you own the units. Is this correct?

She owned this investment jointly with my late father in a JTWROS brokerage account. Since she technically inherited half the shares when he passed, am I right in assuming that the cost basis for those half of the shares only has to be adjusted from the date she inherited and not from the date of the original investment?

Thank you for your time and expertise.
Lee

Answer
Lee,

Thanks for your question.

The answer depends on a number of factors, based on what is reflected on the K-1, as well as any distributions that were received.  The nature of the situation would not give rise to answering this question fully without a face-to-face conversation.  However, I will present some guidelines that may help you.

1. Any income as shown on the K-1 would increase her basis (or losses decrease basis). The income and expenses you refer to are netted on the K-1. Not just operating income.  

2. Several of the items on the K-1 require special treatment, such as Sec 179 deductions.

3. Part II of the K-1 should show the increase or decrease in her capital account during the year.  This is her inside basis, which is the value of her share of the company on the books.  Outside basis, which is her original cost (as adjusted for the inherited portion) plus increases in her capital account and minus decreases in the account for each year, is her basis for gain or loss. You have a tricky calculation in separating the basis of the shares she owned the entire time from the basis of the shares she inherited.

4. When she inherited the husband's portion of the ownership, that portion got a stepped-up basis to FMV as of the date of death.

5. The cost basis will be allocated based on the fair market value of what was received.  If she had basis of $1,000 and received stock valued at $1500 and cash of $500 (for example), then 75% of the $1000 cost basis would be allocated to the shares.

Hope this helps.

John Stancil, CPA  

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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