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Tax Experts
Posted on 4/10/17 at 7:34 am
Posted on 4/10/17 at 7:34 am
I know poodle was our resident tax expert, but with his passing, I hope that someone will be able to answer this.
I invested in a partnership three years ago. It was a baseball sports thing. I invested 10,000. Year 1 I received a k-1 with an ordinary loss of 1,100. Year 2 I received a k-1 with an ordinary loss of 700. At that point the primary investor was becoming really flaky. I talked with my best friend (who had convinced me to invest), and he was fed up with the whole situation, and did not see a positive outcome. At that point I announced my intentions to abandon my interest in the partnership. That was in March. In September, the partnership effectively folded. I received no k-1 and repeated communication to the primary partner has turned up nothing.
According to section 165, I can take the loss as ordinary if I meet the rules to abandon the partnership. I have communication to the partners about the abandonment, and I removed myself from any decision making processes. I ceased being involved entirely.
If I can deduct the remaining 8,200 as ordinary, where do I do it on my 1040? I don't have a k-1. Do I take it as a casualty loss and report it under other income? That is the tricky part I am not getting --where do I report this? I have looked and looked for a solution to no avail. Also, if I don't ever receive a k-1, how am I to proceed. Attach a note to my return?
I invested in a partnership three years ago. It was a baseball sports thing. I invested 10,000. Year 1 I received a k-1 with an ordinary loss of 1,100. Year 2 I received a k-1 with an ordinary loss of 700. At that point the primary investor was becoming really flaky. I talked with my best friend (who had convinced me to invest), and he was fed up with the whole situation, and did not see a positive outcome. At that point I announced my intentions to abandon my interest in the partnership. That was in March. In September, the partnership effectively folded. I received no k-1 and repeated communication to the primary partner has turned up nothing.
According to section 165, I can take the loss as ordinary if I meet the rules to abandon the partnership. I have communication to the partners about the abandonment, and I removed myself from any decision making processes. I ceased being involved entirely.
If I can deduct the remaining 8,200 as ordinary, where do I do it on my 1040? I don't have a k-1. Do I take it as a casualty loss and report it under other income? That is the tricky part I am not getting --where do I report this? I have looked and looked for a solution to no avail. Also, if I don't ever receive a k-1, how am I to proceed. Attach a note to my return?
1
Posted on 4/10/17 at 9:43 am to Boss
Did you treat this partnership as passive in Year 1 and Year 2, or nonpassive?
Posted on 4/10/17 at 9:55 am to Boss
quote:
It was non-passive
That will help a little bit for sure.
Basically, this is a tall mountain to climb, but with the right facts, you can do it.
You need to show that the loss was essentially a theft. If it was just bad business decisions, that would make the loss a capital loss. For it to qualify for ordinary loss treatment, you may be required to show that a theft of malfeasance occured.
You said the primary investor was "flaky"... does that mean she stole or misappropriated the money?
Honestly, I would not take this position without seeking the services of a qualified tax attorney or CPA. The chance of IRS asking questions are pretty high, so you want to make sure you can defend your position.
As far as reporting, you would use Form 4864, Section B, treating this as a loss from theft of a trade, business, rental, or royalty property. From there, the loss goes to Form 4797 as an ordinary loss, and then if applicable, goes to the other gains and losses line on the 1040.
Posted on 4/10/17 at 10:09 am to LSUFanHouston
Thanks for the help.
I was looking at these websites for guidance:
Abandonment
Abandonment part 2
Basically, instead of treating as theft, I treat as casualty. It was set up as an LLC treated as a partnership. I was a general partner and had an active role in the business (thus the ability to take it as an ordinary loss in years 1 and 2).
So I have two tracks I could take, I think. Declare the abandonment and try to take it as ordinary. Or the partnership is done, it doesn't exist anymore. Since I was active, can I treat the remaining as ordinary? If I did in year 1 and 2, why would it revert to passive in year 3.
I was looking at these websites for guidance:
Abandonment
Abandonment part 2
Basically, instead of treating as theft, I treat as casualty. It was set up as an LLC treated as a partnership. I was a general partner and had an active role in the business (thus the ability to take it as an ordinary loss in years 1 and 2).
So I have two tracks I could take, I think. Declare the abandonment and try to take it as ordinary. Or the partnership is done, it doesn't exist anymore. Since I was active, can I treat the remaining as ordinary? If I did in year 1 and 2, why would it revert to passive in year 3.
Posted on 4/10/17 at 11:00 am to Boss
IF you are a general partner, how were you not able to better control the situation with the business? I think you are building more and more a case for an ordinary loss.
An ordinary operating loss is different from an ordinary loss due to abandonment. The fact that you were nonpassive helps to establish that this was a trade or business, which helps you with the abandonment position.
You still have to show that something unsavory occured, that's not just bad business luck. It's a little easier for a partner interest (or an LLC treated like one, the case here) than it is with corporate stock, but there still has to be a reason that it's just not a run of the mill capital loss.
I think you can get there. But just make sure that you have all your ducks in a row, as there's a decent chance this could get looked at.
An ordinary operating loss is different from an ordinary loss due to abandonment. The fact that you were nonpassive helps to establish that this was a trade or business, which helps you with the abandonment position.
You still have to show that something unsavory occured, that's not just bad business luck. It's a little easier for a partner interest (or an LLC treated like one, the case here) than it is with corporate stock, but there still has to be a reason that it's just not a run of the mill capital loss.
I think you can get there. But just make sure that you have all your ducks in a row, as there's a decent chance this could get looked at.
Posted on 4/10/17 at 11:20 am to LSUFanHouston
I was a general partner but I only had a 5% share. There were 3 other partners, and the main guy had 51%. So he had control of the voting. He did not call regular meetings, he did not provide financials, and he paid himself a salary to run the business. (The whole thing was shady and I got burned).
During the course of the business he had a disagreement with the owner of the property that we were leasing (a huge warehouse), and she brought suit. Without calling a board meeting, he contacted a lawyer, nullified the lease, and sold off the assets. I received no return on the sale of the assets. He had no outstanding liabilities, so I am assuming he pocketed the rest and just took it.
I asked repeatedly for a copy of the financials, the bank statements, and a copy of the partnership return and the k-1, and he either has not responded or said he does not have them. So I have little information to go off of, other than the fact that I got screwed, and just want to be able to take the 8,200 all this year, so I can at least get some tax benefit from it.
During the course of the business he had a disagreement with the owner of the property that we were leasing (a huge warehouse), and she brought suit. Without calling a board meeting, he contacted a lawyer, nullified the lease, and sold off the assets. I received no return on the sale of the assets. He had no outstanding liabilities, so I am assuming he pocketed the rest and just took it.
I asked repeatedly for a copy of the financials, the bank statements, and a copy of the partnership return and the k-1, and he either has not responded or said he does not have them. So I have little information to go off of, other than the fact that I got screwed, and just want to be able to take the 8,200 all this year, so I can at least get some tax benefit from it.
Posted on 4/10/17 at 11:32 am to Boss
quote:
I was a general partner but I only had a 5% share.
In the future, I would avoid doing this. Even in an LLC environment, general partners / member-managers can potentially be held personally responsible in matters of fraud. For a 5% interest with no control, I would have taken a limited interest. Even if that makes you passive. Just my two cents.
quote:
During the course of the business he had a disagreement with the owner of the property that we were leasing (a huge warehouse), and she brought suit. Without calling a board meeting, he contacted a lawyer, nullified the lease, and sold off the assets. I received no return on the sale of the assets. He had no outstanding liabilities, so I am assuming he pocketed the rest and just took it.
I think that's your money shot here. Even if natural abandoment doesn't please the IRS, you have an ironclad case here for theft and/or misappropriation of assets.
Posted on 4/10/17 at 11:50 am to LSUFanHouston
Awesome, thanks for the help. Now where do I report this? Still on 4684 as theft, or as casualty?
Posted on 4/10/17 at 12:06 pm to Boss
The 4684, then the 4797, then ordinary gains/losses on the 1040.
Treat it as a business loss. IF you treat it as a personal loss, it will end up on Sch A which you don't want.
Treat it as a business loss. IF you treat it as a personal loss, it will end up on Sch A which you don't want.
Posted on 4/10/17 at 12:16 pm to LSUFanHouston
Awesome...thanks for your help. I am going to do that and roll the dice. The rest of my return and my years past is so vanilla, that I am not worried about anything being looked at.
Posted on 4/10/17 at 1:23 pm to Boss
Good luck. At least the dollar amount is "relatively" low. My guess is your only real exposure is if you get randomly selected for a research audit. If that happens, they will definetly look at this.
Posted on 4/10/17 at 1:35 pm to LSUFanHouston
Not tax related, but why would you not file a police report for theft? It's white collar theft in the least and potentially more going on. Worst case, you have a police report for the IRS. Best case you get money back.
Posted on 4/10/17 at 3:22 pm to baldona
quote:
but why would you not file a police report for theft? It's white collar theft in the least
The failure or mismanagement of a business venture does not necessarily constitute a crime. There is risk involved.
Posted on 4/10/17 at 4:04 pm to VABuckeye
He said he broke the lease and sold off all assets without consulting any other partners, and no one got anything from the sale of the assets. There's possibly grounds for theft as well as a lawsuit for breach of the partnership agreement.
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