Discussion:K-1 from Hedge fund
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Discussion Forum Index --> Tax Questions --> K-1 from Hedge fund
| 28 July 2009 | |
| I'm looking at a partnership K-1 from a Hedge Fund & am confused (more than usual).
Line 1, Ordinary Business Income shows $40,000. The attachment to the K-1 states that line 1 consists of $60,000 of qualified dividends and $20,000 of non-passive business loss. So, do you all think that I can split out the $60K & get the benefit of the lower tax rate on qualified dividends? Thanks. | |
| 28 July 2009 | |
| Kevinh5 - I think what they're getting at is the Section 469 passive activity issues. As I understand it, an exception to the passive activity loss rules has been carved out for traders.
I checked the client's IRS Wage & Income Transcript & it shows the $40,000 of income from the partnership, so I'll somehow have to make sure I don't trigger a matching problem. | |
| 28 July 2009 | |
| Agree that the trade or business of trading personal property is not a passive activity. | |
RoyDaleOne (talk|edits) said: | 30 July 2009 |
| If reporting deviates from the K-1 reporting what must we do?
And not for nothing qualified dividends, possible could be correctly reported on Line 1. | |
| 22 September 2009 | |
| I am wondering if anybody has experienced the matching discrepency notice CP2501 regarding amounts reported on the face of a hedge fund schedule K-1, which the IRS picks, and the detail amounts reported on the attachments to the schedule K-1 which often the preparers report. For example line 11 of schedule K-1 might report Other Income of $20,000 while the attachment referenced to line 11 might break it down as long-term capital gains $15,000 and short-term capital gains of $5,000. The IRS will be looking for $20,000 of Other Income, while the preparer has reported it as $15,000 of long-term capital gains and $5,000 of short-term capital gains.
I am interested in hearing about your experiences with the IRS trying to resolve such descrepencies. | |
Death&Taxes (talk|edits) said: | 22 September 2009 |
| I've never had a discrepancy notice regarding Line 11. The K-1 instructions even note the number of potential forms that could be involved including 6781 for Code C, 4797 in regard to several items under Code F, Line 21. The sheer complexity at this point probably defeats efforts to reconcile same via a CP2501.
I am completing a client now who owns 31 partnerships offered through his investment banking firm and most contain at least threeo items on Line 11 [Section 987 & 988 gains or losses, various gains that may or may not be from portfolio income, straddles etc.] I use a spreadsheet to list these by partnership, though I hope to efile the return and keep the spreadsheet only for future reference or IRS questioning. If I don't efile this return, his state (PA) requires a copy of each K-1, and each other state that might be involved through these K-1s. | |
| 22 September 2009 | |
| D&T, I used the line 11 Other Income as a simplified example to get my point across. I use spreadsheets in reporting Hedge funds schedule K-1 as well (but do not send it to the IRS) given the volume of information on such K-1s. I have not received CP2501 relating to Hedge fund reporting until now. Therefore, I am trying to see how best I can respond to the CP2501 given the complexity of the reporting of hedge fund schedule K-1.
What would be the agrument(s) against a possible assertion that the taxpayer should report the amounts on the face of the Schedule K-1(i.e. lines 1 thru 20) and not on the attached supporting statements for the hedge funds? | |
| 22 September 2009 | |
| You are not required to use the face amounts on the K-1 if the attachments break it down. Just be sure your computer doesn't do something tricky with the corrected input. The Wage & Income Transcripts I've seen reference lines 1 -11 and 20A, so an increase in lines 1 and 11 is not going to affect it. | |
Death&Taxes (talk|edits) said: | 22 September 2009 |
| There is no way to fireproof the return, but if a CP2501 is sent, you should be able to reconcile the items to the return, showing IRS where the 'bodies are buried,' so to speak. Page Two of the K-1, and the K-1 instructions are the basis for where items are reported. | |
| 11 October 2009 | |
| Hi everyone -
I was reading these posts to confirm how I have been entering these hedge fund K-1s. On the ones I'm getting, it appears you have to enter the amounts on lines 1-10 AND ALSO the items broken out in box 11. It's not either/or, I don't believe. If you add all the regular items shown to the amounts broken out in Box 11 you can reconcile to the partnership's reconciliation of book/versus tax income. At least on the ones I'm getting. So I've been entering BOTH sections as income. One on a passive K-1 and one on a non-passive K-1. I think that's what they are trying to get at in breaking out some items separately. Do you disagree? | |
| 12 October 2009 | |
| "One on a passive K-1 and one on a non-passive K-1."
Careful. I'd bet that's not correct. If the entity is only trading, not investing in trades/businesses, then all of the allocations are non-passive. If you are unsure, contact the firm that prepared the partnership return. The entities that I see that have both specify in supplemental schedules the portion that is non-passive. | |
Jamesconnolly (talk|edits) said: | 2 November 2009 |
| I have a related question for the items that are detailed out in the K-1 footnotes for boxes 11F "Other Income" and 13W "Other Deductions". It seems that there is some consensus from the above responses that one can and maybe should break out things such as qualified dividends and long-term capital gains in order to take advantage of the more favorable rates. My question question is whether that is required or just optional? Secondly, can you "cherry pick" which items to break out and which to group as other income or other deductions? In other words, in almost every case it's to your benefit to pull out qualified dividends. But what about long-term capital losses? If the client already has capital losses in excess of gains of $3,000, then there would be no benefit to taking these as capital losses. It would actually be preferable to take them as ordinary losses grouped with other 11F items. Another example would be charitable contributions sometimes found in 13W. Maybe the client has already taken more than 50% of AGI in contributions deductions. To break this item out, would be to limit the deduction, since it theoretically could be taken in lump sum with other 13W items. In both of these cases, I would be better off pulling out the qualified dividends and leaving these items among the others. | |
| 3 November 2009 | |
| The K-1s I have seen don't even put a dollar amount on those lines in the K-1. They have a footnote that says "see statement attached". I would assume it's the detail that has to be reported to do it correctly since it's a pass through entity and the type of transactions are not from one business operation, but hope someone can post some authoritative info that would nail this down. These K-1s are more complicated that oil and gas. | |
| 3 November 2009 | |
| The instructions to Form 1065, Schedule K-1 state:
“Generally, you must report partnership items shown on your Schedule K-1 (and any attached schedules) the same way that the partnership treated the items on its return. This rule does not apply if your partnership is within the “small partnership exception” and does not elect to have the tax treatment of partnership items determined at the partnership level.” “If the treatment on your return or amended return is inconsistent with the partnership’s treatment, or if the partnership was required to but has not filed a return, you must file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with your original or amended return to identify and explain any inconsistency (or to note that a partnership return has not been filed).” In your case, the K-1 was incorrectly prepared. The $40,000 of ordinary business income shown on the face of the K-1 consists of $60,000 of qualified dividends and a $20,000 nonpassive loss. So, if you report the $60,000 and $20,000 as separate items, are you reporting partnership items that are consistent with the K-1? My answer is no. The language in the instructions is derived from IRC §6222. Treas. Reg. §301.6222(a)-1(b) states, “The treatment of a partnership item on the partner’s return must be consistent with the treatment of that item on the partnership return. Thus, a partner who treats an item consistently with a schedule or other information furnished to the partner by the partnership has not satisfied the requirement of paragraph (a) of this section [requiring consistent treatment] if the treatment of that item is inconsistent with the treatment of the item on the partnership return actually filed.” [emphasis added] My recommendation is to report the $60,000 and $20,000 items separately and attach Form 8082. | |
| 3 November 2009 | |
| What about in the case where the K-1 just reads, "see statement attached". Then one can only report based on the detail anyway, so perhaps the preparer as you indicate in those cases is preparing incorrectly? | |
| 3 November 2009 | |
| If the K-1 just reads, "see statement attached," and the partner reports the items on the return consistent with the statement, then there is no inconsistency with the partnership return. The situation that I think the regulation is addressing is where the K-1 says one thing, an attachment to the K-1 says something else, and the partner follows the attachment (rather than the K-1) in reporting the items on the return. | |
| 3 November 2009 | |
| I would agree. What I try to do is reconcile beginning to ending capital to make sure you pick everything up aside from the AMT and other additional info. I got one of these a couple years ago from another CPA and the only items picked up were on the first page, although a couple hundered thousand was in the "see statements" so reconciling these beasts is a good idea. | |
| 3 November 2009 | |
| My recollection is that the reason that the reporting is not consistent with what you see on other K-1s is because the interest and dividends are not passive and not portfolio income under one of the regs. Neither is the allocation of expenses incurred to generate that income. The form of disclosure that you are describing is pretty common. Your client's return should be prepared consistent with the information disclosed on the K-1. You do not have an option of choosing to treat capital losses as anything other than capital losses. I would not attach an 8082. If the K-1 says one thing and the attachment is not consistent, then by all means ask the preparer of the return for clarification, don't make any assumption, and document the resolution. There is usually a reason. As Swheeler implied, watch out for all of those extra statements. The partnership didn't generate them for fun; they have important information. Watch out for tax shelter and other disclosure requirements, which might be alluded to "additional information is available upon request". Understand what you are passing on, because some of those penalties for not filing are truly outrageous. For example, make the preparer of the partnership's tax return tell you in writing that the fund did not contribute over $100,000 to any foreign corporation on your client's behalf if there is a reference to Form 926 possibly being required. Yes, these K-1s are brutal, but they are manageable if you just take each page one at a time and ask questions as they arise. | |
