Publicly traded partnerships (PTPs) have become popular investment vehicles as investors look for higher distribution yields than stocks are paying.1 Unfortunately, what is often touted as "dividend income" are really partnership distributions that cannot be directly compared to dividends paid by corporations.
For example, the December 2017 issue of Kiplinger's Personal Finance has an article, "Our Top Dividend Picks," that lists two PTPs as high-yield dividend companies (Blackstone Group and Enterprise Products Partners) but only identifies one of them as in fact a partnership and the "dividends" as distributions.2 To an unknowing investor, the discussion of cash flow and the high yield from a PTP might seem attractive, especially if the investor is unaware of any tax reporting requirements of PTPs beyond what is required when holding stock in a company. This could cause a tax reporting nightmare for the investor.
Investing in a PTP is as simple as buying stock in a corporation, but the similarity stops there. The investor owns an interest in a partnership and is treated as a limited partner (or a member, in the case of a limited liability company (LLC)) of a flowthrough entity. There are numerous tax implications of investing in a partnership, some of which are not favorable, that investors should be aware of when making an investment in a PTP. To start, the investor will receive a Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., listing the annual flowthrough tax information as opposed to a Form 1099-DIV, Dividends and Distributions, which is received when investing in a corporation. Further, because of the complexity in completing the Schedule K-1, a taxpayer may not receive it until shortly before or even after April 15, requiring the individual taxpayer to file for an extension of his or her tax return.
Many PTP investments are said to carry a high "dividend" yield. This is a misnomer, in that the cash received is treated as a return of tax basis in the partnership interest.3 The distribution does not necessarily correspond to a distribution of income. This is in stark contrast to a dividend distribution received from a corporation that, by definition, is a payment from the corporation's earnings and profits4 and currently may receive preferential tax treatment.5 A cash distribution from a PTP, although it is not currently taxable, will reduce the owner's tax basis in the partnership interest.6 The end result will be a larger gain or a smaller loss when the PTP interest is eventually sold, with the possibility of ordinary income being generated because of Sec. 751(a), under which any amount received by a partner in exchange for all or a part of the partner's interest in the partnership attributable to its unrealized receivables or inventory items is considered realized from the sale or exchange of property other than a capital asset.
Prior literature has often discussed investing in a PTP from a general perspective without regard to an understanding of PTPs from a tax investment perspective.7 Missing in the discussion of PTPs are the often-complicated reporting requirements for individual investors in completing their annual income tax return8 and possible traps for tax-exempt investors due to unrelated business taxable income issues.
This article discusses the detailed and often-complicated tax reporting requirements and analyzes the tax implications for individual investors when they own or sell an interest in a PTP. It does not discuss the economics of the investment, but rather summarizes the tax implications and reporting requirements of holding a partnership interest. The article compares owning corporate stock with owning a PTP interest to illustrate the differences between those two investments and suggests other ways of investing in a PTP to make the the tax reporting for individuals much easier.
Publicly traded partnerships
A PTP is any partnership if interests in the partnership are traded on an established securities market or interests in the partnership are readily tradable on a secondary market or its substantial equivalent. A PTP is in general taxed in the same manner as a corporation since it is treated as an association for tax purposes.9 However, this rule does not apply to PTPs if 90% or more of their gross income is certain types of passive income. These PTPs, which are the focus of this article,10 are generally treated as partnerships and are not subject to an entity-level federal income tax.11 Many PTPs can be found in specific industries such as oil and gas,12 and a current list of PTPs can be found at suredividend.com/mlp-list or by referring to the Alerian MLP Index. A PTP investor will receive an annual Schedule K-1 detailing the flowthrough tax information for the interest owned, rather than a Form 1099-DIV, which is received when corporate stock distributes a dividend.
A comparison of an investment in a PTP to an investment in a corporation finds three differences: (1) the annual accounting for the flowthrough tax information on the investor's tax return; (2) the proper adjustment of the basis in the partnership interest; and (3) the complex reporting requirements of the sale of a partnership interest. The flowthrough tax information provided on Schedule K-1 requires annual adjustment to the tax basis of the PTP interest or what is commonly referred to as "outside basis," meaning the partner's basis in the partnership interest.13 Unlike for stock investments, brokerage firms do not track these basis adjustments, and they are not reflected in the investor's basis in the brokerage account. Instead, the investor must account for these adjustments.
The most common adjustment comes from cash distributions, which reduce the partner's tax basis in the partnership interest.14 The distributions are commonly, but incorrectly, referred to as dividends in many publications. For example, in the December 2017 issue of Kiplinger's Personal Finance, Blackstone Group reported an annual $2.16 per unit15 distribution with a Sept. 29, 2017, "share price" of $33 that is mistakenly described as a 6.5% dividend yield.16 This is in contrast to a corporate distribution from a corporation's earnings and profits, which is a dividend taxable to the shareholder, albeit subject to preferential tax treatment.17
For an individual shareholder, qualified dividends are taxed at a favorable maximum tax rate and, for a corporate shareholder, there is a dividend exclusion of at least 50% for dividends from domestic corporations.18 In general, there is no adjustment to the shareholder's stock basis when a distribution is received. When the stock is sold, the shareholder reports either a capital gain or loss. The sale of a PTP interest is far more complicated because of Sec. 751(a), resulting in the gain being partially treated as ordinary income in certain cases, as discussed below.
For illustrative purposes, this article analyzes the 2016 pro forma Schedule K-1 for the Blackstone Group to illustrate the tax consequences.19 Table 1 summarizes the flowthrough information found on the Schedule K-1 and its relation to the distribution; Table 2 summarizes the impact on the investor's basis in the partnership interest; Table 3 summarizes the unrelated business taxable income; and Table 4 summarizes the other income including the Subpart F income. The Schedule K-1 reports total net passthrough income of $12,218 and a cash distribution of $16,600 for 2016.20 The distribution of $16,600 exceeds the passthrough net income by $4,382, resulting in a decrease in the investor's basis in the partnership interest.21 For calendar year 2016, Blackstone Group made a total cash distribution of $1.66 per unit.
Based on a Dec. 31, 2015, market price of $29.24 per unit, the popular press would report the yield as 5.677%. However, this would be an overstatement since a portion of the distribution was a return of tax basis and not income. A better comparison would be to use the per unit net income that passed through, $1.22 per unit, divided by the market price at Dec. 31, 2015, of $29.24, resulting in a yield of 4.172%. This is significantly lower than just using the cash flow divided by the market price.
For many investors the complexity of reporting the information from a PTP Schedule K-1 on their tax return may make a small investment in a PTP impractical. The proper reporting of the flowthrough information on the partner's tax return will add considerable preparation time. Owning a PTP interest will require the investor to understand: (1) the different types of income and losses that flow through, (2) loss limitations based on the partnership interest's tax basis, (3) the "at risk" rules, (4) the passive activity rules, (5) how to report foreign-source income and calculate foreign tax credits, (6) accounting for alternative minimum tax (AMT) adjustments, (7) how to report various tax credits, (8) how to track the partnership interest's constantly changing basis (and the parallel AMT basis in the partnership interest), (9) multistate filing requirements and thresholds, and (10) complex reporting rules when the interest is sold.22
This is in stark contrast to holding stock in a corporation where the investor receives a Form 1099-DIV for dividend income and a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, when the investment is sold, which often includes stock basis information. Many investors are also more familiar with the Form 1099 and Schedules B, Interest and Ordinary Dividends, and D, Capital Gains and Losses, of Form 1040, U.S. Individual Income Tax Return, than they are with Schedule K-1 and Schedule E, page 2, and the various other tax forms and schedules where flowthrough information from a PTP is reported.
The owner of a PTP interest must be prepared to accurately report all of the information that flows through on the annual Schedule K-1. Table 1, below, summarizes the flowthrough information from the Blackstone Group's 2016 pro forma Schedule K-1 on a line-by-line basis. Most of the complexity from this partnership interest comes from the proper reporting of the different types of flowthrough income and expenses on the owner's tax return, and maintaining detailed records that include the tracking of the tax basis in the partnership interest (sometimes referred to as outside basis) and carryforward schedules involving suspended passive losses and tax credits.
The starting tax basis of an interest in a PTP is its cost basis, which is the same starting point as stock in a corporation.23 But the similarity stops there. There are three bases that must be maintained for an interest in a PTP: the tax basis, the at-risk basis, and the AMT basis. All of these are updated for the partner's distributive share of items that flow through annually from the partnership including, but not limited to, the partner's share of income, losses, money distributions, additional investments, and share of partnership liabilities.24 In addition, the partner will need to account for the specific tax reporting requirements for the flowthrough information on the tax return consisting of numerous types of income, gains, losses, deductions, and tax credits. As a practical matter, the partner should keep a file with copies of all Schedules K-1 received from the PTP.
The three bases all are adjusted for the flowthrough income, losses, money distributions, additional investments, and share of partnership liabilities. However, these are different amounts. For AMT purposes, the flowthrough income and loss items need to be adjusted for tax preferences and AMT adjustments.25 The amount of liabilities included in the at-risk basis differs by the type of allocated liability.26 In general, nonrecourse liabilities do not increase a partner's at-risk basis, except for qualified nonrecourse debt.27 This is only an issue if the PTP is passing through losses and the partner is running out of basis. Table 2, below, summarizes the required adjustments for the 2016 investment in Blackstone.
The losses a PTP generated that annually flow through to the partner are by definition passive losses, the deduction of which are severely limited.28 The flowthrough passive losses cannot be deducted until that PTP generates passive income or the interest is disposed of in a taxable transaction. Because of this, the partner must maintain detailed carryforward schedules that contain the character of the different types of suspended passive losses.29
For example, if an investment in a PTP has an ordinary loss on line 1 and an equal amount of interest income on line 5 of Schedule K-1, the loss is a passive loss and the interest income is portfolio income. The ordinary loss would not be currently deductible by the partner until the PTP generated passive income or was completely disposed of in a taxable transaction, but the interest income would be taxable immediately. Both of the amounts will affect the partner's basis in the partnership interest.30 This is an unfortunate result for the partner from a tax perspective since the partner is currently paying tax on the interest income but is not allowed to offset that income with the ordinary passive loss.
It is also important to note that there is no tax withholding from PTP flowthrough income. The partner/taxpayer may need to plan for quarterly estimated tax payments, depending on the size of the flowthrough income (or increase withholding from other income sources), factoring in the amount and character of the flowthrough items from the partnership. This can be a problem since the Schedule K-1 is only produced after the year end and is not available for the taxpayer to use in calculating the quarterly estimates. Because of this, a taxpayer could potentially underpay taxes in the quarterly estimates, resulting in an underpayment penalty. There is some relief from this, however, as the income from the partnership flows through to the taxpayer on the last day of the partnership tax year that ends within the partner's tax year.31 In general, this means that the income becomes part of the partner's tax return on the last day of the calendar year since most individuals and PTPs have the same year end.
State income taxes are another consideration for PTP investors. The flowthrough nature of a PTP and the multiple states it may operate in mean that an investor may have filing requirements in states other than his or her state of residence. The Schedule K-1 information packet should contain an allocation of income by state that will allow the investor to determine the reporting requirements. The additional state reporting alone may make an investment in a PTP undesirable.
An investment in a PTP through an individual retirement account or some other tax-exempt entity can cause difficulties if the PTP has unrelated business taxable income (UBTI) that flows through to the owner.32 The tax-exempt entity will be required to file Form 990-T, Exempt Organization Business Income Tax Return, and pay income taxes on this income. The UBTI could be the result of the partnership having debt-financed property, which is evidenced by an allocation of this debt on the partner's annual Schedule K-1. At the time of investment, the tax-exempt entity may not be aware of the debt financing and the allocation of debt on the annual Schedule K-1 since this information is usually unknown until the Schedule K-1 arrives. The 2016 pro forma Blackstone Group Schedule K-1 has partner-allocated debt. Table 3, below, summarizes the UBTI amounts (code V) on line 20.
The reporting requirement for foreign property transfers by U.S. persons is an area of tax reporting that could be hidden within the investment of a PTP interest. The flowthrough nature of the PTP requires the investor/partner to make disclosure filings on Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, as a part of the tax return.33 Though it is an information-reporting form, it is a rather complex form to complete and may cause problems with electronic filling of an individual tax return. Reporting of information about foreign-owned assets has become an important area lately with the IRS looking for unreported offshore assets and imposing failure-to-disclose penalties when it finds them.
Table 4, below, lists several items of foreign income reported on line 11 of the pro forma Blackstone K-1. These items must be properly accounted for by the taxpayer in calculating taxable income and the basis in the PTP interest. The owner of the PTP interest generally will require a significant amount of time to determine the tax treatment of these on the tax return.
The $2,426 described as Subpart F income in line 11A3 does not provide enough detail to determine its proper tax treatment. This in turn requires the taxpayer to go elsewhere in determining the proper tax treatment. The Subpart F income is from a controlled foreign corporation described in Sec. 951 and is reported as ordinary income and not as a qualified dividend under Sec. 1(h).34 The other two items listed are straightforward under the Code and are treated as ordinary income.
Beginning in 2018, individual investors and other noncorporate taxpayers may claim the new qualified business income deduction under Sec. 199A. PTPs will be required to report the information necessary to calculate the deduction to investors on Schedule K-1. The addition of the Sec. 199A deduction will make the already difficult job of reporting for an interest in a PTP more difficult.
The sale of a PTP can be a rather complicated tax event. Much of the gain from the sale may be attributable to Sec. 751 property owned by the PTP and treated as ordinary income rather than capital gain when stock is sold. When a partnership interest is sold, the tax law is designed to treat the partner as if he or she is actually selling an undivided interest in all the property that is owned by the partnership rather than just selling the interest in the partnership itself. This is often referred to as the aggregate theory. If the partnership owns property that, when sold, would generate ordinary income, then the sale of the partnership interest will also generate ordinary income.35
As an example, suppose a partnership owns, as its only asset, inventory with a fair market value of $1,000,000 and a tax basis of $600,000 and that Partner A, a one-fourth partner, sells his interest to another investor for $250,000. From an entity perspective, A has sold an interest in the partnership that is classified as a capital asset under Sec. 741 and would therefore expect to have a capital gain of $100,000 ($250,000 less 25% of $600,000). However, under the aggregate theory of partnership taxation and Sec. 751(a), A has ordinary income of $100,000. In essence, A has sold an undivided one-fourth interest in the inventory by way of selling the partnership interest. The sale is treated as ordinary income, not the more desirable capital gain.
PTP ownership example
The following example is modified from an actual investment in a PTP. Assume an investor bought a limited partnership interest in a PTP in June 2010 for $8,600 and sold that interest in April 2012 for $9,915. If this had been an investment in corporate stock, the investor would have a long-term capital gain of $1,315 and expect to pay a maximum federal tax of $197.36 However, the actual sale of the interest is much more complicated and results in a total gain of $2,935, consisting of ordinary income of $2,020 and long-term capital gain of $915. Table 5, below, summarizes the annual flowthrough activity from the Schedule K-1 and includes ordinary income (loss), interest income, Sec. 1231 losses, and cash distributions (return of basis).
Since the PTP is a passive activity, the ordinary losses and the Sec. 1231 losses are not deducted until the PTP has passive income or is sold, whereas the interest income is taxable each year.37 The PTP also made cash distributions in 2010, 2011, and 2012, respectively, of $245, $560, and $150, each of which is treated as a return of basis, resulting in a larger gain when the interest is sold in 2012.38 The partner is also required to reduce the basis in the partnership interest for the nondeductible expense of $5 in 2011.39 The partner is affected twice by this adjustment. First, the actual expense is not deductible for tax purposes and therefore does not reduce taxable income, and second, when the PTP interest is sold, the tax basis has been reduced, making the gain larger.
The $2,935 gain is divided into two pieces: ordinary gain of $2,020 because of Sec. 751(a) and long-term capital gain of $915.40 For this analysis, assume that the ordinary gain portion is taxed at the (then) 33% rate and the long-term capital gain portion is taxed at the 15% rate. The internal rate of return for the PTP investment is 5.97% for the approximately two-year investment period as calculated using the Excel function IRR. The largest portion of the gain is ordinary income rather than capital gain because the sale of the PTP is treated as the sale of an undivided interest in the property owned by the partnership.41 The ordinary income results in a higher tax liability for the PTP investment, reducing the cash flow from that investment as compared to a similar investment in corporate stock that produces annual qualified dividends and a long-term capital gain when sold that are taxed at the lower preferential tax rates, resulting in a higher after-tax cash flow.
Now turn to the concept of cash flow and summarize the partner's cash flow for the years 2010 through 2012, accounting for the investment, cash distributions, sale, and the tax impact of the flowthrough items and the sale proceeds to the partner. Assume that ordinary income (loss) will be taxed at a federal rate of 33%42 and long-term capital gains and dividend income will be taxed at 15%. This also assumes an applicable state tax rate of 5%43 and excludes the effects of the AMT. A small amount of tax was paid in 2010 and 2011 because of the flowthrough interest income reported in those years. The net cash outflow to the investor for 2010 is $8,357, and the net cash inflows for 2011 and 2012, respectively, are $556 and $9,371, including the effect for taxes. Table 6, below, summarizes the partner's cash flow by year and includes the effect for taxes.
Now compare the same investment and cash distributions as if the investor held stock in a corporation. The tax treatment of the two different investments has a significant effect on the after-tax cash receipts. The annual distributions from the stock are treated as qualified dividend income, which is taxed at a favorable 15% tax rate.44 The calculation of tax from the gain on the sale of the stock in 2012 is straightforward, taking the sale price less the initial investment ($9,915 - $8,600) multiplied by the respective federal and state tax rates. Based on this information, the internal rate of return on holding the stock is 6.79%, which is higher than the partnership rate of 5.97%, and, comparing this to investing in a PTP, the investment in corporate stock is more attractive.
The tax reporting is also much easier when investing in corporate stock. Annually the investors include the dividend income from Form 1099-DIV on Schedule B of their individual return. In the year of sale, Form 1099-B reports the information for investors to report the sale on Schedule D of their individual returns. Overall, the annual reporting and recordkeeping for a stock investment is much simpler than that of owning an interest in a PTP.45 Table 7, below, summarizes the corporate stock investment, including dividends and the tax implications.
Note the total tax paid by the individual for an investment in the PTP is $700 as compared to $454 if holding a similar investment in corporate stock — a tax difference of $246 when the investment is a PTP rather than an investment in corporate stock. This analysis does not include the cost of the additional time required in reporting the yearly flowthrough information from the PTP and the much more complex reporting requirements in the year of sale. If these were quantified and factored into the analysis, the investment in corporate stock would look even more favorable.
PTPs as investment vehicles are often touted as having a high cash yield compared to a dividend-paying corporation. However, as this article demonstrates, there are many differences, from a tax perspective, when comparing an investment in a PTP to owning stock in a corporation. These differences are often not apparent to the typical investor until after the end of the year when a Schedule K-1 arrives. The different annual reporting requirements carry a very high burden for a PTP investor. The investor in a PTP receives a Schedule K-1, which requires inputting information from the Schedule K-1, tracking basis information, and considering the foreign tax reporting and state tax implications when filing an individual tax return. This is much more complex than investing in the stock of a corporation, which would require only inputting information from Forms 1099-DIV and 1099-B.
There are also differences for distributions (cash distribution for a PTP and cash dividend distribution for a corporation) and the sale of the investment, as both are taxed very differently. The PTP distribution is generally a return of basis with the tax effect deferred until the interest is sold, whereas the distribution from the corporation is a currently taxable dividend. The flowthrough nature of a partnership interest brings into play the various tax rate differences from the many types of income, gains, losses, and deductions where the investor is usually subject to both ordinary income and capital gains tax rates. A corporate investment in stock, on the other hand, is generally taxed in a fairly straightforward manner: The distributions are currently taxed as dividends, and the gain or loss at the time of the sale is taxed as a capital gain or loss with capital gain tax rates having preferential treatment over ordinary income tax rates (15% vs. 33% in the example). This produces a preferential tax treatment for an investment in a corporation over a PTP.
To avoid many of the tax implications discussed, investors should consider using a corporate investment, such as an exchange-traded fund (ETF) that holds interests in a number of PTPs. In this case, the investor's ownership interest would be similar to that of an investment in corporate stock; there would be no flowthrough consequences; and at the time of the sale, Sec. 751(a) would not apply, making any gain or loss recognized as a capital gain or loss. This alternative would also allow investors to invest in PTPs without the complex and involved tax reporting and recordkeeping requirements. The distributions from the ETF are often return-of-basis distributions that only result in a larger capital gain when the ETF is sold.46
In summary, investors and their tax advisers must be aware of the intricacies of investing in PTPs. The popular press seems to treat an investment in a PTP as similar to an investment in a corporation, but experience says otherwise. The tax reporting is considerably more complex and generally requires more work compared to a stock investment. As with all investments, investors should do their research, understand the terminology and how the investment is treated, and understand the tax implications or hire a professional so as to avoid unexpected tax complexities.
1Publicly traded partnerships are also referred to as master limited partnerships or MLPs.
2Fonda, "Our Top Dividend Picks," Kiplinger's Personal Finance, pp. 50-52 (December 2017).
3Sec. 733; Shaw, "An Examination of Ex-Dividend Day Stock Price Movements: The Case of Nontaxable Master Limited Partnership Distributions," 46-2 The Journal of Finance 755 (1991); Shaw, "Master Limited Partnerships: An Examination of Changes in Dividend Distribution Policy," 7-2 Contemporary Accounting Research 407 (1991).
4Secs. 312, 316, and 301(c)(1).
5Sec. 1(h)(11); taxed at the same rate as net long-term capital gains. For many investors this means a 15% tax rate.
7See, e.g., Baldwin, "Six Partnerships That Give You Good Payouts," Forbes.com (July 24, 2013); DowTheory.com, "Partnerships More Popular," Dow Theory Forecasts, pp. 1-5 (Horizon Publishing Co. 2014); Registeredrep.com, "Investing in MLPs: A Primer," Registered Rep, p. MLP1 (Penton Medi, Inc. 2011).
8See, e.g., Collins and Bey, "The Master Limited Partnership: An Alternative to the Corporation," 15-4 Financial Management 5 (1986); Laise, "MLPs Offer Nice Yield, But Taxes Are Tricky," 20-5 Kiplinger's Retirement Report 7 (May 2013).
10Sec. 7704(c). See Muhtaseb and Karayan, "The Impact of the Revenue Act of 1987 on Master Limited Partnerships," 6-3 Applied Financial Economics 233 (1996); Rutherford, and Springer, "Valuation Consequences of Master Limited Partnership Formation," 33-1 Quarterly Journal of Business & Economics 47 (1994).
11Guenther, "Taxes and Organizational Form: A Comparison of Corporations and Master Limited Partnerships," 67-1 The Accounting Review 17 (1992); Terando and Omer, "Corporate Characteristics Associated With Master Limited Partnership Formation," 15-1 Journal of the American Taxation Association 23 (1993).
12Moss, "Complex Structural Issues Exist in Combinations of Master Limited Partnerships," 24-4 Natural Gas & Electricity 1 (2007); Shaw and Wier, "Organizational Form Choice and the Valuation of Oil and Gas Producers," 68-3 Accounting Review 657 (1993).
15The $2.16 distribution is based on four times the third quarter distribution of $0.54. For calendar year 2017 the actual cash distribution totaled $2.32 per unit.
16Fonda, "Our Top Dividend Picks," Kiplinger's Personal Finance, p. 51 (December 2017).
18Individual shareholders, Sec. 1(h); and corporate shareholders, Sec. 243.
20The information in the Schedule K-1 is based on ownership of 10,000 units for all of calendar year 2016.
22Secs. 704(d), 465, 469, 741, and 751(a).
23Sec. 1012 presuming the PTP and stock are acquired by purchase.
24Secs. 705, 733, and 752.
25Secs. 56 and 57.
26Sec. 465. The "at risk" rules implemented by Congress attempt to limit the taxpayer's deduction of losses to those that are economically paid for. In general, the at-risk rules mirror the calculation of tax basis with the main difference being the treatment of liabilities related to the investment. In general, at-risk basis only includes recourse liabilities except in the case of a real estate investment, which also includes qualified nonrecourse liabilities (Sec. 465(b)).
28Sec. 469(k). A passive activity is any activity involving a trade or business that the taxpayer does not materially participate in. By definition, an owner of an interest in a PTP is not materially participating. (Passive activity is often discussed in contrast to nonpassive activity where there is material participation.)
32Secs. 511 and 512.
33Regs. Sec. 1.6038B-1 and the instructions to Form 926.
34Rodriguez, 722 F.3d 306 (5th Cir. 2013). The holding in Rodriguez makes it clear that the "deemed dividend distribution" in Sec. 951(a)(2) is not a qualified dividend for purposes of Sec. 1(h).
36Sec. 1(h), assuming the investor has a maximum long-term capital gain tax rate of 15%.
37Sec. 469(g); $35 of the passive losses could be used in 2012 because of the $35 passive ordinary income that flowed through for that year.
42This rate would be different based on the actual applicable tax rate for the person holding the investment.
43Tax rates vary by state depending on the applicable income tax rate for that state.
45For stock purchased after Jan. 1, 2011, brokerage firms and other reporting entities are required to report the basis in stock sold on Form 1099-B.
|Dawn Drnevich, Ph.D., is a visiting assistant professor in the Kelley School of Business at Indiana University in Bloomington, Ind. Thomas Sternburg, Ph.D., is a teaching assistant professor of accountancy in the Gies College of Business at the University of Illinois in Champaign, Ill. For more information about this article, contact firstname.lastname@example.org.