BOUNCE

[gambler2075]

No problem. I still think it is crazy that someone could unwittingly incur a huge tax liability many times the value of the profits they made if they traded an MLP.

For example, that link from LINE gave examples of 1, 3 or 5B of debt being cancelled, resulting in 2, 8, or 14$ of CODI PER SHARE!!!
Imagine some hapless investor deciding to buy LINE after BK... they are trading at 10c per share so he's like... well, lets buy 20K$ of it and play it for the BK bounce. Meanwhile, he is unwittingly on the hook for 200,000 shares of LINE, and if they restructure 5B$ of debt, he now has an tax liability of 200,000*14 = 2.8 MILLION dollars! His AGI just went up by 2.8 MILLION dollars, and so he would then owe like over 1 MILLION DOLLARS in taxes. This is crazy!!! ok. I'm a little more calm now. LOL. But still!!!

I am not a tax professional so I don't even want to venture a guess to the answer to your question. All I know is that I am scared enough that I don't think I ever want to trade an MLP again.

Although I don't have any LINE, I _did_ trade it on Feb 5 and Feb 8 (100K share positions, plus) which scares the heck out of me, to be honest. I guess I will just have to go over the K1 I get line by line when I get it in Mar 2017. Till then I guess I'll have to just worry :(

More info on IRAs with MLP's in the comments... I don't know enough to know if this is correct, but I would assume so:

http://seekingalpha.com/article/3956525-mlps-critical-often-overlooked-tax-implications-suspended-distributions-debt-restructuring


kennethfine
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Somebody with real knowledge should reply, here, but what I've heard from similar comment threads elsewhere in SA suggests that the following can happen: 1) UBTI exceeds allowable amount for the year 2) IRS notices this fact 3) IRS reclassifies multi-milllion dollar IRA account based on excess UBTI and/or demands appropriate tax liability 4) hapless investor cries a lot, tells wife, wife throws bar stool and breaks it, apologizes, lots of tax is subsequently paid to Uncle Sam. I wanna avoid all that.
22 Apr 2016, 05:14 AM Report Abuse Reply 0 Like

Mark_A
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"3) IRS reclassifies multi-milllion dollar IRA account based on excess UBTI and/or demands appropriate tax liability"
As someone who was a licensed CPA for many years and has recently dealt with partnerships in an IRA, I am fairly knowledgeable about this. There is no truth to item 3).
A taxpayer who exceeds $1000 per year in UBTI for their IRA account will have to pay corporate income taxes on the excess amount. The tax form (990-T) is filed with the IRS by the plan administrator, such as your broker, who will also pay any taxes due out of your IRA.
Your broker or IRA administrator should be requesting each year that you notify them if your K-1 total UBTI exceeds $1000 per IRA account, as they do not have access to your K-1 statements from your partnerships, even if they do know you own some partnerships in your IRA. I know that Charles Schwab does this.
The tax law about UBTI applies to other tax exempt entities as well, some of which are gigantic compared to an IRA, and this particular tax law about UBTI probably would not even exist if it only pertained to relatively small IRA accounts.
Your reference to "real" knowledge on SA is ironic, since you seem to be throwing gas on the fire by repeating number 3), without anything to back it up, and even though you probably suspect it is not true.
22 Apr 2016, 06:45 AM Report Abuse Reply 0 Like

Mark_A
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I will add one thing about MLP's (and UBTI in particular) if one owns them in an IRA account. If the MLP goes through a restructuring/bankruptcy in which any debts are cancelled or reduced (if bond holders take any haircut or get wiped out), there will be income recognized to the partners called CODI (cancellation of debt income).
The CODI will be classified as UBTI if owned in an IRA account. The amount of UBTI is likely to be many times the value of the investment and such tax liabilities to the partner cannot be discharged by the bankruptcy of the partnership.
But the CODI (and subsequent tax liability) is also applicable to partnerships held on regular brokerage accounts. Therefore, it is not a good idea to be holding an MLP (or any partnership) in any investment account, it that partnership is going through a negotiated restructuring of debt or bankruptcy.