USA HELP: Huge Phantom Income gain passed on to me via K-1. How is this allowed?

[HTX_GUY]

Hi,

I am a full time trader in securities and my elected accounting method is Marked to Market. I had a trade in USO a exchange traded fund that is structured as a partnership and issues a K-1 to anyone who bought their issue during the year.

Last year I had this trade which using basic math was roughly a $14k gain. Here are the numbers pulled from my account trade history.

11/28/2014 12:38:56 Bought 30000 USO @ 25.67

11/28/2014 12:38:56 Bought 9100 USO @ 25.6699

11/28/2014 12:38:56 Bought 900 USO @ 25.665


12/01/2014 14:16:26 Sold 40000 USO @ 26.02

But the K-1 I was issued (dumped on me) a $234k Capital Loss?

To make matters worse and unfortunately before I learned how damaging even touching these K-1 issuing exchange traded products are I had already had made another trade early in 2015. And this was the actual trade numbers pulled straight from my account history. This time basic math I ended up with a $23k loss


12/12/2014 18:11:05 Bought 9900 USO @ 21.9

04/15/2015 12:03:00 Sold 9900 USO @ 19.5701

And when I got my K-1 for 2015 for the last trade it seems the issuer dumped a $18k Capital Loss and a $50K ORDINARY GAIN and not a capital gain?? A capital gain and ordinary gain for the same K-1 and for the same trade?

The excuse from the issuer "The United States Commodity Funds" says that since they use commodity futures contracts to track the price of crude Oil their losses were passed on to investors (partners).
The fact that this has happened to me two years in a row on each of the only two times I ever purchased their product (USO) strikes me as illogical. And how would I be issued a capital gain AND Ordinary gain for the same transaction? It seems like they seem to just dump whatever numbers is convenient to them onto unsuspecting investors. Can someone explain to me if there are any steps I can take to dispute this either via through tax court or to the K-1 issuing company?
There are all kinds of people who trade this product and I am finding out that although my case is rare that it happened to other people before to differing degrees. I can imagine some people who for example might have calculated via their broker's trade history a $5k loss on a trade and get a K-1 for a $100k gain will probably just ignore the K-1 completely because they could not afford to handle the tax implications of having a $100k phantom gain dumped onto them.
Is there any way I can dispute this or challenge the K-1 numbers I received? Even if I lose in the end and it costs me more money to try and change this and I lose in the end I will not regret at least trying. Any ideas or thoughts on this issue are welcome. To the non accounting "layman" this all seems very "crooked" and "shady". It makes me suspect that the issuing company might even have problems with their accounting. In my 17 years in the securities industry I have seem it all so nothing is impossible. But what do accountants think? What would you do in this situation? Does this seem fair?

 

[Tyson]

I am not an accountant and don't have much experience with this, but I am partial owner of an S-corporation. S-corporations pass all income/losses to their shareholders, even if the shareholders do not directly receive the income or suffer the losses. These amounts are reported on the K-1. If the S-corporation makes both ordinary income and capital gains, those are also passed on to its shareholders. That would explain why you could be issued both ordinary and capital gain.

The same thing applies as to how you could lose money on a trade but be issued a K-1 for a gain. The price of the shares is not the same as the earnings or losses the company makes. The price of a share decreasing does not necessarily signify that the corporation is losing money. The corporation does not issue you a K-1 to show you what you personally gained or lost, it shows you your portion of what the corporation gained or lost. How this affects you depends on your basis in the corporation.

The IRS website has a guide to help you calculate how much basis you have. You can find the guide here: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis

 

[kirby]

Hi Tyson

Unfortunately, HTX_GUY is correct. USO is an exchange traded fund that is structured like a limited partnership and not a mutual fund. So HTX_GUY does get a K-1 that he has to report.

 

[Tyson]

Sorry, I don't understand... I didn't say that he didn't have to report it? Aren't we saying the same thing?

It is my understanding that limited partnerships and S-corporations are taxed very similarly, however I am not very familiar with their differences.

 

[kirby]

Hi Tyson.
Yes, we are both saying he has to report it. I should have written, "Unfortunately for HTX-GUY". Sorry for the confusion.

 

[Tyson]

Oh ok I see. Was my hypothesis correct?