USA Tax question for Master Limited partnership


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Hi,

I purchased a MLP in 2018 that reorganized into a corporation about half way through the year. I never sold anything and still haven't. I received a K1 and put the details into TurboTax. My cost basis of the shares was about 6k, but now Turbotax is saying I owe another 4k in taxes(Im in the 22% bracket, so ~17k in extra income is what it looks like it is hitting me with). How can this be possible given my cost basis is only 6k. I received no distributions other than the new shares from the reorganization. I was also told that Cancel of Debt Income cannot be greater than my cost basis. Is that true?

I attached my K1 Any help would be greatly appreciated!

[attachment removed by admin as it contains potentially sensitive information]
 
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Cancellation of debt ("COD") income is not limited by basis. But, this is not COD.
It sounds like what may have happened is the MLP had liabilities in excess of it's basis in it's assets. In the reorganization, the corporation was the transferee of the assets subject to the MLP's liabilities. The MLP would recognize gain under Internal Revenue Code section 357(c) to the extent liabilities exceeded basis. It would then report each partner's distributive share of that gain on the final K-1.
 
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If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don't have to pay. The law provides several exceptions, however, in which the amount you don't have to pay isn't canceled debt. These exceptions will be discussed later. Cancellation of a debt may occur if the creditor can't collect, or gives up on collecting, the amount you're obligated to pay. If you own property subject to a debt, cancellation of the debt also may occur because of a foreclosure, a repossession, a voluntary transfer of the property to the lender, abandonment of the property, or a mortgage modification.

In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income. These specific exclusions will be discussed later.
 
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Thank you both!

Andrew, in the prior period the assets were 1.4B and the liabilities were 650M. The debt holders became 95% owners in the new entity(in exchange for their bonds) and the prior equity holders retained a 5% ownership.

Debora, so since the debt holders were given equity ownership, would I be charged for COD Income?
 
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Herkfsu,

Section 357(c) does not apply to the new facts. What you describe in (a) versus (b) are materially different transactions with different tax consequences:

(a) "MLP in 2018 that reorganized into a corporation,"
(b) "debt holders became 95% owners in the new entity (in exchange for their bonds) and the prior equity holders retained a 5% ownership."

Are you able to pull up the MLP's SEC filings on Edgar that describe what occurred in 2018? Presumably, MLP's tax counsel would have been engaged to advise on the transaction. A general summary of that advice could have been included with the SEC filing.

PM me if you want to talk.

Best,
Andrew
 
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