Tax: Donating K-1 Partnership

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pancake19
Posts: 86
Joined: Thu Jan 16, 2014 1:46 pm

Tax: Donating K-1 Partnership

Post by pancake19 » Sat Jan 13, 2018 10:25 pm

I messed up not once but twice related to this, so feeling particularly stupid. However what's done is done.

Background: I read about the IRA horserace here on BH and realized I could apply the idea to my donations. I therefore set up a portfolio, invested in a variety of ETFs and equities, with the goal to donate the winners and TLH the losers

Problem: One of the ETFs I purchased was DBO, which apparently is structured as a partnership. The ETF went up significantly over the years, but every year at tax season DBO issued me a K-1 that basically passes through the fund's earnings to me as an LP and I had to report it as ordinary income even while I was holding the ETF. When I donated my shares at the end of 2017 in a rush ahead of the tax bill, I donated my shares of this ETF also

Question: What is the tax treatment? Do I claim the fair value of DBO per normal? What about the K-1 I will likely receive since I owned for part of 2017? Should that K-1 reflect only 11 out of 12 months of partnership interest? If my gut is right, this will effectively (from a tax efficiency perspective) be like donating cash as opposed to appreciated shares correct?

Bonus round: How in the world do I search easily how ETFs are structured so I never buy a partnership ever again in my life :oops:

jbranx
Posts: 257
Joined: Thu Feb 09, 2017 6:57 pm

Re: Tax: Donating K-1 Partnership

Post by jbranx » Sun Jan 14, 2018 4:41 am

Think you will report the price the broker reported as the value of the contribution. You will receive a K-1 from Powershares/Invesco and will need to report it on your return. They will have the calculations you need for reporting purposes. At least that is my reckoning as someone who gets K-1's that i use with TurboTax but I'm not a tax person.

There are multiple sources online that describe ETFs, ranging from the brokers to Morningstar to ETF.com. The sponsors, like Powershares in the case of DBO, also have the details and a link to the prospectus. I'm not sure why the DBO structure changes anything about how you report it as a charitable contribution or how the taxes are done from a K-1. Also, when you mention IRAs, was this donation/holding in an IRA? Not an issue if your earnings were below a certain level; otherwise you may have an "unrelated business" tax issue.

pshonore
Posts: 6420
Joined: Sun Jun 28, 2009 2:21 pm

Re: Tax: Donating K-1 Partnership

Post by pshonore » Sun Jan 14, 2018 8:25 am

This may be considered Ordinary income Property - Here's the IRS version from Pub 526

Ordinary Income Property

Property is ordinary income property if you would have recognized ordinary income or short-term capital gain had you sold it at fair market value on the date it was contributed. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets (defined later, under Capital Gain Property ) held 1 year or less.

Property used in a trade or business. Property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income because of depreciation had the property been sold at its fair market value at the time of contribution. See chapter 3 of Pub. 544, Sales and Other Dispositions of Assets, for the kinds of property to which this rule applies.

Amount of deduction. The amount you can deduct for a contribution of ordinary income property is its fair market value minus the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.

pshonore
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Joined: Sun Jun 28, 2009 2:21 pm

Re: Tax: Donating K-1 Partnership

Post by pshonore » Sun Jan 14, 2018 8:32 am

jbranx wrote:
Sun Jan 14, 2018 4:41 am
Also, when you mention IRAs, was this donation/holding in an IRA? Not an issue if your earnings were below a certain level; otherwise you may have an "unrelated business" tax issue.
Commodity ETFs structured as LPs generally don't produce UBTI. They are not operating a "brick and mortar" business with operating income like a typical pipeline MLP. I believe most of their income come from futures contracts.

pancake19
Posts: 86
Joined: Thu Jan 16, 2014 1:46 pm

Re: Tax: Donating K-1 Partnership

Post by pancake19 » Sun Jan 14, 2018 9:49 am

pshonore wrote:
Sun Jan 14, 2018 8:32 am
jbranx wrote:
Sun Jan 14, 2018 4:41 am
Also, when you mention IRAs, was this donation/holding in an IRA? Not an issue if your earnings were below a certain level; otherwise you may have an "unrelated business" tax issue.
Commodity ETFs structured as LPs generally don't produce UBTI. They are not operating a "brick and mortar" business with operating income like a typical pipeline MLP. I believe most of their income come from futures contracts.
Correct, all of the income in prior years were from realized gains on future contracts.

Okay sounds like I'll just report it as it. This one was an oopsie for me, I could have just kept the cash myself and donated other appreciated shares

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