Dissecting the K-1


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Dissecting the K-1

  1. 1. The K-1 Boot Camp • Dissecting the K-1 • 9:15 – 10:15 • January 20, 2012 1
  2. 2. Presenters Contact Information Presenters Contact InformationE. George Teixeira, CPA Elizabeth F. Powell, CPAPartner, Financial Services Tax ManagerAnchin, Block & Anchin LLP Decosimo Certified Public Accountants1375 Broadway Tallan Financial CenterNew York, New York 10018 Two Union Square, Suite 1100(212) 863-1298 Chattanooga, TN 37402Email: (423) 266-7510george.teixeira@anchin.com Email: elizabethpowell@decosimo.comLinkedIn: LinkedIn:http://www.linkedin.com/in/egeor http://www.linkedin.com/pub/elizabeth-geteixeira powell/15/bb8/322 2
  3. 3. Anchin at a Glance• Largest single-office firm in the US• 55 partners, staff of more than 350• Named “Best Place to Work” in New York State (Society for Human Resources Management, 2008-2011)• Named “Best Place to Work” in New York City (Crain’s, 2010, 2011)• Named “Best Accounting Firm to Work For” (Accounting Today, 2009-2011)• Consistently one of top 30 largest firms in the United States (Inside Public Accounting) 3
  4. 4. Anchin at a Glance: Financial Services Group• Serves investment partnerships, hedge funds, funds-of-funds, private equity funds, off-shore funds, broker/dealers, mutual funds, investment advisers, commodity advisers, and traders• Over 400 clients in the financial services industry• 9 partners and 50 dedicated professionals• Anchin’s largest practice group by industry sector• Recognized as a leader in providing assurance and audit, tax, financial reporting, back office administration and business advisory services• Named “Best Accounting Firm in North America” (Hedgeweek Magazine, 2011) 4
  5. 5. Decosimo at a Glance• Founded in 1971• 41partners, approximately 300 professionals and support staff• Nationally and internationally recognized clients.• Ranked among the Top 100 CPA firms in the U.S.• Offices in Grand Cayman; Atlanta and Dalton, Georgia; Chattanooga, Knoxville, Memphis, and Nashville, Tennessee; Huntsville, Alabama; and Cincinnati, Ohio.• Our full service Grand Cayman office, Moore Stephens Decosimo Cayman Limited, helps our domestic and international clients leverage the benefits of a jurisdiction without direct taxation. 5
  6. 6. Decosimo at a Glance: Financial Services Group • Serves financial institutions, alternative investment funds, offshore entities, fund of funds, real estate funds, investment advisors, broker/dealers and alternative loan and private investment groups. • Client base includes funds from start ups to funds with total assets exceeding billions. • Decosimo’s largest practice group by industry sector. • Beyond tax and assurance solutions, Decosimo provides independent due diligence and transaction services; accounting assistance with fund launches; counsel related to fund structure, fee agreements and assistance with complex tax allocation issues; advice on matters of board governance and ethics; and attestation services under the SEC Custody Rule provisions for Registered Investment Advisors (RIAs). 6
  7. 7. AgendaI. Line-by-line review of the Schedule K-1II. Trader v. Investor discussionIII. Varying Schedule K-1 Presentations – Major DifferencesIV. Footnotes – summarize recurring footnotes 7
  8. 8. 2011 Schedule K-1 - Final 8
  9. 9. 2011 Schedule K-1 - Final 9
  10. 10. Trader vs. Investor Year-to-year determination Most case law is about day traders – none to date on Investment Partnerships – most cases go against the taxpayer – INVESTOR www.irs.gov/taxtopics/tc429 -- Topic 429 - Traders in Securities (Information for Form 1040 Filers)  Last reviewed/updated: December 22, 2011 IRS (Market Segment Specialization Program) MSSP Audit Technique Guide (December 2003)  Focus is on issues that fall within sections 701 – 761 of the Code (Subchapter K)  Subchapter K deals primarily with the formation, operation and termination of partnerships  Chapter 12, pages 12-2 through 12-4; Issue: Securities Traders – Engaged in a Trade or Business? 10
  11. 11. Trader vs. Investor To determine whether you are a trader the factors considered are:  Taxpayer’s intent;  The nature of the income to be derived from the activity; and  The frequency (must be substantial), extent, and regularity of the taxpayers transactions. Taxpayer’s activities constitute a trade or business where both of the following requirements are met:  Trading is substantial; and  Taxpayer seeks to catch the swings in the daily market movements and to profit from these short term changes rather than to profit from the long term holding of investments. Court will look to how long positions are held. 11
  12. 12. Trader vs. Investor – Recent Case Law Kay v. Comm (July 2011):  Kay owned a factory but was also a “day trader”  On 2000 tax return, Kay reported losses of $2.05M ($1.9M in losses from stock sales plus expenses related to “day trading”)  In 2000, Kay traded > $20M in securities over 73 trading days in 313 transactions; in 2001, Kay traded > $1.56M in securities over 18 trading days in 72 transactions; in 2002, Kay traded > $1.2M in securities over 21 trading days in 84 transactions  Conclusion: Kay was NOT a trader  # of trades made was not substantial although total amount of $$ was substantial  Trading activity was not frequent enough  Kay’s primary source of income was from his factory  Kay did not hold stock positions that demonstrated an intent to profit from “day trading”; majority of stock positions were held for > 30 days Van Der Lee v. Comm (September 2011):  Trader for several investment banks who then decided to start “day trading”  Most trading done from home and included both stock and option trades  Never disposed of any stock on the date it was acquired  Form 8 ½ months in 2002, he made 148 trades in one account and 11 trades in a second account  Conclusion: Van Der Lee was NOT a trader  Length of time stocks were held before sale indicated that he was an investor  He never sold stocks on the date they were acquired  His source of profit was “asset appreciation” and he did NOT intend to profit from swings in dally market movements  Minimal trading in second account (11 trades); averaged 3-4 trades per month in all 12
  13. 13. Line Placement Differences Line 1 vs. Line 11F/13W for Income from Trading Activities Ordinary Income from Trading Activities is sometimes reported as  Line 1, Ordinary Business Income (loss) or  Line 11F Other Income (loss)  Related expenses are either in Line 11F or Line 13W Other Deductions Passive Income (Loss) is usually included in Line 1, therefore it is important to footnote breakdown between passive/nonpassive amounts. Income from Trading Activities is considered Investment Income for purposes of the Investment Interest Expense limitation. Instructions for Form 1065 indicate that Line 20a Investment Income includes investment income included on lines 5, 6a, 7 and 11 of Schedule K. 13
  14. 14. Line Placement Differences Line 1 or 11F vs. Lines 5, 6a, 6b, 8, and 9a.  Interest income, dividend income and long and short-term capital gains are sometimes included in Line 1 or 11F and detailed in footnotes to Schedule K-1.  Alternatively, these amounts can be reported on their respective lines on the Schedule K-1.  Line 5 – Interest Income  Line 6a – Dividends  Line 6b – Qualified Dividends  Line 8 – Net Short-term Capital Gain (loss)  Line 9a – Net Long-term Capital Gain (loss) 14
  15. 15. Conforming the Different Presentations Fund of Funds Pass through to investors exactly the same manner as reported on underlying K-1’s or Reclassify items to report underlying K-1 information in a consistent manner  All Trading activity on Line 1 or all on Line 11F, etc. 15
  16. 16. K-1 Footnotes What’s Important to Note What do you mean it’s Nonpassive?  Regulation 1.469-1T(E)(6)(i) “In general. An activity of trading personal property for the account of owners of interests in the activity is not a passive activity (without regard to whether such activity is a trade or business activity.)” Disclosure affecting taxation at taxable entity level  U.S. Treasury interest  Line 13H Investment interest breakdown by trader vs. investor  Dividends eligible for 70% Dividends Received Deduction  Foreign Qualified Dividends  Unrelated Business Taxable Income (UBTI)  Effectively Connected Income (ECI)  Passive Activity information  State Tax Information (i.e., composite filings, non-resident withholding, etc)  Tax-exempt income 16
  17. 17. Footnotes – What’s Important Line 11F breakdown  Qualified dividends  Capital Gains Form 8886  Listed Transaction  Reportable Transaction  Notice 2006-16  Protective Disclosures Form 8621, PFIC  Type of election - QEF, MTM  PFIC income included in K-1 or not Publicly Traded Partnerships  Direct or indirect investment  Investors may be subject to the passive activity loss rules under IRC. Sec 469(k). 17
  18. 18. Footnotes – What’s Important Form 926  Transfers of tangible or intangible property to a foreign corporation if a) immediately after the transfer the person holds directly or indirectly at least 10% of the total voting power or the total value of the foreign corporation b) the amount of cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer exceeds $100,000.  Form 926 is not required to be filed by the partnership, but by U.S. citizen or resident (individual), domestic corporation, or a domestic estate or trust. Property Distributions  Tax basis of distribution 18
  19. 19. Footnotes – What’s Important Form 8865 - Report of U.S. Persons With Respect to Certain Foreign Partnerships  Report investments in foreign partnerships depending on amount of investment or ownership percentage.  Due with return including extensions, if no return is required Form 8865 must be filed separately.  Categories of Filing 1. Controlled a Foreign Partnership 2. Owned 10% or greater interest during the year 3. Contributed property to a Foreign Partnership during the year 4. Had a reportable event during the year 19
  20. 20. Final Schedule K-1 – varying presentations: K-1 marked “final” in year liquidated (irrespective of when final cash payout is received)? K-1 marked “final” in year final cash payment is received? Read K-1 footnote(s) -- some examples:  Partner’s Capital Accounts – Withdrawal proceeds payable after December 31, 2010 are included in box L, Partner’s capital account analysis  Part III, Box 19 Distributions – Gain or loss on distribution from the fund: If you made a withdrawal from the fund, you may have gain or loss to recognize outside the fund in the year you received the cash distribution from the fund. Please note that the withdrawal shown in box 19 Code A of the k-1 may reflect distributions that were not made until 2011. Please consult your tax advisor.  No footnote(s) whatsoever – leave you guessing?  Potential gain or loss on liquidation of your partnership interest: if you withdrew from the partnership, you may have gain or loss in the year you received the cash distribution from the partnership. Please note that the distributions shown on Line 19, Code A of your schedule k-1 may include amounts which were reflected in the prior tax year as a withdrawal of partner capital in Part II, Section L. Please consult your tax advisor. 20