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magine that you are a fairly sophis- that a PTP is taxed as a corporation un-
Iticated investor and your broker has less 90% of its gross income consists of There is an argument
“qualifying income,” which can generally
added a publicly traded partnership
be thought of as passive income or in- that a PTP can be a
(PTP) to your portfolio. You trust
come from certain oil and gas endeavors. wise investment.
your broker to invest wisely on your As a result, PTPs are common in the
behalf, but you have heard that owning real property or natural resource indus-
a PTP is a little different than typical tries because they produce “qualifying cause investors to file additional foreign
stock ownership and presents unique income” that allows the PTP to be taxed reporting forms such as Form 926,
as a partnership. Return by a U.S. Transferor of Property to
challenges. You wonder whether this
There is an argument that a PTP can a Foreign Corporation, or Form 965, In-
will be a fruitful investment.
be a wise investment. But some people clusion of Deferred Foreign Income Upon
Let us compare a PTP investment to may feel these assets are like 15 pounds Transition to Participation Exemption
the time the sister of one of the authors of lemons because of tax compliance System. Further, a single PTP invest-
brought her 15 pounds of lemons from and other issues. This article begins by ment can result in the need for multiple
the tree in her backyard. It was nice of addressing general implications of PTP state income tax filings per year, when
her to share the fruits of her labor, but investments for Form 1040, U.S. Indi- the partner’s share of income is allo-
what is a person supposed to do with 15 vidual Income Tax Return, then discusses cated across the various states in which
pounds of lemons? Lemons are great, considerations for monetizing the tax the PTP operates or invests. Some
but what happens when you are tired losses these partnerships often generate, PTPs also invest in underlying PTPs,
of lemonade? and finally explores tax issues that arise which, for reasons discussed later in this
A similar issue may arise with a when gifting or donating a PTP interest. article, can significantly complicate loss
PTP investment: Is investing in a PTP tracking and income tax reporting.
prudent? Is having it more trouble General implications for Sec. 199A: The Sec. 199A qualified
than it is worth? If your investment Form 1040 business income deduction has added
adviser proposes a PTP as part of your Understanding how PTP investments complexity to PTP K-1s. Sec. 199A
investment strategy, what should you be are taxed is crucial. Whereas stocks attributes have to be reported on an
thinking through from a tax perspec- return cash to investors in the form of activity-by-activity basis, and PTPs
tive? PTPs may offer the opportunity dividends, PTPs return cash to inves- can have many underlying activities
to diversify a portfolio and provide cash tors through partnership distributions. (many of which may be PTPs that the
flowthrough distributions, but, unlike Partners in a PTP are taxed on their PTP has invested in) that then must
simpler investments such as stocks, they share of the partnership’s income be accounted for on the individual’s tax
have the added complexity of partner- and deductions, while stock investors return.
ship reporting requirements. are taxed on their share of dividends Basis: The cash distributions
This article explores tax planning received. To be clear, as with any from PTPs may make this all worth
aspects of holding interests in PTPs. flowthrough entity, a PTP’s investors the effort, but investor beware: You
These investments have become popu- are not taxed based on the cash they should make sure you are not out of
lar since their introduction in 1981. receive; they are taxed based on the in- basis. When a PTP reports a loss to
Sec. 469(k)(2) defines a PTP as any come allocated to them. The income is its partner in a tax year, loss limitation
partnership where the “interests in such reported on Schedule K-1 (Form 1065), rules need to be considered, just as they
partnership are traded on an established Partner’s Share of Income, Deductions, must be for any partnership investment.
securities market” or “are readily tradable Credits, etc. Routinely, in their practice, the authors
on a secondary market (or the substan- Often, the Schedule K-1 packages have seen PTPs generate losses and
tial equivalent thereof).” In response to are lengthy, containing not only federal make distributions year after year,
the popularity of PTPs, the Revenue information that needs to be accounted which can cause Sec. 704(d) tax basis
1
Act of 1987 added Sec. 7704 to pre- for on the investor’s tax return but also and Sec. 465 at-risk basis issues. If the
vent most PTPs from being treated as foreign reporting and state income tax PTP makes a distribution in excess of
flowthrough entities. Sec. 7704 provides reporting. Investments in PTPs can the partner’s basis, there will be gain

1. Revenue Act of 1987, Title X of the Omnibus Budget Reconciliation Act of 1987, P.L. 100-203.

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