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Old 09-07-2016, 05:24 AM
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Payment in lieu of dividends for partnership distribution

Broker lent units of listed limited partnership via securities lending. Partnership distributed cash while the units were lent. Broker listed the distribution on the 1099 as payment in lieu of dividend. However, as if that was not bad enough with ordinary income tax rates payable on that amount, the distribution is ALSO listed on the partnership K-1 form and the tax basis reduced by that amount. I am having a hard time understanding this, but it appears that something doesn't add up here. In general, distributions of a partnership having nothing to do with the taxable income that the unit holder is being allocated from the partnership. It's a distribution, not a dividend. So how can there be a payment in lieu of dividend, if there is no dividend in the first place? Secondly, I am having a hard time understanding the logic. If the unit holder received the payment in lieu of dividend/distribution, as the units were not in possession of the owner at the time of distribution, then the person who borrowed the units presumably received the distribution, not the owner. If that is the case, does that mean the partnership K-1 is incorrect in that it should not list the distribution during the time when the units were lent out, on the tax form of the original unit holder? How would that piece of information (timeframe during which security was lent by broker) normally be transmitted to the partnership? How would I go about correcting that mess?


Last edited by helpmewithtaxes : 09-07-2016 at 05:27 AM. Reason: corrections


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Old 09-07-2016, 10:54 PM
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Broker lent units of listed limited partnership via securities lending. Partnership distributed cash while the units were lent. Broker listed the distribution on the 1099 as payment in lieu of dividend. However, as if that was not bad enough with ordinary income tax rates payable on that amount, the distribution is ALSO listed on the partnership K-1 form and the tax basis reduced by that amount. I am having a hard time understanding this, but it appears that something doesn't add up here. ==>>Unless the partnership elected to be taxed as a C corp or an S corp, the partnersip does not issue dividends, but each does provide its owners with the accumulated income of the business through distributions. Dividends are payments of retained earnings made by corps based on ownership of stock. When the corporation wants to dispense retained earnings to its owners, it will announce a per-share payout. For example, a corp could announce a $1K dividend, in which case the owner would get $1K dollar for every share he owned. Distributions are functions of partnerships that serve much the same purpose as corporate dividends.


In general, distributions of a partnership having nothing to do with the taxable income that the unit holder is being allocated from the partnership. It's a distribution, not a dividend. ===>>correct ;
But it depends . A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. but it decreases/increases the adjusted basis of your partnership interest; in general, Partnerships don?t issue stock (unless it elects to be a S or C corp)and don?t pay dividends. Both of these activities are reserved for corps. However, a partnership can make income that it distributes to its partners. Distributions resemble dividends in several ways: They are normally cash payments and may be issued periodically throughout the year. However, they don?t qualify for special tax rates and are treated as ordinary income. Partners report their shares of income, whether or not it?s actually been distributed. Sch K-1 of 1065 reports each partner?s share of income. A partner uses this information to complete Schedule E Part II of Form1040. A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property.

Partnerships may hold property, including stock investments. Partnerships distribute the dividends received on stock holdings to partners. Qualified dividends stem from U.S. corporations that pay taxes on income and from qualified foreign corporations. These dividends are taxed at long-term capital gains rates. Nonqualified dividends count as ordinary income, taxed at the partners? marginal rates. Sch K-1 reports qualified and nonqualified dividends. Partners report these dividends directly on Form 1040.

So how can there be a payment in lieu of dividend, if there is no dividend in the first place? ===>As said, partnership issues dividends, but each does provide its owners with the accumulated income of the business through distributions


Secondly, I am having a hard time understanding the logic. If the unit holder received the payment in lieu of dividend/distribution, as the units were not in possession of the owner at the time of distribution, then the person who borrowed the units presumably received the distribution, not the owner. If that is the case, does that mean the partnership K-1 is incorrect in that it should not list the distribution during the time when the units were lent out, on the tax form of the original unit holder? How would that piece of information (timeframe during which security was lent by broker) normally be transmitted to the partnership? How would I go about correcting that mess?=========>>I guess the broker shouldn't issue a 1099 for a Partners Distribution/guaranteed payment. That should be listed on the K-1.and Unless the partnership elected to be taxed as a C corp or an S corp, the partnersip does not issue dividends. Yo need to contact the broker for sure,



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Old 09-08-2016, 03:20 PM
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Thanks Moderator for the rather comprehensive review of the theory of partnership accounting. But my question was actually regarding the treatment of otherwise non-taxable distributions for units lent to the broker via securities lending, that the broker is usually entitled to with margin accounts and cannot be avoided, and those distributions (not dividends) being converted to substitute payments (payments in lieu), but this fact not taken into account by the partnership's tax reporting, effectively resulting in double-taxation of the amount of the distribution after disposition of the units. You did not elaborate at all on my actual question.


Last edited by helpmewithtaxes : 09-08-2016 at 03:27 PM.


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Old 09-08-2016, 06:32 PM
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Quote:
Originally Posted by helpmewithtaxes View Post
Thanks Moderator for the rather comprehensive review of the theory of partnership accounting. But my question was actually regarding the treatment of otherwise non-taxable distributions for units lent to the broker via securities lending, that the broker is usually entitled to with margin accounts and cannot be avoided, and those distributions (not dividends) being converted to substitute payments (payments in lieu), but this fact not taken into account by the partnership's tax reporting, effectively resulting in double-taxation of the amount of the distribution after disposition of the units. You did not elaborate at all on my actual question.
I am not sure EXACTLY what your question/situation is however, in my opinion,i cn give u one guess. I GUESS :The broker was getting a little confused between distributions and guaranteed payments.
Guaranteed payments to a partner go on Line 4 of the partner's K-1, are deducted as expenses by the partnership.Distributions go on Line 19 of the K-1, and are NOT deducted by the partnership, nor income to the partner. However, in neither case should a 1099 be issued. As said, I guess you need to contact the broker issuing there 1099 for sure. Or you need to contact an IRS EA/ a cPA doigntaxes for more accurate info.



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Old 09-08-2016, 06:48 PM
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You seem to be very knowledgeable about the details of partnership accounting; actually, you appear to be an expert on the subject. But your comments have nothing to do with my question that I can see, or are not relevant to my question. Maybe you did not read, or you are not familiar with, the notion of "substitute payments" or "payments in lieu", and/or the mechanism of securities lending, that I was referring to in my question. No offense. The only thing that I'm pretty sure is that contacting an EA doing taxes would not help me with this rather sophisticated issue.



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