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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121341  
Subject: Re: Partnership and taxes? Date: 2/18/2002 9:27 PM
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Is it a big hassle to prepare a tax return if you own one of these things?

I don't know what CHC is - it may or may not be a big hassle. Read on.

Last year, I helped a friend with taxes. Her financial advisor had put her into four or five limited partnerships, and they complicated her life enormously! Federal taxes really weren't affected that much - a little bit of additional interest/dividend income, and she had to include a statement to the effect that she was using some tax shelters. (Well, to me, that last thing raises flags, which you really don't want to do with the IRS. But I digress.)

The real headache was with state taxes. These partnerships were in the oil/gas pipeline business, and there was income in something like 20-25 different states!! The K-1s were pretty comical - many pages of fine print and explanations, and each K-1 had a dozen or more rows showing things like $10 in interest in Idaho, $7 in Oregon, $13 in Nebraska, $11 in New Mexico, etc. All very trivial amounts. The K-1s cautioned that it might be necessary to file returns in states other than your own - check with your tax advisor. I investigated, and it was a freakin' nightmare!! There were several states - Minnesota was one, as I recall - which were quite sensible. Unless you had a reasonable amount of income in that state (and by that I mean $5K or some such) then a return wasn't necessary. But there were an astonishing number of states which took the position that if you had any income at all in that state, you had to file a return, even if no tax was owed. Strictly speaking, my friend was required to file around a dozen different returns to states, mostly in the midwest and west, in which she had maybe $10 or $20 in income.

I was a little reluctant to advise her to flaunt the law, but suggested that it might be reasonable to just ignore those returns, figuring that none of those states would be foolish enough to chase down an out-of-state scofflaw who failed to file a return on $12 in income. My friend filed federal and in her home state, and ignored all those others. Maybe that's what everyone else does too - I don't know. So far, nobody's come looking for her. But I further suggested that her financial advisor hadn't done her any favors by putting her in a position where she was technically liable to file a dozen or more state returns. I suggested that she dump those partnerships, and maybe dump the advisor as well - after all, as you note, there are lots of investments out there that are NOT limited partnership / tax shelter kinds of things.

Sorry this is long, but there's no way to explain it in just a few words. As I said, I don't know what CHC is. You might inquire as to whether it operates (and has income in) many states, and be wary of the situation I've described above.

Lorenzo

P.S. The good news is that my friend heeded my advice and unloaded all those dumb partnerships. The bad news is that I'm going to help her again this year with her taxes, and it appears that when you get out of these things, you then do something with all those passive losses that you've been hitherto unable to claim. So the nightmare continues for one more tax year, then she's on her own.
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