myICLUB Blog

Publicly-traded partnerships (PTPs), including Master Limited Partnerships (MLPs) and Limited Partnerships (LPs) are problematic investments for investment clubs. Even if they trade on a stock exchange, they are not common stocks, and accounting and tax rules are different for these securities.

In fact, if you hold one of these partnerships in your investment club and contact myICLUB for help, our team members will first strongly advise you to sell this security immediately. These are not suitable investments for investment clubs. By owning partnerships, your club has created significant headaches for the club, its treasurer, and its partners.

Here are some of the problems you will encounter.

First of all, partnerships do not pay "dividends." They make distributions. Each distribution may include some dividend income, but could also include other types of payments, such as returns of capital or capital gains. But the actual makeup of each distribution paid in a year will not be known until sometime in the following year! As a result, recordkeeping is troublesome. When the distributions are received, the treasurer records them as "dividends" in myICLUB as temporary "placeholder" transactions.

Then, early in the following year, the publicly-traded partnership will issue a Schedule K-1 which details the amount of income and expense allocated to each unit holder's ownership in the partnership. According to IRS regulations, partnerships must provide Schedule K-1s (and Schedule K-3, if applicable) to partners by March 15. This is the same date that clubs must file their return, which creates a problem. While many partnerships strive to deliver K-1s well before this deadline, if they are unable to provide this information much before March 15, the club will be forced to request a filing extension from the IRS, and many of the club members may have to request extensions for filing their personal IRS returns. 

After the club receives its K-1 from the partnership, the club treasurer will then have to adjust all of the previously-recorded transactions in myICLUB to account for the amounts of the income, dividend, and other items that the partnership has provided.

This adjustment means that a member who withdrew in the year will not have received a 100% accurate withdrawal. The difference may be small, but a sizeable holding could create a not insignificant difference after the transactions are adjusted. (For individuals who own partnerships in their personal accounts, this adjustment doesn't need to be made -- their personal tax return just reports the income and other items for the entire year.)

While this seems like a minor inconvenience to the club, the treasurer's headaches are just beginning. Depending on how the partnership classifies the various items on the K-1 (dividends, income, expenses), myICLUB may not be able to accommodate all of the types of transactions, or Club Tax may not be able to correctly generate the tax return, requiring the IRS return to be completed and filed by hand.

Unit holders in limited partnerships may be considered to be operators of businesses in any state where that partnership operates a business. As a result, the club and each of its members may be required to file non-resident income tax returns in each of those states. The partnership will provide additional information about this with its K-1.

Finally, when the partnership is sold, the club will probably also need to file IRS Form 4797 (Sales of Business Property) in conjunction with this partnership. Form 4797 is used to report sales, exchanges, or involuntary conversions of business property, disposition of noncapital assets, disposition of capital assets not reported on Schedule D, and section 179 or 280F(b)(2) recapture amounts. myICLUB Club Tax does not support this form, and the club may require the services of a tax professional to complete their tax returns.

• DOUG GERLACH