What I had said about
sheltering distributions in excess of basis against suspended passive
losses is not actually in disagreement with the discussion on taxalmanac. Please bear with me as I go through a
lengthy explanation of why.
The important thing to keep
in mind here is that there are three different kinds of suspended losses:
suspended losses due to lack of basis (i.e., when your K-1 capital account plus
your liabilities is less than zero), suspended losses due to lack of amount at
risk (what gets computed on Form 6198), and suspended losses under the passive
activity loss rules (what tax accountants call PAL carryforwards, or Passive
Activity Loss carryforwards).
Think of these as three sets
of sieves, where you pour your losses from the K-1 at the top, but get to
report only what dribbles out at the bottom. You first have to have basis (capital account plus all three
lines of liablities have to be greater than zero). If you get past this hurdle, then you have to have amount at
risk (capital account plus the second and third line of liabilities on the K-1
greater than zero). And finally,
once you meet these requirements, you also have to have passive activity income
(or sell the activity).
When you first start out with
an MLP, you have basis and amount at risk (from your initial investment), but
you usually don't have passive activity income from that MLP, so your losses
get suspended as PAL carryforwards (that is, the losses get through the first
two sieves but are trapped in the third sieve). After a long time, you will have a negative capital account
and not enough liabilities to offset that, so then any additional losses will
be suspended due to lack of basis (they get trapped in the first sieve). So you will end up with two different
kinds of suspended losses - those suspended due to lack of basis (in the first
sieve), and those for which you had basis but lacked the passive activity
income (in the third sieve)
What the tax almanac article
is talking about is that, when you have gain from distributions in excess of
basis, that does not allow you to free up losses trapped in the first sieve
(because the gain still does not give you basis). That is absolutely correct. But what I was talking about was that those gains do free up
the early losses trapped in the third sieve, i.e., the passive activity loss
carryforwards, because the gain is passive activity income for that MLP.
You may verify my discussion of three "sieves" of loss limitations by going to the section of the IRS instructions for Form K-1 that discusses "Limitations on Losses, Deductions, and Credits" here.