At the beginning of 2020, an investor purchases 10,000 exchange-traded units of Comanche Petroleum Company, which is organized as a Master Limited Partnership. The investment cost $250,000. Per unit allocations of taxable income and cash distributions for 2020 and 2021 take place at the end of each year, as follows:
$$\begin{array} { l r r }
& \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } \
\text { Taxable income } & \$ 0.50 & \$ 0.75 \
\text { Cash distributions } & 1.75 & 1.90
\end{array}$$ The taxable income is taxed at the investor's personal tax rate, while the excess cash distribution reduces the basis of the investment. At the time of sale, the basis reduction is taxed at the investor's personal rate, while the remaining gain is taxed at the capital gains rate. The investor's personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells the investment for $300,000 at the end of 2021.
Required
a. Prepare a schedule of the total after-tax cash distribution for the investment, for 2020 and 2021.
b. Calculate the amount of taxes the investor owes on the sale of the investment at the end of 2021.

Question

At the beginning of 2020, an investor purchases 10,000 exchange-traded units of Comanche Petroleum Company, which is organized as a Master Limited Partnership. The investment cost $250,000. Per unit allocations of taxable income and cash distributions for 2020 and 2021 take place at the end of each year, as follows:
 $$\begin{array} { l r r } 
& \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } \
\text { Taxable income } & \$ 0.50 & \$ 0.75 \
\text { Cash distributions } & 1.75 & 1.90
\end{array}$$ The taxable income is taxed at the investor's personal tax rate, while the excess cash distribution reduces the basis of the investment. At the time of sale, the basis reduction is taxed at the investor's personal rate, while the remaining gain is taxed at the capital gains rate. The investor's personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells the investment for $300,000 at the end of 2021.
Required
a. Prepare a schedule of the total after-tax cash distribution for the investment, for 2020 and 2021.
b. Calculate the amount of taxes the investor owes on the sale of the investment at the end of 2021.

Quizplus · Accepted Answer

The Answer of At the beginning of 2020, an investor purchases 10,000 exchange-traded units of Comanche Petroleum Company, which is organized as a Master Limited Partnership. The investment cost $250,000. Per unit allocations of taxable income and cash distributions for 2020 and 2021 take place at the end of each year, as follows:
 $$\begin{array} { l r r } 
& \mathbf { 2 0 2 0 } & \mathbf { 2 0 2 1 } \
\text { Taxable income } & \$ 0.50 & \$ 0.75 \
\text { Cash distributions } & 1.75 & 1.90
\end{array}$$ The taxable income is taxed at the investor's personal tax rate, while the excess cash distribution reduces the basis of the investment. At the time of sale, the basis reduction is taxed at the investor's personal rate, while the remaining gain is taxed at the capital gains rate. The investor's personal marginal tax rate is 35%, and the capital gains rate is 15%. The investor sells the investment for $300,000 at the end of 2021.
Required
a. Prepare a schedule of the total after-tax cash distribution for the investment, for 2020 and 2021.
b. Calculate the amount of taxes the investor owes on the sale of the investment at the end of 2021.

At the Beginning of 2020, an Investor Purchases 10,000 Exchange-Traded