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* * *. On April 7, 1998, Bakersfield Resources, LLC
acquired additional partnership interests through
purchases. These transactions resulted in a new
partnership for federal income tax purposes (the “new”
partnership retains the same federal employer
identification number).
As reflected within the capital accounts, the
partnership books were restated to reflect the value of
the assets as required in the regulations under IRC
704. As reflected within this return, in the event of
a sale of these assets, proper adjustments have been
made to reflect the tax basis and the proper taxable
gain.
Also attached was a Section 754 Election Statement as follows:
The partnership hereby elects, pursuant to IRC Section
754, to adjust the basis of partnership property as a
result of a distribution of property or a sale or
exchange of a partnership interest as provided in IRC
Sections 734(b) and 743(b).
The FPAA in this case was sent October 4, 2005. The notice
adjusted BEP’s ordinary income as follows:
a. Portfolio income (loss) interest
(1) Adjustment $0
(2) As reported 381,998
(3) Corrected 381,998
b. Net gain (loss) under sec. 1231 not casualty/theft
(1) Adjustment 16,515,194
(2) As reported 5,390,383
(3) Corrected 21,905,577
The adjustment was explained as follows:
Bakersfield Energy Partners, LP has failed to establish
that it had a basis greater than $0 in the gas reserves
it sold during the taxable year 1998. It has been
determined that any optional basis adjustment under
section 743(b) was the result of a sham transaction, a
transaction lacking economic substance that had no
business purpose and no economic effect and/or was
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