1/21/11Electing Large PartnershipsSimplification rules relieve large partnerships of reporting burdens:Schedule KK-1sPartnership must have over 100 partners to make election Each partner separately takes into account his share of:Passive gains and lossesPortfolio income or lossCapital gains and lossesTax-exempt interestNet AMTTax credits1919
1/21/11Electing Large PartnershipsSpecial rules for ELP deductions:Miscellaneous itemized deductionsNot separately reported to partners 70% are disallowed as a rough justice since 2% floor does not applyELP’s charitable deductionAllowed at partnership levelLimited to 10% of income applicable to C corporations 2020
1/21/11Limitations on Partnership LossesBasis LimitationsAllowable loss deduction:Extent of partner’s outside basisAt the end of tax year in which loss occurred Partner’s outside basis:Decreased by share of partnership lossesMay not be reduced below zero Section 704(d)Disallowed losses may be carried forward indefinitelyMay be used when partner acquires additional outside basisIf partner has both ordinary and capital losses:2121
Limitations on Partnership LossesBasis LimitationsWhere do losses go when… A partnership interest is sold?Losses disappearSennett v. Commissioner, 80 T.C. 825 (1983)The partner dies?
The partnership interest is gifted?
1/21/11Limitations on Partnership LossesAt-Risk Limitations Section 465Works to limit deductible losses to the “at-risk” amountRules are generally applied separately to each “activity”“At-risk” amount includes: Cash contributionsAdjusted basis of property contributedAmounts borrowed in the activity for which:The taxpayer is personally liableAre secured by taxpayer property (up to FMV of property) 2323
1/21/11Limitations on Partnership LossesAt-Risk Limitations Non-recourse liabilitiesIncrease outside basisDo NOTincrease amount at riskException – certain real estate activities that are financed through:Non-recourse loansSecured by real propertyAre “qualified non-recourse financing”oObtained from commercial lenders or the governmentoMust be nonconvertible debt Outside basis still reduced by loss amount even if deferred under Section 2424
1/21/11Limitations on Partnership LossesAt-Risk Limitations Recourse debt Regulations require that a creditor be able to sue the partner under state lawThe funds must be borrowed from:A person who has no interest in the activity in which the funds are usedInterest in the activity as a creditor is an exception 2525