Separately take into account his or her share of the

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Income Tax Fundamentals 2019
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Chapter 10 / Exercise LO10.3
Income Tax Fundamentals 2019
Whittenburg/Gill
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separately take into account his or her share of the nonbusiness gross income of the partnership and combine this amount with nonpartnership income from nonbusiness sources. Reg. §1.702-2.
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Income Tax Fundamentals 2019
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Chapter 10 / Exercise LO10.3
Income Tax Fundamentals 2019
Whittenburg/Gill
Expert Verified
Losses in Excess of Partner’s Basis A partner’s distributive share of partnership loss (including capital loss) is allowed as a deduction only up to the adjusted basis of the partner’s interest in the partnership at the end of the partnership year in which the loss occurs. Any partner’s loss that is disallowed due to the lack of basis will be deductible by the partner up to the partner’s basis increases in a future year (through contributions, partnership income, etc.). Code Sec. 704(d); Reg. §1.704-1(d). EXAMPLE 19.71 At the end of year 1, partnership AB has a loss of $20,000. Partner Boyce’s distributive share of this loss is $10,000. At the end of the year, Boyce’s adjusted basis for his interest in the partnership (not taking into account his distributive share of the loss) is $6,000. Boyce’s distributive share of partnership loss is allowed to him as a deduction (in his taxable year within or with which the partnership taxable year ends) only to the extent of his adjusted basis of $6,000. The $6,000 loss allowed decreases the adjusted basis of his interest to zero. Assume that, at the end of year 2, the adjusted basis of Boyce’s interest in the partnership has increased to $3,000 (not taking into account the $4,000 loss disallowed in year 1). $3,000 of the $4,000 loss disallowed for year 1 is carried over and allowed to Boyce for year 2, thus again decreasing the adjusted basis of his interest to zero. If, at the end of year 3, Boyce has an adjusted basis for his interest of at least $1,000 (not taking into account the remaining disallowed loss of $1,000), he will be allowed to deduct the $1,000 loss previously disallowed. Reg. §1.704-1(d), Example (1). PLANNING POINTER For any year in which a partner’s distributive share of losses exceeds the basis of the partner’s interest (including the partner’s share of partnership liabilities), the loss deduction may be obtained by having the partnership buy property on credit or borrow money. The resultant increase in each partner’s share of the liability incurred is treated as a contribution of cash, thus increasing the basis of the partner’s interest. Code Secs. 722 and 752(a). This makes it possible for the partner, to some extent, to control the year in which a loss deduction will be taken. Classification of Loss Pass-Through As discussed earlier, certain items of partnership income or loss are required to be separately stated. Included are short-term capital gains or losses, long-term capital gains or losses, and gains or losses from the sale or exchange of Section 1231 assets. If any one (or more) of these separately stated items is a loss and if the partner’s distributive share of the aggregate of these losses (as well as ordinary losses) exceeds the partner’s basis of the partnership interest, the allowed portion of each type of loss is equal to the partner’s share of the particular type of loss

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