Partnership Basis Question


T

Tom

I have a client who was a 5% partner in an LLC that was
being taxed as a partnership. He invested around 90k
roughly 5 years ago. The partnership went belly up and
terminated during 2006. The K-1 shows that my client still
has around 78k in basis and he says that he received nothing
from the partnership upon liquidation. My question is: can
we write off the remaining basis as an ordinary loss or does
it have to be a capital loss? I would think that if the
partnership lost all of the initial investment, then losses
would have been passed through to the partners for the years
the losses were incurred. But my client has not recorded
any losses in the previous years.

Any help would be greatly appreciated.
 
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S

Shyster1040

It depends on whether the partnership had any remaining
debt, whether the client had a share of partnership
liabilities, and whether the client was relieved of that
share.

If the partnership had no liabilities, or if the client had
no share of partnership liabilities and/or obtained no
relief from partnership liabilities, then you may be able to
treat the loss as an ordinary loss under Sec. 165(a).

Otherwise, and as is more typically the case, if the
partnership still had debts, and the client had a share of
that debt from which he was relieved, then the loss may be
capital.

See, e.g., Rev. Rul. 93-80; see also Citron v. Commissioner,
(97 TC 200, 1991)(taxpayer permitted ordinary loss; however,
Tax Court limited holding to cases where partnership had no
liabilities).

Also, if there were partnership liabilities, and the client
was relieved of his share thereof, make sure to double-check
the effect of Code Sec. 752.

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B

Benjamin Yazersky CPA

Tom said:
I have a client who was a 5% partner in an LLC that was
being taxed as a partnership. He invested around 90k
roughly 5 years ago. The partnership went belly up and
terminated during 2006. The K-1 shows that my client still
has around 78k in basis and he says that he received nothing
from the partnership upon liquidation. My question is: can
we write off the remaining basis as an ordinary loss or does
it have to be a capital loss? I would think that if the
partnership lost all of the initial investment, then losses
would have been passed through to the partners for the years
the losses were incurred. But my client has not recorded
any losses in the previous years.

Any help would be greatly appreciated.
The amount you refer to from the K1 is the taxpayer's inside
basis. His/her loss would be the outside basis & it could be
a different amount.

Most likely ltcl.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
 

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