PROBLEM 4 Juan Diego began the year with a tax basis in his partnership interest

ID: 2470457 • Letter: P

Question

PROBLEM 4 Juan Diego began the year with a tax basis in his partnership interest of $50,000. During the year, he was allocated $20,000 of partnership ordinary business income, $70,000 of §1231 losses, $30,000 of short-term capital losses, and received a cash distribution of $50,000. a) What items related to these allocations does Juan Diego actually report on his tax return for the year? [Hint: See Reg. §1.704-1(d)(2) and Rev. Rul. 66-94.] b) If any deductions or losses are limited, what are the carryover amounts and what is their character? [Hint: See Reg. §1.704-1(d).]

Explanation / Answer

ANS;

a.According to Rev. Rul. 66-94,1966-1 CB 166Juan Diego should increase his basis first by his $20,000 share of ordinary business income and then reduce it by his $50,000 cash distribution. At this point, his remaining basis of $20,000 will be reduced to zero by the $70,000 Section 1231 losses and $30,000 short-term capital losses allocated to him. Reg. §1.704-1(d)(2) describes how Juan Diego’s $20,000 tax basis before considering the loss allocations should be allocated to the two types of losses. The table below illustrates the required calculations:

(1) Original Loss

(2) Amount Deducted Currently

(1) – (2) Loss Carryover

Section 1231 losses

$70,000

$14,000

($20,000 x $70,000/$100,000)

$56,000

Short-term capital losses

$30,000

$6,000

($20,000 x $30,000/$100,000)

$24,000

b.As indicated in the table above, Juan Diego’s $80,000 loss carryover (due to his $20,000 tax basis limitation) will be characterized as a $56,000 Section 1231 loss and a $24,000 short-term capital loss.