Question

Juan Diego began the year with a tax basis in his partnership interest of $40,000. During the year, he was allocated $25,000 of partnership ordinary business income, $80,000 of §1231 losses, and $120,000 of short-term capital losses and received a cash distribution of $40,000. (Do not round intermediate calculations.)

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).]

Answer 1

Part A

As per Rev. Rul. 66-94, it is suggested to Juan Diego to increase tax basis in his partnership interest of $40,000 by $25,000 of partnership ordinary business income and then reduce the same by cash distribution of $40,000. Then the remaining $25,000 will be reduced to 0 by the $80,000 Section 1231 losses and $120,000 short-term capital losses allocated. Tax basis allocation to different losses is stated by Reg. §1.704-1(d)(2).

	(1) Original Loss	(2) Amount Deducted Currently	(1) – (2) Loss Carryover
Section 1231 losses	80000	10000 (25000*80000/200000)	70000
Short-term capital losses	120000	15000 (25000*120000/200000)	105000
	200000	25000

Part B

Loss carryover = $175000

It characterized as a $70,000 Section 1231 loss and a $105000 short-term capital loss.

	Loss Carryover
Section 1231 losses	$70000
Short-term capital losses	$105000