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).]
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 |
Juan Diego began the year with a tax basis in his partnership interest of $40,000. During...
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