Question

Molly Grey (single) acquired a 30 percent limited partnership interest in Beau Geste LLP several years ago for $48,000. At the beginning of year 1, Molly has tax basis and an at-risk amount of $20,000. In year 1, Beau Geste incurs a loss of $180,000 and does not make any distributions to the partners.

• In year 1, Molly's AGI (excluding any income or loss from Beau Geste) is $60,000. This includes $10,000 of passive income from other passive activities.
• In year 2, Beau Geste earns income of $30,000. In addition, Molly contributes an additional $30,000 to Beau Geste during year 2. Molly's AGI in year 2 is $63,000 (excluding any income or loss from Beau Geste). This amount includes $8,000 in income from her other passive investments.

a. Based on the above information, complete the requirements A1 to A3. Complete this question by entering your answers in the tabs below. Reg A1 Reg A2 Req A3 Based on the above information, complete the following table: (Leave no answers blank. Enter zero if applicable.) At-Risk Amount: Initial year 1 amount Allowed loss: End of year 1 at-risk amount Contribution for year 2 BG Income Allowed loss: End of year 2 at-risk amount Req A1 Req A2 >

Answer 1

To determine the required amounts, Molly need to determine her at-risk basis for each year.

At-risk amount:
Initial year 1 amount	$20000
Allowed loss:	(20000)
End of year 1 at-risk amount	$0
Contribution for year 2	$30000
BG income (30% x $30000)	9000
Allowed loss:	(34000)
End of year 2 at-risk amount	$5000

At-risk allowed loss calculation:

Year	Total loss	At-risk allowed	At risk-disallowed
1	$54000	$20000	$34000
2	34000	34000	0

Passive activity loss allowed calculation:

Year	At-Risk Allowed	PAL Allowed	PAL Disallowed
1	$20000	$10000	$10000
2	34000 10000	17000	27000

In year 1, Molly has at-risk amount of $20000 before losses from Beau Geste and therefore is only allowed $20000 of losses under the at-risk rules. This loss then must pass the passive activity loss rules.Since Molly has $10000 of passive activity income from other sources in year 1, She may deduct $10000 of the $20000 loss allowed under the at-risk rules under the passive activity loss rules. This leaves $10000 suspended under the passive activity loss rules for year 1.

In year 2, Molly's at-risk amount increases by the amount of her contribution ($30000) and by the income generated by Beau Geste to $39000 before considering any losses from Beau Geste. This additional at-risk amount will allow Molly to use up to $39000 of losses suspended by the at-risk rules in previous years.As a result, the $34,000 of losses suspended in year 1 now flow to the passive activity loss rules. In addition to the $34,000 loss freed from the at-risk rules, Molly must also consider whether she can use the $10,000 loss that was suspended under the passive activity loss rules in year 1. Since she has $17,000 ($9,000 from Beau Geste and $8,000 from other sources) of passive income she may deduct $17,000 of the total $44,000 losses in year 2. This leaves $27,000 of losses that remain suspended under the passive activity loss rules at the end of year 2.

Molly's AGI for the year 2 is determined as follows:

Year 2 AGI:

AGI before Beau Geste:	$63000
+Year 2 passive income from Beau Geste	9000
-Year 2 allowed passive losses	17000
=year 2 AGI	$55000

Based on the above calculation the following amounts:

At-risk amount at the end of year 1	$0
At-risk amount at the end of year 2	$5000
Losses allowed under the at-risk rules in year 2	$34000
Total suspended passive losses at the end of year 1	$10000
Total suspended at-risk losses at the end of the year 2	$0
Deductible losses in year 1	$10000
Year 2 AGI after considering Beau Geste events	$55000