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Partnership Basis Question

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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Reply to
Tom
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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.

Reply to
Shyster1040

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.

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Reply to
Benjamin Yazersky CPA

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