Discussion:Worthless Partnership Interest
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Discussion Forum Index --> Advanced Tax Questions --> Worthless Partnership Interest
Discussion Forum Index --> Tax Questions --> Worthless Partnership Interest
| 20 October 2009 | |
| My client invested in a partnership as a limited partner to buy and develop land. In 2008, the bank foreclosed on the land. The partnership dissolved in 2008 and my client lost his entire investment.
He received a 2008 K1 from partnership that shows:
I don’t understand the accounting on the final K1. It seems like his capital account should have been reduced to zero thru a loss. Regardless, I want to take an ordinary loss for the remaining balance in his capital account for a loss on his worthless interest. In researching the subject it seems that the requirements are pretty strict to be able to do that. Given the entries on the K1 can I take an ordinary loss for a worthless partnership interest in 2008? | |
Michaelstar (talk|edits) said: | 20 October 2009 |
| Based on the K-1 you received and your post - my answer would be No - you will not be able to take an ordinary loss for this ending capital account. See Rev. Rul. 93-80. | |
| 20 October 2009 | |
| Thanks Michaelstar.
Yes, I read that. To be clear I assume you say no because of the releif of $380 of recourse debt? | |
Michaelstar (talk|edits) said: | 20 October 2009 |
| Unfortunately, yes. The recourse debt of $380 presents a problem. Also, there would need to be a formal abandonment as I read the Revenue Ruling. | |
| 20 October 2009 | |
| An abandonment loss is not available if the partner is relieved of debt as part of the abandonment. Not sure if partner was relieved of debt.
Also, the capital account reconciliation does not make sense. Why would there be a $35,000 balance in the capital account? There may be COD issues here as well. | |
Michaelstar (talk|edits) said: | 20 October 2009 |
| Fully agree - that is where the $380 presents the problem - certainly if this is actually recourse debt. | |
| 20 October 2009 | |
| R2, that is why I'm a little confused on how to handle this. The capital account recon doesn't make sense. Under the circumstances it seems that the K-1 should have shown a ordinary loss for the entire amount of my client's investment.
It seems like the K1 (and it is the final k1) is incorrect. After making calls to the General Partner it appears unlikely that it will be corrected. I guess the conservative thing to do is to take a capital loss for the remaining balance in the capital account. | |
| 20 October 2009 | |
| How much did your client invest? If the answer is $35,000, then I see no capital loss at all. | |
| 20 October 2009 | |
| Invested $70k. Lost all of it. K1 shows $35k of ordinary loss and $35k left in capital account.
I don't know how they came up with 35k left in capital account? There is nothing left. | |
Michaelstar (talk|edits) said: | 20 October 2009 |
| That other $35k could have been distributed or "lent" to other partners which would not effect your clients capital account. If something like that happened, the K-1 would then be correct. You would need to obtain the 1065's (and hopefully the Schedule L has been completed) or partnership accounting (which is allowed by most partnership agreements - but you would need to read it and see)to confirm what really happened. | |
| 21 October 2009 | |
| There's a pretty good discussion of the tax treatment of losses from abandonment or worthlessness of a partnership interest in an article posted to a law firm's website here in Sacramento. The name of the firm is Wagner, Kirkman, Blaine, Klomparens & Youmans. Here's a link to the newsletter containing the article:
http://www.wkblaw.com/newsletters/wkblaw_newsletter_08_2008.pdf | |
