526 MODULE 35 TAXES: PARTNERSHIPS

DR.
Short-term capital loss 6,000
Guaranteed payments ($8,000 per partner) 24,000
Charitable contributions 9,000
Advertising expense 2.00q
$129000
Partnership ordinary income is $66,000, computed asfollows:
Book income
Add:
Charitable contributions $ 9,000
Short-term capital loss 6.000 15.000
$ 90,000
Deduct:
Tax-exempt income $ 1,500
Sec. 1231 casualty gain 9,000
Section 1231 gain (other than casualty)
Long-term capital gain 6,000
Partnership ordinary income
Each partner's share of partnership ordinary income is $22,000. 7.500

4. Three sets of rules may limit the amount of partnership loss that a partner can deduct.
5. A partner's distributive share of partnership ordinary loss and special loss items is deductible
by
the partner only to the extent of the partner's basis for the partnership interest at the end of the
taxable year [Sec. 704(d)].
(1) The pass-through of loss is considered to be the last event during the partnership's taxable
year; all positive basis adjustments are made prior to determining the amount of deductible
loss.
(2) Unused losses are carried forward and can be deducted when the partner obtains additional ba-
sis for the partnership interest.
EXAMPLE: A partner who materially participates in the partnership's business has a distributive share of
partnershipcapital gain of $200 and partnership ordinary loss of $3,000, but the partner's basis in the part-
nership is only $2,400 before consideration of these items. The partner can deduct $2,600 of the ordinary loss
($2,400 of beginning basis + $200 net capital gain). The remaining $400 of ordinary loss must be carried
forward.
6. The deductibility of partnership losses is also limited to the amount of the partner's at-risk basis
[Sec. 465].
(1) A partner's at-risk basis is generally the same as the partner's regular partnership basis with
the exception that liabilities are included in at-risk basis only if the partner is personally liable
for such amounts.
(2) Nonrecourse liabilities are generally excluded from at-risk basis. \
(3) Qualified nonrecourse real estate financing is included in at-risk basis.
7. The deductibility of partnership losses may also be subject to the passive activity loss limitations
[Sec. 469]. Passive activity losses are deductible only to the extent of the partner's income from
other passive activities (see Module 33).
(1) Passive activities include (a) any partnership trade or business in which the partner does not
materially participate, and (b) any rental activity.
(2) A limited partnership interest generally fails the material participation test.
(3) To qualify for the $25,000 exception for active participation in a rental real estate activity, a
partner (together with spouse) must own at least 10% of the value of the partnership interests.
8. Partnership Agreements
9. A partner's distributive share of income or loss is generally determined by the partnership
agreement.
Such agreement can have different ratios for income or loss, and may agree to allocate other items
(e.g., credits and deductions) in varying ratios.
10. Special allocations must have substantial economic effect.
(1) Economic effect is measured by an analysis of the allocation on the partners' capital accounts.
The special allocation (a) must be reflected in the partners' capital accounts, (b) liquidation