The partners of the MCL Partnership, Martin, Clark, and Lewis, share profits and losses in a ratio of 4:3:3, respectively. The tax basis of each partner, as of December 31 of the current year, is as follows: Martin, $7,200; Clark, $6,000; and Lewis, $2,500. During the current year, the partnership incurred an ordinary loss of $15,000. The loss is not reflected in the tax basis figures presented
above. Nothing else occurs during the year that would affect the partners' bases. As a result of this loss, what amount should Martin, Clark, and Lewis report on their individual tax returns for the current year? What limitations (other than the Sec. 704(d) loss limitations) may prevent them from deducting their losses in the current year?
What will be an ideal response?
The loss allocation is:
Martin: $15,000 × 0.40 = $6,000
Clark: $15,000 × 0.30 = $4,500
Lewis: $15,000 × 0.30 = $4,500
Martin and Clark are limited to deducting $6,000 and $4,500, respectively, by their allocation of the partnership loss and not by their bases for their partnership interests under Sec. 704(d). Lewis, on the other hand, has his $4,500 share of the partnership loss limited by his $2,500 basis for the partnership interest under Sec. 704(d). These amounts may be further restricted by the at-risk rules and the passive activity limitations.
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