Harry’s basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership’s loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.
Answer the following statement true (T) or false (F)
False
Rationale: Harry’s basis first is adjusted for the distribution he received, so it is reduced to $6,000 ($10,000 – $4,000 distribution). The loss is limited under § 704(d) to his basis after the distribution, or $6,000, with the remaining $2,000 being deferred to a future year.
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