Jerry has a 10% interest in the EKG Partnership capital, profits, and losses. He is a limited partner. At the beginning of the current year, his basis in his partnership interest is $10,000. The partnership earned $20,000 of ordinary income this year and repaid a $150,000 nonrecourse liability. What tax issues should Jerry consider with respect to reporting the results of this year's activities

Question

for the EKG Partnership on his personal return?

What will be an ideal response?

Answer 1

• What is Jerry's basis in his partnership interest?
• Does the repayment of the partnership liability cause an adjustment to Jerry's basis in his partnership interest?
• Is the repayment of the nonrecourse liability a taxable event for Jerry? If so, what are the amount and character of the income reported?

Repayment of partnership liabilities is treated as distributions to the partners. A distribution made to a partner that exceeds their basis for the partnership interest produces a taxable gain. The gain can be calculated as follows:

Basis at the beginning of the year $10,000
Plus: George's share of income
(0.10 × $20,000) 2,000
George's basis before the distribution $12,000
Minus: George's deemed distribution from
repayment of partnership liability
(0.10 × $150,000) (15,000)
George's recognized gain $ 3,000