Question

Suki and Steve own 50 percent capital and profits interests in Lorinda LLC. Lorinda operates the local minor league baseball team and owns the stadium where the team plays. Although the debt incurred to build the stadium was paid off several years ago, Lorinda owes its general creditors $300,000 (at the beginning of the year) that is not secured by firm property or guaranteed by any of the members. At the beginning of the current year, Suki and Steve had a tax basis of $170,000 in their LLC interests, including their share of debt owed to the general creditors. Shortly before the end of the year they each received a $10,000 cash distribution, even though Lorinda’s ordinary business loss for the year was $400,000. Because of the time commitment to operate a baseball team, both Suki and Steve spent more than 1,500 hours during the year operating Lorinda. Both Suki and Steve are single and neither of them have any business income or losses from other sources.   (Leave no answer blank. Enter zero if applicable.)

1. a-1. Determine how much of the Lorinda loss Suki and Steve will each be able to deduct on their current tax returns.

2. a-2. List their losses suspended by the tax-basis, at-risk, and passive activity loss limitations.

Each Partner

a1. Deductible loss ------------------?

a2. Loss suspended by tax basis limitation ------------------?

Loss suspended by at-risk limitation -------------------?

Loss suspended by passive activity limitation -------------------?

b.

Assume that some time before receiving the $10,000 cash distribution, Steve is advised by his tax adviser that his marginal tax rate will be abnormally high during the current year because of an unexpected windfall. To help Steve utilize more of the losses allocated from Lorinda in the current year, his adviser recommends refusing the cash distribution and personally guaranteeing $100,000 of Lorinda’s debt, without the right to be reimbursed by Suki. Assuming Steve follows his adviser's recommendation:

1. b-1. How much additional Lorinda loss can Steve deduct on his current tax return?

2. b-2. How much Lorinda loss can Suki deduct on her current tax return?

3. b-3. List Suki's losses suspended by the tax basis, at-risk, and passive activity loss limitations.

b1. Steve's additional loss --------------------------?

b2. suki's deductible loss ------------------------------?

b3. Loss suspended by tax basis limitation -----------------------?

Loss suspended by at risk limitation ------------------------?

Loss suspended by passive activity limitation ----------------------?

Answer 1

a. The members (either Steve or Suki) may deduct $10,000 in losses currently, and they will have a $40,000 loss suspended by the tax basis limitation, and a $150,000 loss suspended by the at-risk limitation as illustrated in the table below:

Description	Tax Basis Limitation	At-risk Limitation	Explanation
(1) Beginning Tax basis and At-risk amount	$170,000	$20,000	General debt obligations of LLCs are treated as nonrecourse debt. Thus, Suki  or Steve’s beginning at-risk amount is $150,000 less than their beginning tax basis.
(2) Distribution	($10,000)	($10,000)
(3) Tax basis and At-risk amount before ordinary business loss	$160,000	$10,000	(1) + (2)
(4) Ordinary business loss	($200,000)		$400,000 x50%
(5) Loss clearing the Tax basis hurdle	($160,000)		Loss limited to $160,000 tax basis
(6)Loss suspended by Tax basis hurdle	($40,000)		(4) - (5)
(7) Loss clearing Tax basis hurdle		($160,000)	(5)
(8) Loss clearing At-risk hurdle and currently deductible		($10,000)	Loss limited to $10,000 at-risk amount on line (3). This amount is currently deductible because Steve and Suki are active participants in the activity.
(9) Loss suspended by At-risk hurdle		($150,000)	(7) - (8)

b. Under these facts, Steve may deduct $120,000 in losses currently (a $110,000 increase over the loss he could deduct in part a.), and will have a $80,000 loss suspended by the at-risk limitation as illustrated in the table below:

Description	Tax Basis Limitation	At-risk Limitation	Explanation
(1) Beginning Tax basis and At-risk amount	$170,000	$20,000	General debt obligations of LLCs are treated as nonrecourse debt. Thus, Steve’s beginning at-risk amount is $150,000 less than his beginning tax basis.
(2) Increase in debt allocation	$50,000	$100,000	[(100,000 + 50% x $200,000) - $150,000] for tax basis and [100,000 – 0] for at-risk amount because guaranteeing the debt makes it recourse debt
(3) Tax basis and At-risk amount before ordinary business loss	$220,000	$120,000	(1) + (2)
(4) Ordinary business loss	($200,000)
(5) Loss clearing the Tax basis hurdle	($200,000)		Loss is less than tax basis limitation
(6)Loss suspended by Tax basis hurdle	$0		(4) - (5)
(7) Loss clearing Tax basis hurdle		($200,000)	(5)
(8) Loss clearing At-risk hurdle and currently deductible		($120,000)	Loss is limited to at-risk amount on line (3). This amount is currently deductible because Steve is an active participant in the activity.
(9) Loss suspended by At-risk hurdle		($80,000)	(7) - (8)

Suki may deduct $10,000 in losses currently (the same amount of loss as in part a.), and she will have a $90,000 loss suspended by the tax basis limitation and a $100,000 loss suspended by the at-risk limitation as illustrated in the table below:

Description	Tax Basis Limitation	At-risk Limitation	Explanation
(1) Beginning Tax basis and At-risk amount	$170,000	$20,000	General debt obligations of LLCs are treated as nonrecourse debt. Thus, Suki’s  beginning at-risk amount is $150,000 less than her beginning tax basis.
(2) Distribution	($10,000)	($10,000)
(3) Decrease in debt allocation	($50,000)	$0	[($200,000 x 50% ) –($300,000 x 50%)]
(4) Tax basis and At-risk amount before ordinary business loss	$110,000	$10,000	(1) + (2)+ (3)
(5) Ordinary business loss	($200,000)
(6) Loss clearing the Tax basis hurdle	($110,000)		Loss is limited to the tax basis
(6)Loss suspended by Tax basis hurdle	($90,000)		(5) - (6)
(7) Loss clearing Tax basis hurdle		($110,000)	(6)
(8) Loss clearing At-risk hurdle and currently deductible		($10,000)	Loss is limited to at-risk amount on line (4). This amount is currently deductible because Sukiis an active participant in the activity.
(9) Loss suspended by At-risk hurdle		($100,000)	(7) - (8)