Question

Marshall has a one-third capital and profits interest in the Blue Stone General Partnership. On January 1, year 1, Blue Stone has $120,000 of general debt obligations and Marshall has a $50,000 tax basis (including his share of Blue Stone’s debt) in his partnership interest. During the year, Blue Stone incurred a $30,000 nonrecourse debt that is not secured by real estate. Because Blue Stone is a rental real estate partnership, Marshall is deemed to be a passive participant in Blue Stone. His share of the Blue Stone losses for year 1 is $75,000. Marshall is not involved in any other passive activities, and this is the first year he has been allocated losses from Blue Stone.

Determine how much of the Blue Stone loss Marshall will currently be able to deduct on his tax return for year 1, and list the losses suspended due to tax-basis, at-risk, and passive activity loss limitations.

If Marshall sells his interest on January 1, year 2, what happens to his suspended losses from year 1?

Research aids: See §706(c)(2)(A), Reg. §1.704-1(d)(1). Prop. Reg. §1.465-66(a), and Sennett v. Commissioner, 80 T.C. 825 (1983).

Answer 1

a	Requirement
	Marshall will not deduct any losses currently and the loss which is limited
	is shown below in the table
	Particulars	Tax Basis Limitation	At Risk Limitation	Passive activity limitation	Explanation
1	Beginning tax	$50,000	$50,000		Since in the case of general partnership
	basis and which				Marshall beginning at risk amount will be
	is at risk amount				the same as his beginning tax basis as the
					debt obligations are treated as recourse debt
2	Increase in Non	$10,000	$0		Non Recourse debts are not included in
	Recourse Debt				the at Risk Amount
3	Tax Basis and at risk	$60,000	$50,000
	before ordinary
	business loss(1+2)
4	Ordinary Business	($75,000)
	Loss
5	Loss Clearing the tax	($60,000)			Loss is limited to $60000 tax basis
	basis
6	Loss suspended	($15,000)
	by the tax basis(4-5)
7	Loss Clearing by the		($60,000)
	Tax Basis
8	Loss Clearing at		($50,000)		Loss is limited to $50000 at risk basis
	risk basis
9	Loss suspended		($10,000)
	by at risk basis(7-8)
10	Passive activity			($50,000)	Marshall is not a material partcipant
	loss
11	Passive income			$0	it is given in the question
12	Loss used to offset			$0	to the extent of passive income loss is used
	the passive
	income
13	Carryover of Passive			($50,000)
	activity loss(10-12)
b	Requirement
	As per Sennett V.Commissioner ,80 TC 825 (1983) the partners losses will get suspended by the tax basis and it will disappear
	when the partnership is sold.Thus Marshall will lose $15000 loss suspended by the tax basis limitation.
	However also as given in Prop Reg §1.465-66(a) that Marshall will utilize the $10000 loss suspended
	by the at risk limitation to offset any gain which can be reported from the partnership interest disposition.At Last it can be said
	that Marshall may deduct $50000 passive activity loss to be carried forward to the year of its disposition.