1. LP is a limited partner in a newly formed partnership which is engaged in the

Question

1. LP is a limited partner in a newly formed partnership which is engaged in the following activities:

(i) A research and development activity to which LP contributed $10,000 cash; LP’s share of partnership nonrecourse liability attributable to this activity is $10,000. LP’s share of loss from the research and development activity is $12,000 for the current year.

(ii) A motion picture production activity to which LP contributed $20,000 cash; LP’s share of income from this activity for the current year is $25,000. LP’s outside basis at the beginning of the year was $40,000, and his share of net gain for the year was $13,000. What are the tax consequences to LP under § 465.

Explanation / Answer

A:- Activity to which §465 Appliesi.

1:- § 465(c)(3)(A): section 465 applies to all activities engaged in by T in carrying on a trade/business or for the production of income

B::-.Amount At Risk

1:-§ 465(b)(1)(A): money + AB property contributed by T to the activity1.$10k cash contributed.

2:-.§ 465(b)(1)(B): amounts borrowed

i:-.§ 465(b)(2): if personally liable or pledged property other than property used in such activity as security

ii:-.Here, LP has no personal liability on NR debt.

iii:-.Amount At Risk = $10k

C:-.Deduction

i:- .LP can only deduct $10k of the $12k loss

ii:-§ 465(a)(2): extra $2k carries forward

D:-Basis

Original Basis $40k+ Share of Income. $25k– Share of Loss. ($12k) = Outside Basis$53k

E:-.Reduce Amount At Risk

i:-.Amount at risk decreases from $10k to zero

-->> .Motion Picture Activity

A:-.§ 465 limits losses, not gains

B:-§465(b)(1): LP’s amount at risk = $20k.

C:-$25k share of income increases that amount to $45k.

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