Sections 704(d) and 465 A cattle ranch, operated as a partnership, has the follo

Question

Sections 704(d) and 465

A cattle ranch, operated as a partnership, has the following year end information for a four-year period:

G acquired a 10% general interest at the beginning of year 1 for $20,000. He has received his 10% share of the cash distributed during the four years. Calculate his 704(d) basis and his 465 at-risk amount at the beginning of years 2 through 5.

Year 1 Year 2 Year 3 Year 4 Net income (loss) $(90,000) $(40,000) $(20,000) $(40,000) Cash to partners 0 45,000 30,000 20,000 Recourse debt 45,000 42,000 39,000 36,000 Nonrecourse debt 80,000 70,000 60,000 50,000

Explanation / Answer

The tax basis increase would enable G to deduct the $2,000 carryover loss, reducing A’s tax basis to zero. The use of debt as a means to deduct the loss comes with a future cost. A subsequent reduction of a partner’s allocable share of partnership debt would be treated as a distribution of money potentially resulting in gain recognition if the partner did not have sufficient basis. If in year 2, partnership (a cattle ranch) paid off the debt, G’s allocable share of partnership liabilities would decrease, and G would be deemed to have received a distribution of money in the amount of the decrease. If G’s tax basis still equaled zero at the time of the deemed distribution, G would recognize a gain of $4,000 under Sec. 731(a) attributable to the decrease in G’s share of partnership liabilities. Sec. 731(a)(1) provides that a partner does not recognize gain on a distribution from a partnership except to the extent that any money distributed exceeds the adjusted tax basis of the partner’s interest in the partnership before the distribution.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.