The MOP Partnership Is Involved in Construction Activities ​
During the Year, the Partnership Has an Operating Loss

question 8

Essay

The MOP Partnership is involved in construction activities.Patricia has an adjusted basis for her partnership interest on January 1 of the current year of $600,000, consisting of the following. $$\begin{array} { l r } \text { Capital account } & \$ 350,000 \\\text { Share of partnership recourse debt } & 50,000 \\\text { Share of partnership nonrecourse debt } & 200,000 \\& \$ 600,000\end{array}$$ ​
During the year, the partnership has an operating loss of $1.2 million and distributes $60,000 of cash to Patricia.Partnership liabilities were the same at the end of the tax year, and the nonrecourse debt is not "qualified nonrecourse debt." If she owns a 60% share of partnership profits, capital, and losses, and is an active ("material") participant in the partnership, how much of her share of the operating loss can Patricia deduct? What Code provisions could cause a suspension of the loss? How would your answer change if MOP were an LLC and Patricia had not personally guaranteed any of the debt?

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Definitions:

Unrealized Gain

Represents the increase in value of an investment or asset that has not yet been sold for cash.

Commercial Substance

A concept in accounting that a transaction has commercial substance if it significantly changes the economic circumstances of the entities involved.

Joint Venture

A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task or business activity.

Fair Value

A valuation method that approximates the amount for which an asset could be bought or sold in a current transaction between participants at arm's length.