Last Year, Ben and Jeri (Unrelated) Formed a Partnership to Operate

question 2

Multiple Choice

Last year, Ben and Jeri (unrelated) formed a partnership to operate a restaurant.Ben contributed all of the money, $2,000,000, to the venture for a 50% interest while Jeri agreed to work for the partnership for five years without pay for her 50% interest.According to the agreement, Jeri would receive 50% of the profits (or losses) of the business.During the year, Jeri worked tirelessly, often 80 hours per week.On the other hand, Ben did little, sitting back and watching the fruits of Jeri's efforts.For the year, the partnership reported a $900,000 loss (revenues $600,000, deductible expenses $1,500,000) .Ben and Jeri are both married and their spouses have salaries from their jobs.Neither Ben nor Jeri have any other investments.Which of the following statements is true?

• A)None of the loss can be used by either Ben or Jeri; rather the loss is carried forward to offset future profits of the partnership.
• B)Both Ben and Jeri can use their share of the loss as a deduction to offset their other income they might have on their own individual tax return (Form 1040) such as the salary income of their spouses.
• C)Ben can use his share of the loss as a deduction to offset his other income he might have on his individual tax return (Form 1040) such as the salary income of his spouse because he took the risk of investing in the venture while Jeri did not take a similar risk.
• D)Jeri can use her share of the loss as a deduction to offset her other income she might have on her individual tax return (Form 1040) such as the salary income of her spouse because she was regularly and continuously involved on a substantial basis.
• E)None of the above is correct.

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Definitions:

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Central Line

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