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Tax Court denies partnership loss deduction for lack of evidence of basis

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Tax Hot Topics: Tax Court denies partnership loss deduction for lack of evidence of basisThe Tax Court has ruled in Namen v. Commissioner (T.C. Memo 2017-24) that a podiatrist in private practice could not deduct his distributive share of loss in a partnership because the taxpayer could not provide enough evidence to establish basis in the partnership interest.

The taxpayer was a member of a surgery center organized as a limited liability company (LLC) and treated as a partnership for U.S. federal income tax purposes. The taxpayer deducted his distributive share of the partnership loss on his personal return. The IRS denied the deduction under Section 704(d), which limits the deduction for a partner’s loss to the partner’s basis in the partnership interest. The excess loss is instead carried forward for a deduction in a future year in which the partner has a sufficiently adjusted basis in his or her partnership interest.

The taxpayer testified that he made contributions and was personally liable on loans made to the LLC in an attempt to establish basis in his partnership interests. However, the taxpayer provided no documentation to corroborate his testimony. Additionally, the taxpayer did not provide any evidence regarding the amount of his distributive share of partnership losses and the extent of any prior adjustments to the basis in his partnership interest. The Tax Court found that the evidence was not sufficient to establish his basis in the partnership interest or the extent to which he was entitled to the distributive share of any partnership losses.

The Tax Court cited another recent case, Hargis v. Commissioner (T.C. Memo 2016-232), in its opinion. In Hargis, the taxpayer deducted her distributive share of partnership losses from LLCs that operated nursing homes on her personal return. The IRS denied those deductions because the taxpayer did not provide adequate information, including numeric computations, to establish the basis in her partnership interests. Additionally, the taxpayer provided no evidence (other than providing copies of loan agreements and witness testimony) to explain how and to what extent loans made by third parties to the LLCs affected the basis in her partnership interests. The Tax Court asserted that the existence of loan documents and “generalized testimony” was not enough to establish basis in the taxpayer’s partnership interest.

Contact
Grace Kim
Principal, Washington National Tax Office
+1 202 521 1590


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