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

The 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

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.