Identify which of the following statements is true.
A)Although a partner's basis in the partnership cannot go below zero, a partner's book capital account (equity)may be negative.
B)Tom purchased for cash a 40% capital, profits, and loss interest in the TP General Partnership. His $140,000 basis in his partnership interest includes his $45,000 share of recourse debt and his $30,000 of nonrecourse debt (that is not qualified nonrecourse real estate financing). His at-risk basis cannot be more than $65,000.
C)Terri is a limited partner in the STU Partnership, which manufactures children's toys. Because the partnership is actively involved in a trade or business, Terri's income from the partnership is classified as active income for the passive activity loss rules.
D)All of the above are false.

Question

Quizplus · Accepted Answer

Statement A is true. The partner's basis in the partnership represents the partner's investment in the partnership, and it cannot go below zero. However, the book capital account can be negative if the partnership experiences losses or distributions in excess of the partner's share of the partnership's income. Statements B and C are false. For statement B, Tom's at-risk basis would include his share of both recourse and nonrecourse debt, as long as the latter is qualified real estate financing. For statement C, limited partners generally have passive income from the partnership, even if the partnership is actively involved in a trade or business.

Identify Which of the Following Statements Is True