11.12 Partnership Loss Limitations

Your share of partnership losses may not exceed the adjusted basis of your partnership interest. If the loss exceeds basis, the excess loss may not be deducted until you have partnership earnings to cover the loss or contribute capital to cover the loss. The basis of your partnership interest is generally the amount paid for the interest (either through contribution or purchase) less withdrawals plus accumulated taxed earnings that have not been withdrawn. You also have a basis in loans to the partnership for which you are personally liable.

A partner’s basis is not increased by accrued but unpaid expenses such as interest costs and accounts payable unless the partnership uses the accrual accounting method. However, basis is increased by capitalized items allocable to future periods such as organization and construction period expenses.

Partners are subject to the “at-risk” loss limitation rules. These rules limit the amount of loss that may be deducted to the amount each partner personally has at stake in the partnership, such as contributions of property and loans for which the partner is personally liable. See the discussion of the “at-risk” rules in Chapter 10 (10.17). Furthermore, if the IRS determines that a tax-shelter partnership is not operated to make a profit, deductions may be disallowed even where there is an “at-risk” investment. Finally, any loss not barred by these limitations may be disallowed under the passive activity rules discussed in Chapter 10.

Court Decision

Settlements Need Not Be Consistent

Neither the IRS nor the Department of Justice is required to offer consistent settlements to audited partners so long as they do not discriminate for arbitrary reasons.

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