Have a Tax Question? Ask a Tax Expert
Different expert here. Sorry to hear of your loss. Internal Revenue Code 165 governs the deductibility of a worthless/abandoned partnership interest. Since it sounds like the partnership is worthless it would appear your would qualify for this deduction. See the link here for some information on the deduction and the difference between "abandonment and worthlessness" - http://gilpingivhan.com/pdf/resources/Tax%20Tips%20-%20Abandonment%20vs%20Worthlessness%20(00224527).PDF
How do I write this off on my return and what forms do I use? This loss would be an ordinary loss assuming you did not receive any consideration for the interest. (i.e. you received no cash)* This would not be a capital loss deduction. Generally you report ordinary losses on Form 4797 Part II.
Form 4797 - http://www.irs.gov/pub/irs-pdf/f4797.pdf
Instructions - http://www.irs.gov/pub/irs-pdf/i4797.pdf
How do I complete the forms? - Row 10 columns A-G; basically just put the name of the partnership and EIN if you have it in column A. Columns B-G should be self explanatory, I wouldn't expect anything in column E since the partnership is not a depreciable asset. I would expect column F to be 5,000 (your investment + any other add on investments). Your deductible loss in column G is basically your investment + any other expenses incurred in connection with the investment. Assuming you have no other ordinary losses I would expect this loss to show up on line 14 of page 1 of your Form 1040.
* Generally, a loss from the worthlessness of an asset is an ordinary loss due to the absence of a "sale or exchange," within the meaning of IRC section 1222, whether or not the asset is a capital asset. However, if the loss results from a sale or exchange, the loss will result in a capital loss. For example, if a taxpayer receives a deemed distribution in the context of abandoning an asset, the transaction will be classified as a deemed sale or exchange and he/she will have a capital loss. See Rev. Rul. 93-80, 1993-2 C.B. 239. - http://www.irs.gov/Businesses/Partnerships/Partnership---Audit-Technique-Guide---Chapter-7---Dispositions-of-Partnership-Interest-(Rev.-3-2008)
I trust this provides the clarity you were looking for. Please let me know if you have any follow up questions.
I read the link re Abandonment. Would you conclusion change if I invested as a limited partner? I don't think I mentioned that. It's an alternative energy partnership LLC.
Due to lack of disclosure, we are uncertain if there are assets still held - eg land or patents, perhaps though likely not of any real value. There have been no K-1's or financial reports. We do know that the investors were defrauded. This is clear in the court documents' cease and desist order and restitution order and administrative penalties order.
I was thinking along the lines of theft loss like the Madoff Ponzi scheme.
Would it still be ordinary loss and reported the same way? If not, how do I report this embezzlement, what schedules do I use and how do I fill out the forms?
I do like the idea of reporting everything on the 4797 which makes sense since I came into this with the idea of making a profit. Is the fact that there was theft involved may or not may be relevant in abandonment issues?
Thank you for your very comprehensive answer and instruction. I poured through it all and prepared the 4797 form and boy, you really took the mystery out of it!
Would you conclusion change if I invested as a limited partner? - no the conclusion should not change even if you were a limited partner.
Would it still be ordinary loss and reported the same way? If not, how do I report this embezzlement, what schedules do I use and how do I fill out the forms? - This isn't really theft from you personally, it is theft from the partnership in which the general partner was defrauding the other partners. This is an issue within the partnership and would generally not be reported by you personally. If you had invested with the general partner directly, and not through a partnership, then I could see the theft loss as being relevant to you personally.
Is the fact that there was theft involved may or not may be relevant in abandonment issues? - exactly. Not really relevant to you personally. Your investment is in the Partnership itself.
Glad I could help :).
Ah.... I get it...."it is theft from the partnership." I see the distinction. Thank you, again!
Can I use you (specifically) again in the future? If I have another tough question, can I present to you rather than someone else at USTaxAdvising?
I am assuming you meant to say "...can I present to you rather than someone else at JustAnswer?" but if not please disregard my message below.
Yes for sure, you can work with me directly by using the following link - http://www.justanswer.com/finance/expert-ustaxadvising/
It would be best to put something like "For USTaxAdvising only" in the first line and other experts will generally not respond to the question. I think there is also some way to request to just work with a specific expert although I am not certain on how to do it.
Looking forward to working with you again.
Thanks. I REALLY appreciate the way you present your answers. Your experience really comes through. I recently submitted another question to your (company) link and another CPA did answer.... It wasn't as clear as your explanation, especially with regard to how to complete the forms. Also, our initial conclusions differed - whether or not to file the Form 982. But we had a meeting of the minds in the end. I don't think he/she has had a lot of experience with loan mods/1099-C but made tremendous effort to be helpful. I've done a whole lot of reading and cringing prior to submitting the question and was on the right track but couldn't quite transfer the info on the forms. Thanks again.
Hello, earlier, you wrote, " Internal Revenue Code 165 governs the deductibility of a worthless/abandoned partnership interest..is worthless it would appear your would qualify for this deduction. See.., information on the deduction and the difference between "abandonment and worthlessness"...
My question is what if the $5K were invested in a corporation as a non-shareholder investor and the corp became worthless? Would abandoning the corporation give me an ordinary loss? Would it be governed by the same IRC165? This is on an unrelated (from above) investment. There was no fraud in this investment, but simply mismanaged and a fire was involved. If it does qualify for ord loss, do I fill out the same forms above the same way?
Thanks and please do not assign to another expert! I'll wait for your answer and happy to pay for new question. This option is not available unless you are online so I am submitting this as a reply. :)
My question is what if the $5K were invested in a corporation as a non-shareholder investor and the corp became worthless? - If the stock became worthless (i.e. the corp became worthless) then the stock would be deemed sold on the last day of the tax year and be treated as a "capital" loss. (Subject to the $3,000 limitation) See link here for support - http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses,-Sale-of-Home/Losses-(Homes,-Stocks,-Other-Property)/Losses-(Homes,-Stocks,-Other-Property)-1
Would abandoning the corporation give me an ordinary loss? - Not in the case of holding stock which is different than holding a partnership interest. The worthless stock deduction would generally never give you an ordinary loss, it would always be a capital loss.
Would it be governed by the same IRC165? - Yes but it is actually IRC 165(g)(1)
This is on an unrelated (from above) investment. There was no fraud in this investment, but simply mismanaged and a fire was involved. If it does qualify for ord loss, do I fill out the same forms above the same way? - If you suffered a loss from fire then it would be a casualty loss reported on Form 4684. IRC 165(h) governs the character and treatment of casualty losses. Note that if the underlying asset were a capital asset then it would most likely give rise to capital loss. If it were an ordinary asset like a working partnership interest then it would be an ordinary loss.
See Tax Topic 515 here for some more information - http://www.irs.gov/taxtopics/tc515.html
The investor was a non-shareholder investor. Apparently no shares were issued to the investor. Would the answer be different?