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PARTNERS & PARTNERSHIPS

to report under Sec. 731. Additionally, is that PTPs usually generate tax losses continuing to hold the property. Inves-
to the extent the PTP allocates the year after year. Without offsetting tors should consider whether disposing
partner losses in excess of basis, those income, PALs remain suspended and of a PTP investment to recognize a tax
losses will be limited. Or if a partner’s provide an investor no current tax loss is a better strategy than holding the
at-risk amount has gone to zero and the deduction. investment for further appreciation and
partner later has a distribution, making As a result, losses allowable for tax cash flow.
the partner’s at-risk amount negative, and at-risk basis but limited under Sec. When disposing of a PTP invest-
the partner may have at-risk recapture 469 are carried forward to future years ment, be aware, too, that selling a PTP
under Sec. 465(e). and are allowable to the extent of passive interest with “hot assets” — unrealized
Passive-activity-loss rules: income from the PTP. Note that even if receivables or inventory items of the
Assuming a taxpayer has enough tax a loss is allowed under Sec. 469, it could partnership — may result in ordinary
basis and at-risk basis to allow a loss be further limited by the Sec. 461(l) income. Sec. 751 requires the gain at-
from a PTP, he or she still has an excess business loss rules; however, that tributable to disposition of these assets
additional limitation under Sec. 469. topic is beyond the scope of this article. to be characterized as ordinary, meaning
PTPs are subject to the passive-activity- Given that losses from a PTP can be that the preferential capital gains tax
loss (PAL) rules under Sec. 469 just offset only by income or gain from that rates will not apply; this may come as a
like other partnership investments specific PTP, how could an investor go surprise to investors. Sec. 751(c) defines
but with added limitations. The PAL about monetizing a loss? One answer in- “unrealized receivables” and Sec. 751(d)
rules generally limit the deductibility volves getting rid of those extra pounds defines “inventory” to include items that
of losses from passive activities to the of lemons. if sold by the partnership would result
extent of income from passive activities. in ordinary income, such as tangible
However, each PTP is viewed separately Monetizing passive activity losses and intangible personal property held
for applying the PAL rules under Sec. One option for monetizing PALs from by a business (Sec. 1245 depreciable
469(k). This means that a PAL from a a PTP is to fully dispose of the PTP in- property).
PTP can be offset only against other vestment in a taxable transaction. Then, Also be aware that, due to the nature
income/gain from that specific PTP. the PALs will be allowed as a current of the business of most PTPs, deprecia-
PALs from PTPs must be tracked tax deduction under Sec. 469(g) and tion can be a big factor in creation of
separately and reported on Worksheet Sec. 469(k)(3). However, by disposing the losses that flow through to inves-
5, 6, or 7 of Form 8582, Passive Activity of the asset, the investor loses any ad- tors. This ordinary income recapture
Loss Limitations. The practical problem ditional appreciation that may occur by is reported on the sales statement

EXECUTIVE SUMMARY • A PTP owner, as an owner of a and passive-activity-loss
partnership interest, receives a rules.
• A publicly traded partnership Schedule K-1, Partner’s Share
(PTP) is any partnership with of Income, Deductions, Credits, • Gifts of interests in PTPs to
interests in the partnership that etc., which lists the various charities are subject to the
are traded on an established items flowing through to the bargain-sale rules and may also
securities market or with inter- owner from the PTP. be limited if the PTP has “hot
ests in the partnership that are asset” ordinary income recap-
readily tradable on a second- • Investments in PTPs can cause ture items.
ary market or its substantial investors to be required to file
equivalent. additional foreign reporting • Gifts of PTPs to private founda-
forms. They can also require tions are generally limited to the
• PTPs are by default taxed as multiple state income tax filings. lesser of the investor’s basis or
corporations; however, if the fair market value and may ex-
gross income of a PTP consists • PTPs often generate tax losses pose the investor to the excise
of 90% or more of certain types year after year. An investor’s de- tax on acts of self-dealing with a
of passive income, it is treated duction of these losses may be private foundation by a qualified
as a partnership. limited by the basis, at-risk, person.

36 October 2022 The Tax Adviser