Unrecog Sec 704c Losses - treatment on 1040?

Technical topics regarding tax preparation.
#1
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Hello...I have a new client who received a K-1 showing a net unrecognized 704(c) loss and it's a sizeable loss of over $750,000. I did a bit of research, but everything I am finding refers to the new required reporting on the K-1. I am making a huge assumption here that "unrecognized" means the same here as with regular unrecognized capital losses...no reporting on 1040 until loss is recognized. Is this a correct assumption?

Second question: client says this investment is worthless. They have not been able to produce any documentation saying it is worthless, but if they do, does that change the tax treatment noted above? How so?

Thanks in advance for your help!
 

#2
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The 704(c) item is informational only.

If this investment is truly worthless, I would encourage you to investigate whether an abandonment of his interest may be in his best interest.
~Captcook
 

#3
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If this investment is truly worthless, I would encourage you to investigate whether an abandonment of his interest may be in his best interest.


Can’t you take a deduction for worthlessness absent an abandonment?
 

#4
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Jeff-Ohio wrote:
If this investment is truly worthless, I would encourage you to investigate whether an abandonment of his interest may be in his best interest.


Can’t you take a deduction for worthlessness absent an abandonment?


You certainly may, but an abandonment loss is an ordinary deduction instead of a capital loss.
~Captcook
 

#5
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You certainly may, but an abandonment loss is an ordinary deduction instead of a capital loss.

Why capital?
 

#6
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Thank you so much for the information...at least I now have a bit of direction to take my research on abandonment loss.
 

#7
lckent  
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Why capital?


Sec 741
CPA, Retired
 

#8
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Sec 741

That’s if there’s a sale or exchange.

at least I now have a bit of direction to take my research on abandonment loss.


You have more to research than that.
 

#9
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how would you establish worthlessness of a partnership interest without some commensurate step such as an abandonment? continuing to hold the interest would seem to indicate that the taxpayer doesn't believe it's worthless.

since the partnership is a pass-through, it seems the partnership would take a loss (for worthlessness, etc.) if permitted and would pass that through to the partner; why hasn't the partnership recognized a loss? why would the partner recognize a loss separate from the partnership?
 

#10
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how would you establish worthlessness of a partnership interest without some commensurate step such as an abandonment?


By analyzing financial data (current financials, future projections and forecasts) and showing that the owner in question would get $0 and creditors (or preferred equity holders) would get everything.

continuing to hold the interest would seem to indicate that the taxpayer doesn't believe it's worthless.


I wouldn’t say that’s all that important.

since the partnership is a pass-through, it seems the partnership would take a loss (for worthlessness, etc.) if permitted and would pass that through to the partner; why hasn't the partnership recognized a loss?


Yeah, maybe down the road. But those actual events would just evidence current worthlessness. Moreover, it might be a situation where the entity isn’t worthless, but the particular partner’s equity interest is.

Plenty of law in this area…
 


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