At the beginning of the current year, Corporation M had a $50,000 basis in its 50% interest in the M&N Partnership.For the year, M&N incurred a $168,000 net operating loss and a $32,000 capital loss and received $20,000 of dividend income.The amount of the partnership's debts did not change during the year and it made no distributions to its partners.Based on these facts, what amount of M&N's ordinary loss and capital loss may M recognize during the current year?

Question

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As a 50% partner, Corporation M can claim 50% of the partnership's losses and income. Therefore, M can recognize a $84,000 ordinary loss ($168,000 x 50%) and a $16,000 capital loss ($32,000 x 50%). However, M's loss deduction is limited to its basis in the partnership, which was only $50,000 at the beginning of the year. Therefore, M can only recognize up to a $50,400 ordinary loss ($50,000 beginning basis + $20,000 dividend income - $168,000 ordinary loss) and a $9,600 capital loss ($50,000 beginning basis - $40,000 allowable ordinary loss - $32,000 capital loss).

At the Beginning of the Current Year, Corporation M Had