Eve and Tom own 40% and 60%, respectively, of the ET Partnership, which manufactures clocks. The partnership is a limited partnership, and Eve is the only general partner. She works full-time in the business. Tom essentially is an investor in the firm and works full-time at another job. Tom has no other income except his salary from his full-time employer. During the current year, the partnership reports the following gain and loss:
Ordinary loss ………………………$140,000
Long-term capital gain …………… 20,000
Before including the current year’s gain and loss, Eve and Tom had $46,000 and $75,000 bases for their partnership interests, respectively. The partnership has no nonrecourse liabilities. Tom has no further obligation to make any additional investment in the partnership.
a. What gain or loss should each partner report on his or her individual tax return?
b. If the partnership borrowed an additional $100,000 of recourse liabilities, how would your answer to Part a change?