Losses - Section 704(d)

Z has a 60% interest in the capital, profits, and losses of the Zeta Partnership. Both Z and Zeta are calendar year taxpayers. At the beginning of the current year, Z's basis in her partnership interest was $100,000. For the current year, Zeta incurred a $200,000 ordinary loss from its business operation, earned $14,600 of dividend and interest income on its investments, and recognized a $62,000 capital gain on the sale of a partnership capital asset. On March 12 of the current year, Z received a $15,000 cash distribution from Zeta. Assume that there was no change in the amount of Zeta's liabilities during the current year.

a. How much of the $200,000 operating loss may Z deduct on her current-year tax return? In anwering this question, ignore any impact of the at-risk or passive-activity loss limitations.

b. Calculate Z's basis in her partnership interest at the end of the year.