Problem: Module 7 Textbook Problem 9

Learning Objectives:

• 7-6 Adjust the tax basis in a partnership interest
• 7-7 Apply the basis limitation on the deduction of partnership losses
• 7-9 Identify similarities and differences in the tax treatment of S corporations versus partnerships

At the beginning of Year 1 Ms. Mushroom, an individual, purchased a 20 percent interest in Fungi Partnership for $20,000. Ms. Mushrooms Schedule K-1 reported that her share of Fungis debt at year-end was $14,000, and her share of ordinary loss was $30,000. On January 1, Year 2, Ms. Mushroom sold her interest to another partner for $2,200 cash.

Required:

1. How much of her share of Fungis loss can Ms. Mushroom deduct on her Year 1 tax return?
2. Compute Ms. Mushrooms recognized gain on sale of her Fungi Partnership interest.
3. How would your answers to parts a and b change if Fungi were an S corporation instead of a partnership?