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Revenue Ruling

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 Rev. Rul. 66-93

1966-1 C.B. 165

Sec. 702

Full Text

Rev. Rul. 66-93

A and B were limited partners in a firm organized under a state law corresponding to the Uniform Limited Partnership Act and engaged in a general brokerage business in securities. One of the general partners embezzled funds of the partnership causing the partnership to become insolvent in 1964. The partnership was placed in receivership and terminated during that same year. Each of the general partners also became insolvent during 1964 and the limited partners were unable to recover any part of their respective capital contributions to the partnership. As a result of the embezzlement the partnership sustained a loss for 1964 in an amount exceeding the combined capital contributions of all the partners.

Held , the loss incurred by the partnership in 1964 is an ordinary loss under the provisions of section 165(a) and (c)(1) of the Internal Revenue Code of 1954. Since the capital contributions of the limited partners were wiped out by this loss and there was no recoupment from the general partners, each limited partner by virtue of the provisions of sections 701, 702, and 703 of the Code has a distributive share of such ordinary loss. Therefore, the limited partners should report, on their individual returns, their distributive shares of the partnership loss, as required by section 702(a) of the Code. The loss deductible is subject to the limitation provided in section 704(d) of the Code, and section 1.704-1(d) of the Income Tax Regulations, which restricts the amount of loss allowed as a deduction to the adjusted basis (before any reduction occasioned by the current year's loss) of the partner's interest in the partnership at the end of the partnership taxable year in which the loss occurred.