Joint Venture Loss

[Snaggletooth]

Contracto, Inc. is a defense contractor who operates Army contracts.

Unique Ullman is an individual well-known to the Army for various skills, who has a proprietorship of his own operating Army contracts.

The Army invites various parties to bid on upcoming work, which requires a large workforce but also in an area where Ullman has his particular expertise. In order to form a competitive entity capable of winning, Contracto and Ullman decide to form a Joint Venture. The Joint Venture must be an existing entity, so an LLC is formed under the laws of Contracto's home state and is a partnership for federal tax purposes. Contracto owns 75% of the joint venture, and Ullman owns 25%.

Joint Venture spends $40,000 bidding the contract, and loses. Joint Venture has no revenue, and no other activity, and sends Contracto a K-1 for a $30,000 loss.

Can the $30,000 loss be deducted by Contracto? or is it stopped because of related party rules? Joint Venture was formed for no other reason than to bid and win, and most likely will never have any further activity or purpose for existing.

[erchess]

Bump

I have no idea but I'd like to see this get answered.

[JoshinNC]

Who are the related parties?

Contracto, Inc. is a defense contractor who operates Army contracts.

Unique Ullman is an individual well-known to the Army for various skills, who has a proprietorship of his own operating Army contracts.

The Army invites various parties to bid on upcoming work, which requires a large workforce but also in an area where Ullman has his particular expertise. In order to form a competitive entity capable of winning, Contracto and Ullman decide to form a Joint Venture. The Joint Venture must be an existing entity, so an LLC is formed under the laws of Contracto's home state and is a partnership for federal tax purposes. Contracto owns 75% of the joint venture, and Ullman owns 25%.

Joint Venture spends $40,000 bidding the contract, and loses. Joint Venture has no revenue, and no other activity, and sends Contracto a K-1 for a $30,000 loss.

Can the $30,000 loss be deducted by Contracto? or is it stopped because of related party rules? Joint Venture was formed for no other reason than to bid and win, and most likely will never have any further activity or purpose for existing.

Maybe I missed something, but I don't see any related parties. Is Ullman related to Contracto? It would seem that Contracto has basis with which to deduct the loss of $30,000 and the expenses were in conjunction with an active business, so I say that they would be deductible.

[Snaggletooth]

Related Party

The related party is the joint venture itself. It files a $40,000 loss as a partnership.

K-1 to Ullman passes through $10,000 loss. Ullman and the Joint Venture are not related.

K-1 to Contracto passes through $30,000 loss. Contracto owns 75% of the Joint Venture.

Assume basis for both parties is adequate to absorb the loss. The related party issue is the only issue.

[JoshinNC]

I don't see the partnership being a related party

I would think that if the LLC were taxed as a Corp than the Parent-Subsidiary rules would apply, but since it is a MMLLC taxed as a Partnership it's not a related party and the loss, up to basis, is deductible.

Caveat: Subsidiaries and Brother-Sister Corps are not my best area and I usually have to do research every time one of these issues comes up in my practice.