Limited Partner / Passive Loss - Audit Issue

[bbrownatl]

Any insight appreciated here. I have a client that had a limited partnership interest of 70% and from 2004-2006 incurred passive losses of ($91K). At the beginning of 2007, he bought out the other partner. For 2007, the business had income of $51K but ended up shutting down the business at the end of the year with still being on the hook personally for $84K in accounts payable. On his 2007 return, I took the full loss of $91K offset by the income of $51K for a net loss of $40K. In getting audited this year, the gov't contends that he can't take the $40K loss as he only basis of $51K. Before replying, I'd appreciate any insight here. I'm thinking that his basis would be increased by the $84K that he is on the hook for and thus would be able to take the $40K loss. Again, any insight appreciated here. Not sure if I'm missing the boat on this basis issue.

Much thanks.

[Matt Sova]

Basis

How much did he pay the other partner for his share at the buy out? This is something that would not show up in the equity section of the balance sheet. I would also tend to think that by paying off the A/P personally would increase his basis.

[bbrownatl]

$ for Buyout Share

The payment for the other 30% was minimal (i.e. $100), so really not a factor. Though the assumption of the liabilities would I assume.