section 1256 contracts

[sdtaxman]

I have a farm partnership that has a net section 1256 contract loss that will take them many years to use up, however they had gains in the previous three years that could offset a large portion of the loss. In reading the instructions for form 6781 is states that partnerships are not eligible to make the election to carry the loss back three years. In thinking this through, since the loss carries to the individual on a k-1 and that is reported on the form 6781 of the individual return , as were the profits in prior years, I feel that the partnership passes the loss to the partner on the k-1 and then the partner is eligible to make the election to carry the loss back to offset gains in prior years.

I am just wondering if I am reading anything wrong into this logic. It appears correct to me but I wanted to see if anyone has had experience with this to give clarification.

Thank you for your input.

[Roland Slugg]

You are reading the rules correctly. The partnership can't make the carryback election, but each individual partner may make that election if he wishes.

The partnership should complete F-6781, down to line 5 only, and the amount on that line than goes to line 11 on Schedules K and K-1 (1065), code C. Each partner then reports his amount on another F-6781, where he can make an election to carry his own loss back three years, by checking Box D at the top of F-6781, if he wishes to do so.

Keep in mind that if a Section 1256 loss is carried back, it can only be used to offset net Section 1256 gains reported in the carryback years.