Worthless LLC units

[cpr1955]

How do I claim worthless LLC units on a client's Form 1040?

[dsi]

I've never had this situation myself, but wouldn't it be a sch D item?

[cpr1955]

More background -

This LLC files a 1065. In researching, I found that a partner's interest that is abandoned or deemed worthless is considered an ordinary loss (which would suggest Form 4797?).

If it is form 4797, how do I classify? If not, then what?

[OldJack]

Form 1065 shows ordinary losses from operations on form 1040 Sch-E or sale of business assets reported on form 4797. Worthlessness of "Units of Ownership" are personal assets, the same as worthlessness of shares of stock on the stock market and reported on 1040 Sch-D.

I expect that what you have read has to do with deducting it as ordinary loss under Reg.§1.165-2 and code §165(a). Unfortunately, worthlessness or abandonment of investment property, deducting as ordinary loss under that provision makes it a 1040 Sch-A deduction subject to the 2% limitation.[SBQF N-14]

[cpr1955]

Thank you, Old Jack!

One more question - can I treat the units as Section 1244 stock and write off the entire amount in 2006?

[OldJack]

One more question - can I treat the units as Section 1244 stock and write off the entire amount in 2006?

No... code §1244 is only for a small business corporation stock issued in original issue for money or property. An LLC is not a corporation and its units of ownership are not shares of stock even if the LLC is taxed as a corporation.