Opinion ID: 61651
Heading Depth: 2
Heading Rank: 3

Heading: The Tax Treatment of the Transactions

Text: Although partnerships do not pay federal income tax, see I.R.C. § 701, they are required to file annual information returns reporting the partners' distributive share of income, gain, deductions or credits. Weiner v. United States, 389 F.3d 152, 154 (5th Cir.2004). The individual partners then report their distributive share on their federal income tax returns. Id. ; see also I.R.C. § 702. On its partnership return for 1999, GMK reported a short-term capital loss of $102.7 Million from the sale of its partnership interest in Valiant. It computed this loss by subtracting its purported outside basis in Valiant of $104.5 Million from the purported sales price of $1.8 Million. GMK did not treat Czerwinski's assumption of Valiant's obligation to replace the borrowed T-Notes as part of the amount realized on the sale of its partnership interest, and GMK's outside basis in the partnership interest was not adjusted or reduced based on the obligation to replace the shorted T-Notes. GMK's reported loss of $102.7 Million enabled the Trust, a 99.99% partner in GMK, to offset its future capital gains. On Schedule D (Capital Gains and Losses) of its 1999 tax return (Form 1041), the Trust reported a short-term capital loss of $102.6 Million as its pro rata share of GMK's loss. I.R.C. § 1211(b) limited the deduction of capital losses to the lower of $3,000 or the excess of capital losses over capital gains. Having no capital gains in 1999, the Trust deducted $3,000 of its loss. It then carried over the remaining loss to 2000. See I.R.C. § 1212(b). On its 2000 tax return, the Trust used the capital loss carryover to offset $562,000 in short-term capital gains and $123,000 in long-term capital gains. This offset reduced the Trust's net capital loss to $101.9 Million. The Trust then claimed a capital loss deduction of $3,000 on its 2000 tax return and carried forward the remaining loss to 2001. On its 2001 tax return, the Trust used this capital loss carryover to offset short-term capital gains of $1.1 Million and long-term capital gains of $585,000.