Which of the following is true about taxation of a partner in a partnership?
a. Partners must include their share of partnership capital gains as ordinary income on their personal income tax returns.
b. If a partner's loss is limited on one tax year because of the at-risk rules, it may be carried forward to a later year, subject to that year's at-risk
The answer is b but can please someone explain why the answer is not a?
Capital gains are reported in boxes 8 and 9, while ordinary income is reported in box 1.
Capital gains has preferential tax treatment on the personal return so it needs to be stated and reported separately from capital gains income.
If a) did not have the word “ordinary”, it would completely change the question/answer.
Memento Mori - Kingston NY CPA & EA (SUNY Albany 2002)
That's a good trick question, I have many years of tax so I was able to catch it right away, but Recked pointed it out, they would be taxed on the partner's personal return as capital gains tax not as ordinary income. This just shows how detailed the tax questions on REG are.