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Treatment of Losses

15.49. The treatment of partnership tax losses differs from the treatment of tax losses of a trust. A tax loss is not carried forward by the partnership in determining the net income of the partnership in a subsequent year. It is distributed to the partners in accordance with the individual interests of the partners. ‘Individual interests’, for this purpose, refers to the liability of a partner to share in losses.

15.50. A partnership agreement may provide for the payment of a salary to a partner. The salary in a particular year may be greater than the net income of the partnership or may be payable though a tax loss has been incurred by the partnership. The application of the individual interests of the partners to determine the allocation of the net income or of the tax loss becomes, in these circumstances, a difficult exercise. The present practice of the Commissioner in accepting an allocation agreed to by the partners, where there is no suggestion that a tax advantage is the objective of the allocation, seems to be satisfactory. The practice may involve a result which, curiously, taxes one partner on an amount of net income and allows the other a loss. However, the principle is preserved that, when the tax consequences for the partners


  ― 218 ―
are combined, no more is taxed than the net income of the partnership or no greater loss is allowed than the tax loss.

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