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Rev. Rul. 2008-38, the IRS has confirmed the proper tax treatment of a
noncorporate limited partner's distributive share of interest
expense on debt allocable to a partnership's trade or business of
trading securities for its own account. The interest expense is subject
to the investment interest limitation of Sec. 163(d)(1) if the limited
partner does not materially participate in the trading activity, and for
an individual taxpayer the allowable deduction is reported as a
nonpassive ordinary business loss on Schedule E. Furthermore, a
taxpayer's investment interest expense from investing and trading
activities must be accounted for separately using a pro-rata or some
other reasonable method.
Tax practitioners need to verify that their tax preparation
software appropriately calculates the allowable interest expense
allocable to trading activity and separately identifies the deduction on
Schedule E.