I have a customer that was a minor investor in a partnership. This partnership lasted 11 1/2 years and eventually went bankrupt in 2020. This partnership never returned any of the capital back to its investors. The partnership also promised, in writing, 8% interest cumulative annualized on the capital invested until the investors were paid back in full. Unfortunately, not only did the investors not receive 8% interest for any of the 11 1/2 years, they also lost 100% of their capital.
During the first 5 years, this customer was able to write off part of the loss because he was an active partner. For the years remaining he was passive and not able to write off any losses.
The partnership never filed a K-1 since 2018 and the partnership went bankrupt on 2/29/2020. The customer now wants to write off the remaining capital for the passive activity plus all the 8% interest promised on the unpaid capital. For the entire 11 1/2 years.
The question is, can he write off any/all that interest on his 2020 return? Also, when switching from active to passive participation is there anything that needs to be noted on form1065, or can he write off the remaining capital loss?