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Partnership final year- Negative basis for 1 partner

Technical topics regarding tax preparation.
#1
RowTax  
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157
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Location:
Florida
New client....says he can't provide any info as to his outside basis. He was basically the only operating partner, and the other partners did not participate in the business, which ended in 2018 with the sale of the partnership's building. The other partners seem to have positive capital accounts .

I am stuck with the partner who did that day to day operations and see that he has a pretty hefty negative capital account. I don't think that the income will be capital gains income and should be ordinary income. I think we are just forced to use the negative capital account as ordinary income. Thoughts?
 

#2
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2668
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22-Apr-2014 3:06pm
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WA State
I'd be willing to bet he took additional cash distributions in prior years because he was the active partner. Maybe these should have been guaranteed payments, maybe not. If this was the case, he probably should have received an additional allocation of income in those years, but he probably didn't.

I'm also going to assume he received an allocation of debt basis that kept his overall basis positive. Given that premise, I would work through the sale of his interest like any other sale. Likely ends up being all capital gain income.
~Captcook
 

#3
RowTax  
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157
Joined:
15-Jan-2018 3:45pm
Location:
Florida
Well....based upon a review of 3-4 years past returns, he did have guaranteed payments, but his capital account has been negative for a while. It appears to be cumulative losses (I would guess that is why they closed up shop) causing the resultant negative capital account. His father is a partner and the father kept putting in money, and so, the father does not have a negative capital account. My software is treating it as ordinary income.
 

#4
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2152
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21-Apr-2014 10:39am
Location:
Los Angeles, California
In order for partnership allocations have have economic substance, there must be a deficit restoration obligation or a qualified income offset.

Does the operating partner have suspended losses?
 


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