Have a client that has a partnership. Client was allocated all gains/losses and 40% of capital on initial 1065 return (done by another "accountant"). Client's partner is allocated a 60% capital interest, but no other interests. Client's partner (Mr. Capital) contributed some funds (cash of $80k, according to the return), but is not on the bank accounts, doesn't participate in the business activities, and otherwise has no interest in the partnership.
I've read through the court rulings on debt v. equity in a partnership setting, and this smells more like debt than equity. Also, Mr. Capital is stating that somehow his contributions to the partnership allowed him to take a $30k tax deduction in the year of the contribution -- which further seems to make his contribution feel like debt since the basis of the debt v. equity cases seem to be that the partnership was only entered into so that a tax deduction can be had.
Two questions:
1) Ignoring the tax deduction comment from Client and Mr. Capital, I don't think this is a partnership. Thoughts?
2) What tax deductions would Mr. Capital, who only contributed capital, be allowed take? By the way things are being explained to me, I think he took a bad debt deduction, but he's not forthcoming about his personal income tax returns. There weren't any start-up costs (and only $5k for that), only $8k of PP&E... I can't think of any way a tax deduction could be had.
Thanks for taking the time to read/respond. I'm a little perplexed.