Distribution

Technical topics regarding tax preparation.
#1
Al723  
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Location:
Michigan, USA
An entity is filing a final 1065 return in 2018.
After clearing all assets and liabilities, their is a positive cash balance.
One partner is disputing between the other two major shareholders.
The cash on hand needs to be distributed but they did not technically receive money. I just need to clear the balance sheet.

The minor shareholder will not let me distribute cash to him since he did not receive the cash.
If I distribute to the other two partners, they will end up with a negative capital account.
The minor shareholder wants me to correct their negative capital accounts by adding guaranteed payments that way the minor partner can take advantage of the additional losses but I find it unfair that the two shareholders must recognize this income and the minor shareholder gets the advantage of the losses.

Is there another way to "distribute the phantom cash" where my two clients will not be penalized by adding guaranteed payments?
 

#2
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WA State
Al723 wrote:but I find it unfair that the two shareholders must recognize this income and the minor shareholder gets the advantage of the losses.


A GP is just an easy way to specially allocate income connected with cash or property distributions. If the minority owner didn't receive any cash, he shouldn't have a distribution reported to him on his K-1.
Alternatively, if the cash distributed to the majority owners is in excess of their basis, then they SHOULD recognize income.
We would need more information to determine whether that needs to be a GP, but treating it as a GP would generate a greater loss.
Bottom line, they can (more or less) do what they agree to do in this instance.
~Captcook
 

#3
Al723  
Posts:
35
Joined:
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Location:
Michigan, USA
Can I leave the capital account for the two partners as a negative and pick up the income as a capital loss on their personal returns?

The point of the GP is to generate more losses for the minority and income to the two majority partners. This will fix the negative capital accounts of the two majority partners from negative to zero and increase the capital account balance for the minority ending in a higher balance then previously reported. His CPA wants to claim the max amount of ordinary losses based on his ending capital account.

I stated that I would leave the ending capital account as a negative number for the majority partners and recognize the gain on the majority shareholders personal return. I believe I read somewhere that this can be treated as a capital gain.
 

#4
Al723  
Posts:
35
Joined:
2-Jun-2018 8:47pm
Location:
Michigan, USA
CaptCook wrote:
Al723 wrote:but I find it unfair that the two shareholders must recognize this income and the minor shareholder gets the advantage of the losses.


A GP is just an easy way to specially allocate income connected with cash or property distributions. If the minority owner didn't receive any cash, he shouldn't have a distribution reported to him on his K-1.
Alternatively, if the cash distributed to the majority owners is in excess of their basis, then they SHOULD recognize income.
We would need more information to determine whether that needs to be a GP, but treating it as a GP would generate a greater loss.
Bottom line, they can (more or less) do what they agree to do in this instance.

Can I leave the capital account for the two partners as a negative and pick up the income as a capital loss on their personal returns?

The point of the GP is to generate more losses for the minority and income to the two majority partners. This will fix the negative capital accounts of the two majority partners from negative to zero and increase the capital account balance for the minority ending in a higher balance then previously reported. His CPA wants to claim the max amount of ordinary losses based on his ending capital account.

I stated that I would leave the ending capital account as a negative number for the majority partners and recognize the gain on the majority shareholders personal return. I believe I read somewhere that this can be treated as a capital gain.
 


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