Partnership distribution

[Kram BergGold]

I am looking at a K-1. My client's share of liabilities (item K on the K-1) is $91,904 and is non recourse.

The beginning capital account is a negative $34,000

The income for the year is $3390 and the distributions for the year are $6,663. As the debt is non recourse and not qualified non recourse or recourse, and where the distributions exceed income by $3,273 I am thinking that the client has to report $3,273 as income. Is this correct? If so, what type of income is it?

[AuditorTurnedGood]

Off the cuff

If he's essentially out of capital, isn't he essentially selling back his shares of the partnership, resulting in a capital transaction? I might be confusing basis and capital here.

[Roland Slugg]

Normally, the $3,390 would be taxable. However, since the partner has a negative balance in his capital account, it may not be. You (or he) should have been tracking his tax basis all along and completing F-6198 (the At Risk form) each year when applicable.

You should also be alert to the possibility that the K-1 may be incorrect. Mistakes are often made when classifying and allocating liabilities among the partners. If your partner is a limited partner, and the debt is not "qualified nonrecourse," the K-1 may be correct.

[Corduroy Frog]

Welcome Back

Roland Slugg!! Welcome back to the board. One of the most helpful people, and accurate too.