Help for Partner's percentages please?

[JG EA]

I am doing a 1065. The partner's agreement is really a handshake, but they say 50%/50% in everything. In reality though, one puts in money as needed (losses so far for this entity) and they both take out different draws.

So, as a result the capital account of one is negative and the other is positive. In the instructions for the K-1 item J it says:

Generally, the amounts reported in item J are based on the partnership agreement. If your interest commenced after the beginning of the partnership's tax year, the partnership will have entered, in the Beginning column, the percentages that existed for you immediately after admission. If your interest terminated before the end of the partnership's tax year, the partnership will have entered, in the Ending column, the percentages that existed immediately before termination.

The ending percentage share shown on the Capital line is the portion of the capital you would receive if the partnership was liquidated at the end of its tax year by the distribution of undivided interests in the partnership's assets and liabilities. If your capital account is negative or zero, the partnership will have entered zero on this line.

Do you put zero for the negative account in the "Capital" last column for a continuing partnership or just in the year they terminate?

[BHoffman]

Do you put zero for the negative account in the "Capital" last column for a continuing partnership or just in the year they terminate?

During the continuing partnership.

[JG EA]

Thank you.

Would you help me just a little more? So you would put (for one that has below zero capital account):
50 50
50 50
50 0

?

And then 50% or 100% for the other one?

[Gretel]

JG,

I cannot help with the % but believe you have a bigger problem on your hands. I struggled with one client to keep him out of "special allocations", which I believe always applies if you don't stick to your partnership agreement - oral or written.

I learned in a seminar that "Special Allocations" has as consequence that you will need to keep a second set of books at FMV. The presenter also said that one cannot charge enough to do this.

I am afraid I cannot answer any of your questions about this, but I surely made sure to only except client that did not have special allocations.

[JG EA]

Thank you and ...

Yikes. If it's not one thing it is another. I'll read up on special allocations. But I let the return go with 50/50 in capital as in the other designations.

I don't understand why one guy has to put in all the emergency money. The good thing is they are both liable for the loans, because if they keep going down this path the loans will be the only thing left.

[Corduroy Frog]

Capital Balances

If indeed this is a 50-50 partnership, the capital balances MUST be equal.

If one partner keeps putting in all the money, then a loan to that partner must be recorded if needed to keep the capital balances 50-50.

Then of course, if the money is not paid back in the course of a year, interest must be imputed.

There is also a good discussion in TTB Small Business Edition, page 20-9 where contributions of partners can be so lopsided that IRS may disallow partnership treatment. This can happen particularly in family situations where the lopsided contributions may be perceived to be an attempt to shift income.

[oceanlovin'ea]

I had a crazy partnership a couple of years ago. 2 men who were friends set up this partnership, but they lived in different states. They put in an equal amount of money, which was minimal

If partner A got a project for them to work on, he got 70% of the profit and the other one got 30%. So for income purposes, each project had to be figured separately. It was going to get really complicated. I did the return the first year. Then the partner that lived here went out of the country to do some work and didn't come back to this area. So someone where the other partner is took over the return. I was very happy.

Linda, EA