Partnership has OA stating partner 1 owns 10%, partner 2 90%. However, they agree that partner 1 puts a little cash into the partnership than partner 2. There are more complications with build in gain of land and partner 2 getting some payment for services. I know how to deal with these issues. My question is if unequal contributions have tax consequences in the moment of contributions. All I can find is consequences of unequal distributions, which essentially require the restoration of the deficient capital account upon dissolution. I believe this also applies to contributions.
-
-
No Apparent Problem
Gretel, I brought a similar question to this forum some time ago, and was assured by most of the group that there is no problem for partners to have capital balances that are out-of-synch with their income/loss splitting formula.
Although it didn't appear to be a problem for most of the forum members, it is a problem for me. Partnerships are the most fleeting of all entities and most of them dissolve within 2-3 years. Partners begin fighting one another, and an unbalanced capital account constitutes a very good reason. It also is evidence that there is no compunction among the partners to discipline themselves to the avail of balanced capital accounts. -
Thanks, Snag. Yes, the legal/dissatisfaction issue is a good point that I fully agree with. Plus, if you have to come up with the money you might do so right away or close to it. The other partner could also come back to you and say that he always owned a bigger % and his distributions did not follow that formula.Comment
-
What does the partnership agreement say with respect to liquidating distributions? Does the Agreement allow the partner who contributed a disproportionately amount of money to be made whole upon dissolution? Put pencil to paper and see if the Agreement would make the contributing partner whole upon an immediate dissolution.Comment
-
Gretel, if the partners agree, it might work better if the extra cash contributed by Partner 1 was recorded as a loan rather than a capital contribution. It fixes the capital account inequality, he keeps his (debt) basis, and is cleaner at liquidation.Comment
-
Answer is: New Attorney
Thanks, to both of you, for your thoughts. The Partnership Agreement is vague, at best. It neither puts a dollar amount for initial contributions, nor does it say anything what will happen to the capital accounts upon dissolution. Fortunately, this client, who has multiple enterprises like this, finally listened and is seeking the advice of an attorney who knows what he is doing. My client (I am doing everything for him but his tax returns) could be in a world of hurt real fast if one of his partners would turn against him.
For various reasons, loans are not an option either. I can't wait to see what the new Partnership Agreements look like. The CPA who is doing the tax returns finally arrived at a point to say that he will not doing these tax returns any longer unless he gets clear guidance from an tax attorney on some of these issues.Comment
Comment