Partnership - Special Allocations

[Gretel]

Partners of Partnership are a pain in regards to cash distributions following their partnership interest. It never happens. It not off by much but I am concerned about the special allocation rules. Gains, losses etc. are allocated according to their interest.

If the partnership agreement requires the maintenance of book capital accounts, liquidation by book capital accounts, and capital deficit restoration requirement, are we in good shape then?

[Bees Knees]

Partnerships are not like S corporations where you are in danger of losing your S status if you don’t make distributions in proportion to your stock ownership.

As long as capital accounts are maintained and it all comes out even in the end at liquidation, you should be fine.

[Gretel]

One step further

Thanks Brad. Somehow, Partnership rules scare me a little bit and I feel there is not enough good guidance out there. I feel much more comfortable with any kind of corporations.

So, lets say, they want to allocate income different from their ownership %, am I still fine with what I stated before or is there anything else I need to consider?

[Bees Knees]

The rules are a partner’s distributive share of income is determined by the ownership percentage, unless the partnership agreement has a different method of allocating income. A partner’s distributive share is also considered equal to ownership percentage if the allocations agreed to do not have substantial economic effect. [Section 704(b)]

So in your original question, if the income is allocated different than ownership percentage, then having a partnership agreement where capital accounts are maintained and capital deficit restoration requirements exist so that the liquidation will equal things out in the end, you should be fine.

But if you tried to allocate income without ever having things equal out in the end, then it would not work because the end result has no substanital economic effect. For example, a family partnership tries to allocate all the income to the kids in a lower tax bracket, but they never get economic benefit for paying tax on all that income. The allocation is purely for tax avoidance. Section 704(b) says no, you can't do that.

[Gretel]

Bees, please

Thank you so much, Brad.

I tried hard to find the right words for the liquidation part and the capital deficit restoration requirement. Not much success. Would you please help me? I'll be sending a kiss and a flower over to bloom in the middle of winter.

[Bees Knees]

Just say something like:

“Partners agree to take distributions in proportion to their ownership interest. In the event that distributions are not equal, partners agree to maintain capital accounts taking into consideration unequal distributions. Upon liquidation of their partnership interests, partners agree to distribute remaining assets in proportion to their ownership interest, adjusted by any prior unequal distributions per their respective capital accounts. In the event that a partner’s capital account is negative upon liquidation, that partner agrees to make a contribution to the partnership to restore the capital account to zero.’

Or something along those lines.

Don’t send live plants, they will die a slow death in my office as I never remember to water things.

[Gretel]

Thank you

The flower was meant allegorical. I saw you with deep snow all around you and how nice it would be to have a flower growing out of the snow right in front of you.

You do a lot of watering on this board to make all of us grow so it's excusable to forget to water flowers.

[shelleyw]

LLC- SEE allocations

I am new to this message board.

I just read this thread on using allocations not based on % of ownership.

My LLC client wants to give 3 of the 24 members the bulk of the losses, without regard to % of ownership

A few facts:

1. LLC agreement is silent on every issue of SEE, distributions, contributions, etc, it is very, very boilerplate.
2. There are no loans at all, at this time
3. The 3 members just happen to be high income tax payers

I believe I cannot do this. I must allocate losses based on % of ownership, is this correct?

Thanx, shelley