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RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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If a partner in a partnership is forced to leave the ...

Customer Question

If a partner in a partnership is forced to leave the partnership due to his inabilty to make capital calls, is it correct that he has a capital loss to the extent of his basis? If so, how is the partnership or the remaining partners taxed for "inheriting" the partners basis?
Submitted: 6 years ago.
Category: Tax
Expert:  RD replied 6 years ago.
Is the partner leaving the partnership getting some amount towards his interest? How much is his basis in the partnership?
Customer: replied 6 years ago.

He is not receiving any money. It was a real property purchase that now has very questionable value with the decline in property values. He is insolvent so him walking on the partnership makes sense. He has about $150,000 of basis not including the $500,000(his portion) of recourse financing on the property. All the mortgage documents were rewritten without him and the remaining partners picked up his share.

Expert:  RD replied 6 years ago.

You need to calculate the value of the partnership and consider this as a purchase of his share by the remaining partners if that is what is intended.

Since the value of the partnership may be lower than the investment the partners have in the partnership, the value of that partner's share may be zero or even negative. Since the partner leaving the partnership will not get anything in return, he will write off his basis in the partnership as a capital loss.

The other partners will not be subject to any tax as a result of the purchase of the partnership interest.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
RD and 6 other Tax Specialists are ready to help you
Customer: replied 6 years ago.

Thank you for your help and I would like to double the suggested fee if you could clarify your thoughts.

Are you saying we debit the withdrawing partner's capital account $150K and credit the remaining partner's account $150K? If there is a loss by the exiting partner is there not a gain (or a reduction in basis) to be recognized at some point by somebody.

Expert:  RD replied 6 years ago.

This is a complicated issue. If the partnership has made a sec 754 election than you may have to adjust the inside basis to outside basis. Attached is a link to explain what it really means.

http://www.nysscpa.org/cpajournal/2005/205/essentials/p50.htm

 

However, if the partnership has not made this election(which is also good in this case) - Your inside basis in the partnership will be your original basis plus 50% of the outgoing partner;s basis and same will apply to the other partner. Hence, you will make the entry as you mentioned.

Note that if you make this deal outside of the partnership - such as you both are buying out the partner - no gain or loss will be currently recognized in the partnership unless there is a section 754 election in place. Since the assets in the partnership have depreciated in value, it is not a good idea to make such election too.

You may want to (and I would also suggest you to) engage a professional to help you evaluate the tax consequences with detailed information on the partnership taxes, assets etc.

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

 

RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
RD and 6 other Tax Specialists are ready to help you
Customer: replied 6 years ago.

Is there someway I can request you in the future? (if you wish, of course) I greatly appreciate your responses.

Thanks

 

Expert:  RD replied 6 years ago.

You can either request me or mention "For RD Only" on the post.

I would be glad to help you with any other questions you may have.

 

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