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Partnership Liquidation

 
 
verleye@msn.com
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      05-31-2005, 06:29 AM
I picked up a new client (Obvioulsy Short Term) that is a
L.P. and is filing a final 1065 as of 12/31/04. The only
assets in the partnership are Organizational Costs of $1,000
and accumulated amortization of $250.00. There was no
activity in 2004.

Here is my issue. I noticed that when I marked the
termination of the asset and it allocated the loss to the
partners, the current year loss was allocated based on their
P/l percentages. This is not a problem, except that the
partners capital accounts do not agree with their
partnership percentages. Thus the current year applied loss
is leaving a capital account balance for the 1% general
partner and a negative capital account balance for the other
two 49.5% limited partners? Does this mean that that general
partner will show a capital loss and the limited partners a
capital gain? I should add, there was no cash or anything
else for that matter involved in the liquidation.

In looking back through the prior returns, it appears that
the contributions to the partnership were not in accordance
with the partnership percentages.

I do not have a lot of liquidation experience, so any advice
would be greatly appreciated and also any source of
learning/study that you could recommed in this area would
help.

Thanks,

Dax

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Harlan Lunsford
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      06-01-2005, 09:45 AM
(E-Mail Removed) wrote:

> I picked up a new client (Obvioulsy Short Term) that is a
> L.P. and is filing a final 1065 as of 12/31/04. The only
> assets in the partnership are Organizational Costs of $1,000
> and accumulated amortization of $250.00. There was no
> activity in 2004.
>
> Here is my issue. I noticed that when I marked the
> termination of the asset and it allocated the loss to the
> partners, the current year loss was allocated based on their
> P/l percentages. This is not a problem, except that the
> partners capital accounts do not agree with their
> partnership percentages. Thus the current year applied loss
> is leaving a capital account balance for the 1% general
> partner and a negative capital account balance for the other
> two 49.5% limited partners? Does this mean that that general
> partner will show a capital loss and the limited partners a
> capital gain? I should add, there was no cash or anything
> else for that matter involved in the liquidation.
>
> In looking back through the prior returns, it appears that
> the contributions to the partnership were not in accordance
> with the partnership percentages.
>
> I do not have a lot of liquidation experience, so any advice
> would be greatly appreciated and also any source of
> learning/study that you could recommed in this area would
> help.


"Partnership percentage" usually refers to the method by
which partners share in profits and losses, and may be any
ratio they agree upon. For example, in one partnership the
husband and wife may be accorded profits 50/50, however
losses are allocated in the ratio 100/0. It depends on how
the partnership agreement reads.

Capital accounts are not necessarily always in the same
ratio, and can see why with the scenario above.

Partners will deduct any losses according to their bases,
anyway.

ChEAr$,
Harlan Lunsford, EA n LA

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Thomas Healy
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      06-01-2005, 10:23 AM
"(E-Mail Removed)" <(E-Mail Removed)> wrote:

> I picked up a new client (Obvioulsy Short Term) that is a
> L.P. and is filing a final 1065 as of 12/31/04. The only
> assets in the partnership are Organizational Costs of $1,000
> and accumulated amortization of $250.00. There was no
> activity in 2004.
>
> Here is my issue. I noticed that when I marked the
> termination of the asset and it allocated the loss to the
> partners, the current year loss was allocated based on their
> P/l percentages. This is not a problem, except that the
> partners capital accounts do not agree with their
> partnership percentages. Thus the current year applied loss
> is leaving a capital account balance for the 1% general
> partner and a negative capital account balance for the other
> two 49.5% limited partners? Does this mean that that general
> partner will show a capital loss and the limited partners a
> capital gain? I should add, there was no cash or anything
> else for that matter involved in the liquidation.
>
> In looking back through the prior returns, it appears that
> the contributions to the partnership were not in accordance
> with the partnership percentages.
>
> I do not have a lot of liquidation experience, so any advice
> would be greatly appreciated and also any source of
> learning/study that you could recommed in this area would
> help.


The clue is the uneven contributions. Unless the partners
just want to liquidate and move on, the partners in a
deficit capital account position should contribute funds to
bring their accounts to zero. Otherwise, your assumption is
correct: capital gain for the deficit accounts and capital
loss for the positive accounts.

--
Tom Healy, CPA
Boulder, CO
Web: http://www.tomhealycpa.com

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pgattocpa@excite.com
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      06-06-2005, 08:23 AM
Thomas Healy wrote:
> "(E-Mail Removed)" <(E-Mail Removed)> wrote:


>> I picked up a new client (Obvioulsy Short Term) that is a
>> L.P. and is filing a final 1065 as of 12/31/04. The only
>> assets in the partnership are Organizational Costs of $1,000
>> and accumulated amortization of $250.00. There was no
>> activity in 2004.
>>
>> Here is my issue. I noticed that when I marked the
>> termination of the asset and it allocated the loss to the
>> partners, the current year loss was allocated based on their
>> P/l percentages. This is not a problem, except that the
>> partners capital accounts do not agree with their
>> partnership percentages. Thus the current year applied loss
>> is leaving a capital account balance for the 1% general
>> partner and a negative capital account balance for the other
>> two 49.5% limited partners? Does this mean that that general
>> partner will show a capital loss and the limited partners a
>> capital gain? I should add, there was no cash or anything
>> else for that matter involved in the liquidation.
>>
>> In looking back through the prior returns, it appears that
>> the contributions to the partnership were not in accordance
>> with the partnership percentages.
>>
>> I do not have a lot of liquidation experience, so any advice
>> would be greatly appreciated and also any source of
>> learning/study that you could recommed in this area would
>> help.


> The clue is the uneven contributions. Unless the partners
> just want to liquidate and move on, the partners in a
> deficit capital account position should contribute funds to
> bring their accounts to zero. Otherwise, your assumption is
> correct: capital gain for the deficit accounts and capital
> loss for the positive accounts.


It's hard to say that the partners with a deficit capital
account *should* restore their deficit accounts without
reading the p'ship agreement. There are many agreements
that specifically state that partners are not required to
restore deficits. Kind of an "anti-DRO" clause.

Additionally, many p'ship agreements state that profits &
losses are to be allocated in such a manner that the ending
capital account balances are to equal what they would be if
the p'ship immediately liquidated. This *could* mean that
despite the *uneven* balances the accounts have now, that if
they should have been 1% 49.5% / 49.5%, then the $750
current year loss should be allocated in such a manner as to
get as close aas possible to that result.

However, as Tom pragmatically points out, if the partners
don't care they can move on by restoring the deficits. They
can probably also move on without restoration. That's the
beauty of small numbers. Add two or four zeroes to the
equation and then you better have that p'ship agreement in
hand. <G>

Regards,

Peter C. Gatto, CPA

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Lanny Williams, CPA
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      06-07-2005, 06:52 AM
(E-Mail Removed) wrote:
> Thomas Healy wrote:
>> "(E-Mail Removed)" <(E-Mail Removed)> wrote:


>>> I picked up a new client (Obvioulsy Short Term) that is a
>>> L.P. and is filing a final 1065 as of 12/31/04. The only
>>> assets in the partnership are Organizational Costs of $1,000
>>> and accumulated amortization of $250.00. There was no
>>> activity in 2004.
>>>
>>> Here is my issue. I noticed that when I marked the
>>> termination of the asset and it allocated the loss to the
>>> partners, the current year loss was allocated based on their
>>> P/l percentages. This is not a problem, except that the
>>> partners capital accounts do not agree with their
>>> partnership percentages. Thus the current year applied loss
>>> is leaving a capital account balance for the 1% general
>>> partner and a negative capital account balance for the other
>>> two 49.5% limited partners? Does this mean that that general
>>> partner will show a capital loss and the limited partners a
>>> capital gain? I should add, there was no cash or anything
>>> else for that matter involved in the liquidation.
>>>
>>> In looking back through the prior returns, it appears that
>>> the contributions to the partnership were not in accordance
>>> with the partnership percentages.
>>>
>>> I do not have a lot of liquidation experience, so any advice
>>> would be greatly appreciated and also any source of
>>> learning/study that you could recommed in this area would
>>> help.


>> The clue is the uneven contributions. Unless the partners
>> just want to liquidate and move on, the partners in a
>> deficit capital account position should contribute funds to
>> bring their accounts to zero. Otherwise, your assumption is
>> correct: capital gain for the deficit accounts and capital
>> loss for the positive accounts.


> It's hard to say that the partners with a deficit capital
> account *should* restore their deficit accounts without
> reading the p'ship agreement. There are many agreements
> that specifically state that partners are not required to
> restore deficits. Kind of an "anti-DRO" clause.
>
> Additionally, many p'ship agreements state that profits &
> losses are to be allocated in such a manner that the ending
> capital account balances are to equal what they would be if
> the p'ship immediately liquidated. This *could* mean that
> despite the *uneven* balances the accounts have now, that if
> they should have been 1% 49.5% / 49.5%, then the $750
> current year loss should be allocated in such a manner as to
> get as close aas possible to that result.
>
> However, as Tom pragmatically points out, if the partners
> don't care they can move on by restoring the deficits. They
> can probably also move on without restoration. That's the
> beauty of small numbers. Add two or four zeroes to the
> equation and then you better have that p'ship agreement in
> hand. <G>


Aren't limited partners protected against negative account
balances. I've always thought that limited partners can
never be liable for more than the capital contribution
required by the partnership agreement. Thus, in this case,
assuming all partners made their full, required capital
contributions, the limited partners do not have to make up
their deficits.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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Stuart A. Bronstein
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      06-09-2005, 04:55 PM
"Lanny Williams, CPA" <(E-Mail Removed)> wrote:

> Aren't limited partners protected against negative account
> balances. I've always thought that limited partners can
> never be liable for more than the capital contribution
> required by the partnership agreement. Thus, in this case,
> assuming all partners made their full, required capital
> contributions, the limited partners do not have to make up
> their deficits.


Normally, yes. But that can be changed by the partnership
agreement.

Stu

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