Partnership Liquidation

Discussion in 'Tax' started by verleye@msn.com, May 31, 2005.

  1. Guest

    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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    , May 31, 2005
    #1
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  2. 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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    Harlan Lunsford, Jun 1, 2005
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  3. Thomas Healy Guest

    "" <> 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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    Thomas Healy, Jun 1, 2005
    #3
  4. Guest

    Thomas Healy wrote:
    > "" <> 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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    , Jun 6, 2005
    #4
  5. wrote:
    > Thomas Healy wrote:
    >> "" <> 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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    Lanny Williams, CPA, Jun 7, 2005
    #5
  6. "Lanny Williams, CPA" <> 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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    Stuart A. Bronstein, Jun 9, 2005
    #6
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