Partnership distributions

[Craig]

Partnership makes a distribution. It has 4 equal partners (family members)
but one of the partners (parent) does not want a distribution but would
rather his go to the other partners (kids). Is the partnership required to
make a pro-rata distribution to all partners or can they be made at
different amounts?

Thanks, jcs


========================================= MODERATOR'S COMMENT:
What does the Partnership Agreement say?

 

[Harlan Lunsford]

Partnership makes a distribution. It has 4 equal partners (family members)
but one of the partners (parent) does not want a distribution but would
rather his go to the other partners (kids). Is the partnership required to
make a pro-rata distribution to all partners or can they be made at
different amounts?

Thanks, jcs


========================================= MODERATOR'S COMMENT:
What does the Partnership Agreement say?

If all partners agree on this, they could amend the partnership
agreement to reflect their concord.

But do it before end of partnership fiscal year.

ChEAr$,
Harlan Lunsford, EA n LA
"Holy C.....!"
(the word is not "cow")

 

[Gil Faver]

If all partners agree on this, they could amend the partnership agreement
to reflect their concord.

Do I smell a gift here?

 

[Stuart Bronstein]

Do I smell a gift here?

Yup. A partnership agreement can allocate income and deductions other
than in proportion to investment, but it must be done in a way that
reflects some sort of "economic reality." If the fourth partner
doesn't work in the business but the others do, that might validate the
change.

But if there's no good economic reason for doing this, the IRS might
want to reallocate income to the fourth partner and treate this as
gifts.

Stu

 

[Gene E. Utterback, EA, RFC, ABA]

Yup. A partnership agreement can allocate income and deductions other
than in proportion to investment, but it must be done in a way that
reflects some sort of "economic reality." If the fourth partner
doesn't work in the business but the others do, that might validate the
change.

But if there's no good economic reason for doing this, the IRS might
want to reallocate income to the fourth partner and treate this as
gifts.

Stu

might?

MIGHT?

How about WILL (assuming they get caught)!

The 4th partner can do whatever he wants to do with his money. It IS his
money. If he wants to give it to the grandkids, cool. But that does NOT
change his legal tax responsibilities - which most certainly include
reporting the income on his return and which would result in a gift.
Whether a gift tax return is required will depend on the dollar amounts
involved.

Gene E. Utterback, EA, RFC, ABA

 

[Stuart A. Bronstein]

might?

MIGHT?

How about WILL (assuming they get caught)!

Ok, you caught me. That's what I meant - assuming they get caught.

Stu

 

[Katie]

Ok, you caught me.  That's what I meant - assuming they get caught.

Stu

I think the OP was talking about distributions of cash from the
partnership to the partners -- not about the allocation of
distributive shares to the partners on their K-1s. IRC Sec. 704(b)
requires distributive shares to be allocated in a way that has
substantial economic economic effect. But I don't know any reason why
all partners in a partnership must receive proportional distributions
of cash or property from the partnership; that's a different issue.
As long as the partnership agreement and the other partners are in
agreement, of course one partner can be excluded, and as long as the
partnership has the cash/property to do so, it can distribute any
amount it wants to any or all of the partners. Of course each
partner's basis in the partnership will be reduced by the amount of
the distribution he or she actually receives (Sec. 705), and if the
distribution exceeds a partner's basis, the excess will be capital
gain to that partner (Sec. 731(a)). So the partners will end up with
different bases in their partnership interests if the distributions
are not proportional.

The father in the OP's case would have paid tax on his distributive
share of the partnership income. That's not the issue, as I
understood the OP. The issue is whether he can forgo distribution of
that income to himself and allow the partnership to distribute his
share to the other partners. He can do that if the partnership
agreement allows it. He'll end up with a larger basis in the
partnership than the other partners, because his basis was increased
by his distributive share of the partnership's income and not
decreased by the distribution. Depending on the other partners' basis
in the partnership prior to the distribution, some or all of them may
recognize capital gain on the distribution.

In an S corporation, distributions must be proportional to ownership,
because otherwise you could be creating a second class of stock, which
would terminate the S election. The same is not true for
partnerships.

Katie in San Diego

 

[Stuart A. Bronstein]

I think the OP was talking about distributions of cash from the
partnership to the partners -- not about the allocation of
distributive shares to the partners on their K-1s. IRC Sec.
704(b) requires distributive shares to be allocated in a way that
has substantial economic economic effect. But I don't know any
reason why all partners in a partnership must receive proportional
distributions of cash or property from the partnership; that's a
different issue.

Excellent point. As long as the distributions are properly accounted
for in their capital accounts or however else it can be done so that
ultimately everyone is treated the same way, that shouldn't be a
problem.

Stu