Partnership distributions

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?

Reply to
Craig
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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")

Reply to
Harlan Lunsford

Do I smell a gift here?

Reply to
Gil Faver

"Gil Faver" >> What does the Partnership Agreement say?

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

Reply to
Stuart Bronstein

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

Reply to
Gene E. Utterback, EA, RFC, AB

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

Stu

Reply to
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. 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

Reply to
Katie

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

Reply to
Stuart A. Bronstein

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