Sale of partnership interest

I don't understand negative equity! How was this conjured?

I do understand a partner having an accounts receivable to the partnership and zero basis for internal reporting purposes. But I don't know if that flies for tax purposes?

Dick

I looked into your issue a little more. I am still convinced that a negative partnership basis can't exist. In addition to section 733 of the IRC, sections 704(d), 465, & 469 all work together to make a negative basis unlikely. These additional code sections suspend partnership losses that might otherwise create a negative basis for a partner. A loss can only take the partner's basis down to zero and not below. The loss can be carried forward for use in future years when activities occur that increase the partner's basis (e.g. profits, contributions of property to the partnership, etc). Unfortunately unused losses can never pass through to a successor partner. Furthermore, retroactive allocations of full share of profits or losses when admitting a new partner can not occur (section 706(d)). Hope that helps, Josh

I am interested in how a partner can have a negative basis in his or her partnership interest. How did the partner end up with such a basis? Section 733 of the internal revenue code prohibits a negative basis from occuring, at least to my understanding. Could you mean that the partnership's inside basis of an asset is negative? That can only happen very limited and rare cirmumstances. Sorry I don't have a solution for you...maybe someone else on here can help him out? But I am interested in how the negative basis came to be. Thanks, Josh

I remember this from Accounting 201 I think. I was in a partnership some years ago and each she had a negative equity. IOW, the sum of capital accounts was (example)

1,000. My balance was 2,000 and her's was -1,000. Which only meant that she owed me. Actually it wasn't that high, and I remember receiving a tape recorder plus cash for her negative interest before she left town. This of course was a non taxable event.

Say the partner with a negative balance of 1,000 like my previous partner above had thought that our fledgling tax business was worth much more, she might have wanted to sell for 3,000, whereupon if I had agreed, I would have paid her

2000 and she would have had a capital gain. Actually she could not have sold to an outsider since a parnership is legally dissolved when a partner withdraws. Do I remember that right, Stu? ChEAr$, Harlan

Question: when you say "negative inside basis" do you mean one of the following: (a) the partner has a negative capital account, or (b) the partner's share of the partnership's basis in the partnership assets is negative? Answer (a) is quite possible; answer (b) is generally not possible - the Service does not like negative basis and, in general, it cannot be accomplished (e.g., Code Section

704(d), which disallows and rolls over (my term) a partner's distributive share of partnership losses, achieves this result by ensuring that a partner can never have a negative outside basis). The term "inside basis" generally refers to the partnership's tax basis in the assets it holds and, where necessary for tax calculations, a partner will have a share of that inside basis. To attempt an answer to what I think your question was, namely that the partner in question has a negative capital account, that can be transferred. A person who purchases a partnership interest from an existing partner generally inherits that part of the capital account that relates to the interest transferred, without adjustment. This can, of course, cause some nasty tax consequences, particularly since the person acquiring such a partnership will often have to have at least some responsibility to make up that deficit in order for the partnership allocations to have substantial economic effect and be respected for tax purposes. The other item to consider is whether or not the partnership holds assets with an inside tax basis that is less than book basis; if so, you might want to consider the propriety of requesting that the partnership make a 752 election to give the incoming partner a basis step-up; otherwise they'll get tax disparities.

The partnership dissolves, but that doesn't mean the business has to liquidate. The law in fruit-and-nutland says that if someone sells his partnership interest the buyer doesn't become a partner (without the agreement of the other partners) but does have the right to income that the transferor partner had. Stu

Question. You say that the new fellow will have a right to income? That would imply that the business would continue in some form and buyer would get a share of profits from then on. Or did you mean a right to share of assets?

ChEAr$, Harlan

A little of both or either. It really depends on the specific circumstances. If the business continues the assignee becomes entitled to his assignor's share of the profits, and his share of the assets on liquidation. Whether or not the assignee has a right to have the business liquidated depends on local law. But he could well have the right to do so. Stu