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It is return of capital even if E&P is negative. You have been calculating E&P every year, haven't you? It is dividends up to the extent of current E&P. Edit: If it exceeds his basis, it becomes a capital gain. http://thismatter.com/money/tax/corporate-distributions.htm

Thanks, you two. I searched, but used too many words with composite. That was my own question from earlier this year. I hadn't run into the problem this season. I hate that my memory is failing me as I get older.

^^^^^^^^^^^^ ^ ^ ^ ^ ^ ^ THIS

That's not an error message but a footnote that's actually been required since the tax act of 1986 and fall within the scope of sec 263A interest cap rules and the related party rules. The article below gives an overview of when costs are required to be capitalized, possibly even some costs outside of the partnership. It also talks about when capitalizing might not necessary under deminimis rules depending on the level of ownership but that related party rules must be considered before making a final decision on that. http://www.gilaberttax.com/2013/03/26/avoided-cost-k-1-footnotes/