nctx Posted January 28, 2010 Report Share Posted January 28, 2010 I have a semi-complicated situation with a partnership and am looking for the proper way to handle this. Let me lay out the facts: 1. Partnership began with $6,000 investment in 2009 recorded as 50/50 between two partners. In reality, all $6k came from Partner A and we treated the $3k as a personal loan to partner B. 2. Partnership invested $5,000 in business venture which was totally lost (invested as non-refundable down payment for promotional event that never occurred) 3. Partner B never repaid loan to Partner A If possible, I would like to: Dissolve the partnership and reflect the $5k loss all for Partner A I'm wondering if this is possible, and if so, how I can record the capital/losses. Considering this is the first return, can I simply file the 1065 as if Partner A has all along been a significant majority owner since we never filed anything saying it was 50/50? I don't want to file anything fraudulent, but in reality this was 100% Partner A's loss. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 28, 2010 Report Share Posted January 28, 2010 >>I don't want to file anything fraudulent, but in reality this was 100% Partner A's loss. << You can't just change the partnership agreement to fit what you think is reality. Each partner gets his share of the loss and Partner A has to attempt to collect his loan from Partner B in order to claim a bad debt. Quote Link to comment Share on other sites More sharing options...
nctx Posted January 28, 2010 Author Report Share Posted January 28, 2010 >>I don't want to file anything fraudulent, but in reality this was 100% Partner A's loss. << You can't just change the partnership agreement to fit what you think is reality. Each partner gets his share of the loss and Partner A has to attempt to collect his loan from Partner B in order to claim a bad debt. I realize that, but question is --- Partner A can not collect from Partner B, attempts have been made. And is it really a change in agreement if an agreement was never signed or filed? Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 28, 2010 Report Share Posted January 28, 2010 >>And is it really a change in agreement if an agreement was never signed or filed? << Verbal agreements are legal and do not require filing. Its not for you, as a preparer, to change or claim something different from what you know are the actual facts. Quote Link to comment Share on other sites More sharing options...
nctx Posted January 28, 2010 Author Report Share Posted January 28, 2010 So, is the correct way: A ) The $5,000 loss shared 50/50 on the 1065 B ) The $3,000 personal loan from Partner A to Partner B as a short-term capital loss on Partner A's 1040 This seems to result in the same end result for Partner A but also gives Partner B a loss on their K-1. Quote Link to comment Share on other sites More sharing options...
jainen Posted January 28, 2010 Report Share Posted January 28, 2010 >>is it really a change in agreement if an agreement was never signed or filed? << Is it really a partnership if there was never any agreement, never any activity, and never any anything except $5000 lost directly and indirectly in a failed investment? I presume he kept all the last G himself, and didn't give his buddy any of that. So, in my opinion, it sounds like a short-term capital loss going nowhere but Schedule D. Assuming, of course, that the "promotional event that never occurred" was something legitimate, which is too big an assumption to make from here. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 28, 2010 Report Share Posted January 28, 2010 NO! The 1065 tax return loss deduction reduces each partners tax basis. Partner A: $3,000 Beginning Tax Basis 2,500 50% Loss deduction from form 1065 deducted on 1040 Sch-E, page 2 $0,500 Tax Basis for Sch-D liquidation capital loss $3,000 Possible Bad Debt Loss on Loan to Partner B Partner B: $3,000 Beginning Tax Basis 2,500 50% Loss deduction from form 1065 deducted on 1040 Sch-E, page 2 $0,500 Tax Basis for Sch-D liquidation capital loss edit: Of course something doesn't add up as $5,000 deduction leaves $1,000 capital unaccounted for in this example. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 28, 2010 Report Share Posted January 28, 2010 >>Is it really a partnership << The facts established in the first post says there was and the statement "2. Partnership invested $5,000 in business venture" looks like a partnership disbursement to me. Quote Link to comment Share on other sites More sharing options...
nctx Posted January 28, 2010 Author Report Share Posted January 28, 2010 NO! The 1065 tax return loss deduction reduces each partners tax basis. Partner A: $3,000 Beginning Tax Basis 2,500 50% Loss deduction from form 1065 deducted on 1040 Sch-E, page 2 $0,500 Tax Basis for Sch-D liquidation capital loss $3,000 Possible Bad Debt Loss on Loan to Partner B Partner B: $3,000 Beginning Tax Basis 2,500 50% Loss deduction from form 1065 deducted on 1040 Sch-E, page 2 $0,500 Tax Basis for Sch-D liquidation capital loss I'm not sure what the "NO!" is for? That is exactly the same thing I proposed...right? $5,000 loss split 50/50 on the 1065 (Like you have above) and $3,000 bad debt for Partner A's 1040 (Like you have above). Am I missing something? As for the other $1k, it is cash in the account which is being closed and disbursed. Quote Link to comment Share on other sites More sharing options...
jainen Posted January 28, 2010 Report Share Posted January 28, 2010 >>2,500 50% Loss deduction from form 1065 deducted on 1040 Sch-E, page 2<< What information suggests that "Partnership invested $5,000 in business venture" means an ordinary loss? What information suggests that "promotional event that never occurred" means a non-passive loss? nctx has already posted four times in this thread, and I don't see any facts yet to support such assumptions. Quote Link to comment Share on other sites More sharing options...
nctx Posted January 28, 2010 Author Report Share Posted January 28, 2010 >>2,500 50% Loss deduction from form 1065 deducted on 1040 Sch-E, page 2<< What information suggests that "Partnership invested $5,000 in business venture" means an ordinary loss? What information suggests that "promotional event that never occurred" means a non-passive loss? nctx has already posted four times in this thread, and I don't see any facts yet to support such assumptions. It's an active and ordinary loss. Thanks for your help everyone, I have the answers that I need. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 28, 2010 Report Share Posted January 28, 2010 I'm not sure what the "NO!" is for? That is exactly the same thing I proposed...right? $5,000 loss split 50/50 on the 1065 (Like you have above) and $3,000 bad debt for Partner A's 1040 (Like you have above). Am I missing something? As for the other $1k, it is cash in the account which is being closed and disbursed. Disregard the NO. The $500 loss then in my example would not exist. If partner A claims/takes partner B's $500 share on liquidation, then Partner A's claim of bad debt would be only $2500. However regarding the partnership tax return, depending upon the classification of the $5,000 loss would determine if the loss was an operating loss for 1040 Sch-E (1065-k1 Box 1)or a capital loss for 1040 Sch-D (1065-k1 Box 8 or 9a). Quote Link to comment Share on other sites More sharing options...
jainen Posted January 28, 2010 Report Share Posted January 28, 2010 >>It's an active and ordinary loss. Thanks for your help everyone, I have the answers that I need. << That's somewhat non-responsive to the issues I raised, but I understand. I get that a lot. Quote Link to comment Share on other sites More sharing options...
nctx Posted January 28, 2010 Author Report Share Posted January 28, 2010 That's somewhat non-responsive to the issues I raised, but I understand. I get that a lot. Wow...I'm glad I'm not a regular on this forum. I'm also a CPA, and people like you make us look like jerks. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted January 28, 2010 Report Share Posted January 28, 2010 nctx - you need to learn what jainen is all about. He always has a point, but it is sometimes phrased in a way that makes people a little defensive. I would look at what he is trying to get to. You will find that jainen has an excellent tax mind and shares a great deal of wisdom on this board. But he is a little hard to take at times. Don't be offended, it is just jainen being jainen. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
jainen Posted January 28, 2010 Report Share Posted January 28, 2010 >>people like you make us look like jerks<< So it seems. Quote Link to comment Share on other sites More sharing options...
mcb39 Posted January 28, 2010 Report Share Posted January 28, 2010 >>people like you make us look like jerks<< So it seems. Personally, I have learned more from reading between Jainen's lines than one would ever think. Nobody can make you feel small unless you allow them to. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 29, 2010 Report Share Posted January 29, 2010 Jainen is a proud 'contrarian' who make take a bit of getting used to, [OK, a lot of getting used to] but he does not really have a mean bone in his body. He just want's to make you think things through. We've all learned from him over the years. And even tho he's not always right, he's always got a point that will make you think a bit deeper. Don't take him personally, and you will come to appreciate him. Quote Link to comment Share on other sites More sharing options...
jainen Posted January 29, 2010 Report Share Posted January 29, 2010 >>Jainen is a proud 'contrarian' << If so, I contrarianed myself. May I point out that my first post in this thread fully supported Partner A taking the entire $5000 as a current investment loss? Our honored visitor made no objection to THAT. Quote Link to comment Share on other sites More sharing options...
OldJack Posted January 29, 2010 Report Share Posted January 29, 2010 Wow...I'm glad I'm not a regular on this forum. I'm also a CPA, and people like you make us look like jerks. All you guys are missing what nctx means in this comment. This is a compliment to jainen inthat he knows more than us CPA jerks! Well most of us. :) Quote Link to comment Share on other sites More sharing options...
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