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QUESTIONS & ANSWERS

Emerging Issues and Insights

Q. If a partner receives a partnership distribution that causes the partner to have a negative tax capital account, but for which the partner has basis (by reason of an appropriate allocation of partnership debt), can the distribution ever be taxable?

A.

It’s easy to forget about the §465 at-risk rules that can come into play. Very generally, a taxpayer can receive a distribution where the at-risk rules are irrelevant; however, if the taxpayer has previously deducted losses that were supported by a capital contribution and later receives a distribution funded by nonrecourse debt, the previously deducted losses can be subject to ordinary income recapture under the rules of §465(e).

None of the authors is rendering legal, accounting or other professional advice. If such advice is required, it is strongly recommended that a professional advisor be engaged.

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