I have four person partnership. The capital accounts are as follows:

 A.      (112,000)
B.       (49,000)
C.        92,000
D.       250,000
Total    181,000

The Partners A and B with negative capital accounts have walked away from the partnerhip. Partners C and D will remain. The operating agreement does have a negative capital make up provision. However, partners A and B will not pay back the money. I presume that A and B will pay tax on the negative accounts. What happens to C and D and the partnership going forward?

asked 05 Feb '10, 23:31

Mike%201's gravatar image

Mike 1
accept rate: 0%

Sounds like a homework question to me.


answered 09 Feb '10, 19:36

SandySea's gravatar image

accept rate: 7%

Sandy is right, this sounds like a homework question. I am not an attorney, but the following issues come to mind. Can you really walk-away from a partnership? Depends on state law. In NY, you can't withdraw unless the partnership agreement specifically allows it. If A&B haven't legally withdrawn or abandoned their interest, they still own it even if you can't force repayment of negative capital. If A&B can't legally withdraw, perhaps C&D have some recourse to enforce the provisions for restoring negative capital. After you have the legal issues sorted out regarding ownership interests, you will have to determine if you have a technical termination of the partnership to answer questions for the partnership and C&D going forward.


answered 09 Mar '10, 22:02

Linda%20Hamilton%20CPA's gravatar image

Linda Hamilt...
accept rate: 10%

A partnership terminates for tax purposes( whether or not it has terminated for local law) when: 1. it stops doing business as a partnership, or 2. 50% or more of the total interest in partnership capital and profits changes hands within 12 consecutive months by sale or exchange or by distribution unless exempted by regs.


answered 15 Mar '10, 18:31

Eddie%20Douglas's gravatar image

Eddie Douglas
accept rate: 0%

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Asked: 05 Feb '10, 23:31

Seen: 6,372 times

Last updated: 15 Mar '10, 18:31