There are lots of issues to consider, and some are legal rather than tax considerations. What does the partnership agreement say? Did you ask the non-participating partner to contribute his share of capital? The non-participating partner has a capital gain to account for his negative basis. It seems to me that the other two partners have already absorbed the loss especially if there was a redemption of his interest.

If the 3rd partner is "absorbed" by the other partners; then indeed this is still part of the equation of the basis/tax/income/losses of the partnership.

They bought him out and then instead of 33 1/3 each, now they are 50 each for the two remaining partners. Essentially, the retiring partner has tax consequences for "selling" his shares of the partnership for assumption of his liabilities.

Not enough information to really see what is basis, what is suspended, etc. but nonetheless, you can't just absorb prior activity with a loss of a partner and then assume that it just disappears.

To be a "partner" what did he contribute? No money, time, anything? But for just to share in expenses/profits for nothing?

I agree with Bill-EA. There are many issues to consider, especially what exactly was in the partnership agreement. I also agree with SandySea that a negative equity for one partner doesn't just disappear - there could be tax consequences to the exiting partner and basis and equity changes for the remaining ones. The equity of the partnership overall does not chasnge, so either the exiting partner makes a contribution to the partnership to bring His/her portion of equity to zero, or the other partners contribute to bring it to zero. If the other partners contribute, the exiting partner has a potential taxable gain.

If the exiting partner never contributed anything and the partnership only had losses, what was the economic transaction - what was there to "buy back" from the exiting partner?