LuckyLefty8
Returning Member

Partnership Distribution / Negative Capital Account / 731 Gain ?

Hi there,

 

Looking for some help on the following fact pattern:

 

- 2 person partnership, 50/50 split on everything

- Partner B begins year with $5K tax capital account

- Partnership loses $30K in 2019

- Partner B also took random distributions totalling $40K in 2019

- Partner A kept putting money in and pulling it back out throughout entire year to keep operation going

 

- After calculating above ($5,000 starting minus $15,000 share of loss minus $40,000 distributions) the ending capital account would be NEGATIVE $50,000.  

 

So it is my understanding that Partner B has to pay tax on the distributions that exceed his basis.  So does he pay tax on the $40,000?  Is this $40,000 taxed at LTCG or STCG rates?  

 

Thank you in advance!