The mere right to share in the earnings and profits is not a capital interest in the partnership. If the partnership agreement does not provide for a special allocation method, the allocation of each item must be based on the partner s ownership percentage in the partnership. A partnership distribution is taxable when it is treated as a guaranteed payment, or if the distribution is considered a liquidation or sale of part or all of a partner s capital interest in the partnership. A distribution in excess of a partner s basis is also taxable. A partner s distributive share of partnership losses is allowed up to the partner s adjusted basis in the partnership.
Basis generally includes the partner s pro rata share of partnership liabilities.
A partner s adjusted basis in the partnership can never be less than zero. Losses in excess of basis will be allowed when the partner s basis is increased above zero. If the purchaser later sells the property, gain is taxable only to the extent that the gain exceeds the previously disallowed loss. Gain resulting from transactions between related parties is treated as ordinary income, unless the property in the hands of the transferee immediately after the transfer is a capital asset. See IRS Publication 541 for more information.