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Crane is a partner in the Cardinal Partnership. A dispute arose with the partnership regarding his...

Crane is a partner in the Cardinal Partnership. A dispute arose with the partnership regarding his share of current earnings. The partnership contends that the amount is $75,000, while Crane believes his share is $100,000. Crane ceased being a partner on November 1, 2015. As a result of the dispute, the partnership distributed only $75,000 and placed the disputed $25,000 in escrow. However, Crane's Schedule K–1 from the partnership included the full $100,000. Crane believes that the K–1 should include only the $75,000 that is not in dispute. Is Crane correct? Explain.

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Answer #1

Yes, Crane is correct and Crane’s Schedule K–1 from the partnership should include only the $75,000 that is not in dispute.

This is because only the guaranteed income of a partner is reported in Schedule K-1, line 4. The amount of $25,000 (100,000 – 75,000) is in dispute and hence it is not guaranteed that Crane will be paid $100,000. However the payment of $75,000 is guaranteed and so Crane’s Schedule K–1 from the partnership should include only the $75,000 that is not in dispute.

As per the provisions of tax law partners are required to pay taxes on the disputed amount only when and if they receive the money.

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