Message Font: Serif | Sans-Serif
No. of Recommendations: 5
Are you saying that the disbursement has to be allocated in a specific manner? I'm wondering about that as we've reported and paid taxes on all the income from the club all these years, but everything has always been reinvested. We have cash this year because we made a very nice profit on something we sold, and we opted to distribute some of the money back to the members, but they do also have to pay taxes on that capital gain.

Now that it's clear exactly what the distribution is, the answer is pretty straightforward. As long as the amount of cash received by each member in the distribution does not exceed that member's tax basis in the club, then the cash distributed is, as you posted originally, a return of capital to that member. The amount is reported on Schedule K, line 19a, with a code "A" on the respective K-1 entries.

Since this is the first time you've ever made a distribution like this, (that is, a partial withdrawal in club accounting parlance), and the distribution is being funded by a large capital gain, the realization of which increases everyone's tax basis, there shouldn't be anyone who is withdrawing more than their tax basis.

My criticism of using Excel spreadsheets tracking investment club finances is two-fold. The first is a practical one: what happens if you leave the club, or god forbid, die suddenly. Is there anyone else who can maintain the records? The second objection involves the allocation of income and expense to the members. I would assume you are using the "snapshot" method of allocation. That is, you allocate all items on the basis of the capital ownership percentage on December 31. The current recommendation is that you use "time-based" allocation. That is, each item of income/expense is allocated on the basis of the capital ownership percentages on the date of the transaction.

If you're interested in looking at the investment club accounting software that is available today, both bivio ( and ICLUBcentral ( offer free trials of their software.

Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.