One of the regular question I get asked at Search Conferences is one which @MattCutts answered in a recent Webmaster Video. "If a site linking to mine gets caught selling links, what happens to my site?" For example (this is a real life scenario) your website is linked to from an article based website which has been penalised by a Google Algo update, does my website get penalised too?
The answer to the question (they are both the same question in reality) is fairly simple. If a website is penalised the links out to another website are basically ignored and stop passing link juice. Your website itself will not receive a penalisation just from a site linking to you being told off. What may occur, which is more common, is that your rankings may slightly slump if you were getting a lot of link juice from that site (and others like it which have been penalised too).
Anyhow, over to Matt to explain a little better.
Have you been effected by such a penalisation issue? let us know