Chapter 9-1C.Partnership Operation

C16-Chp-9-1C-Ptshp-Operate-2016

This file covers pages 20 through 44

Howard Godfrey, Ph.D., CPAProfessor of Accounting

Copyright 2011

The student should be able to:

4. Differentiate between items that must be separately stated and those that are included in ordinary income or loss for partnerships that are not electing large partnerships.

5. Calculate a partner's distributive share of partnership income, gain, loss, deduction or credit items.

6. Explain the requirements for a special partnership allocation.

7. Calculate a partner's basis in a partnership interest.

8. Determine the limitations on a partner's deduction of partnership losses.

9. Determine the tax consequences of a guaranteed payment.

10. Explain the requirements for the holder of a partnership interest to be recognized as a partner in a family partnership.

11. Determine the allocation of partnership income between a donor and a donee of a partnership interest.

12. Determine the requirements for filing a partnership tax return.

4. Differentiate between

items that are separately stated and those that are included in ordinary income or loss for partnerships that are not electing large partnerships.

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Practice Question

In computing the ordinary business income of a partnership, a deduction is allowed for:

a. Net operating loss deduction.

b. Depreciation Expense

c. Short-term capital losses.

d. Gifts to qualified charities. 

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Practice Question

In computing the ordinary business income of a partnership, a deduction is allowed for:

b. Depreciation Expense

JM Partners -1 John and his wife Mary are equal partners in JM Enterprises, which operates as a partnership. How would they report the income and loss items from partnership operations shown on the next

slide?

JM Partners - 2Consulting revenue $125,000Travel expenses 40,000 Transportation 3,000 Advertising 7,000 Office expense 3,000 Telephone 1,000 Dividend Income 5,000 Interest Income 2,000 Charitable contribution 1,000 Political contribution 6,000 What is Partnership Income?

JM Partners-3 Information Form 1065 Sch- K

Consult rev. $125,000Travel exp. 40,000Transport. 3,000Advertising 7,000Office exp. 3,000Telephone 1,000Dividends 5,000Interest Income 2,000Charitable. cont. 1,000Political cont. 6,000Ordinary Income

JM Partners-3A Information Form 1065 Sch- K

Consult rev. $125,000 $125,000Travel exp. (40,000) (40,000) Transport. (3,000) (3,000) Advertising (7,000) (7,000) Office exp. (3,000) (3,000) Telephone (1,000) (1,000) Dividends 5,000 5,000 Interest 2,000 2,000 Char. cont. (1,000) (1,000) Political cont. (6,000) (6,000) Ordinary Income $71,000

JM Partners-4The $71,000 of items that make up net income on Schedule C in the preceding problem will all be reported as net income on Form 1065. The dividends, interest and charitable contributions will be reported on Schedule K (Form 1065) as separately stated items and the political contribution will be reported as a nondeductible item.

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JM Partners-5John and Mary will each receive a Schedule K-1 reporting their shares of the net income, separately stated items, and nondeductible item. These will then be included in their Form 1040, with dividends and interest income on Schedule B and the charitable contributions included with other charitable contributions and reported as an itemized deduction.

5. Calculate a partner's distributive share of partnership income, gain, loss, deduction or credit items.

Gil & Bill partnership had net incomeper books of $37,000 which included:

Dividend income $1,000ST capital loss (4,000) Section 1231 gain 7,000 Ordinary income(sec. 1245 recapture) 1,500 Interest income 1,000

Ordinary Income ?They share profits and losses equally.What is partnership ordinary income?

Gil & Bill partnership had net incomeper books of $37,000 which included:

Ordinary Book income $37,000Dividend income $1,000ST capital loss (4,000) Section 1231 gain 7,000 Ordinary income(sec. 1245 recapture) 1,500 Interest income 1,000 Ordinary IncomeThey share profits and losses equally.What is partnership ordinary income

Gil & Bill partnership had net incomeper books of $37,000 which included:

Ordinary

Book income $37,000AdjustmentsDividend income $1,000 ($1,000)ST capital loss (4,000) 4,000 Section 1231 gain 7,000 (7,000) Ordinary income(sec. 1245 recapture) 1,500 Interest income 1,000 (1,000) Ordinary Income $32,000

6. Explain the

requirements for a special partnership allocation.

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George and Barbara form an equal partnership. George contributes $15,000 cash and Barbara contributes land with a fair market value of $15,000 and an adjusted basis of $10,000. A year later, the partnership sells the land for $20,000. How much of the gain on the sale will Barbara report?

a. $2,000 b. $3,000

c. $4,000 d. $5,000 e. $7,500

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Barbara contributes to partnership BASIS 10,000 Barbara contributes to partnership FMV 15,000 Barbara's partnership interest: 50%

Partnership has carryover basis 10,000 Partnership sells land for 20,000

Total Gain $10,000

Gain since land was invested $5,000

Barbara reports income of:All of built-in Gain $5,000One-half of gain since investment 2,500

Total Gain reported by Barbara $7,500

7. Calculate a partner's basis in a partnership interest.

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Taxation of Partnership Income

B. Partner's Basis. A partner's basis in his partnership interest begins with his basis in assets contributed to the partnership.

The partner's basis is increased by the partner's share of the partnership liabilities.

Basis is increased by the partner's share of income and decreased by the partner's share of loss.

Basis limits the amount of losses deductible by the partner and can never be less than zero.

Investment or Beginning BasisChange in share of debt (+ or -)Add: Ordinary Income

Separate Income & gainsTax-free incomeContributions of Capital

Less: Ordinary LossSeparate Exp. & LossesNon-deductible ExpensesPartner Withdrawals

Ending Basis

Partner Basis - Sec. 705, 722, 742

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BA Partnership- 1Ben and Ann formed the BA Partnership as equal partners. Each partner contributed cash and property with a value of $100,000 for partnership operations. As a result of these contributions, Ben had a basis of $80,000 and Ann a basis of $60,000 in their partnership interests. At the end of their first year of operations, they had the results on slide 26:

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BA Partnership - 2

a. What is the net income, excluding separately stated items, that each partner is required to report at the end of the year?

b. How is each of the separately stated items treated on the partners’ tax returns?

c. What is each partner’s basis at year-end?

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Gross sales $150,000Cost of goods sold 95,000Rent Expense 15,000Wages to employees 15,000Utilities Expense 4,000Charitable contributions 1,000Section 1231 gain 2,000

BA Partnership -3

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BA Partnership - 4 Fm. 1065

Gross sales $150,000Cost of goods sold 95,000Rent Expense 15,000Wages to employees 15,000Utilities Expense 4,000Charitable contributions 1,000Section 1231 gain 2,000

Ordinary Income

Each Ptnr reports 50%

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BA Partnership - 4A Fm. 1065

Gross sales $150,000 $150,000Cost of goods sold 95,000 (95,000) Rent Expense 15,000 (15,000) Wages to employees 15,000 (15,000) Utilities Expense 4,000 (4,000) Charitable contributions 1,000Section 1231 gain 2,000

Ordinary Income 21,000$

Each Ptnr reports 50% 10,500$

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BA Partnership - 5 a. Partnership net income is $21,000 ($150,000 - $95,000 - $15,000 - $15,000 – $4,000). Each partner reports $10,500 (50% x $21,000).b. Each partner’s share of Sec. 1231 gain will be included with any other Sec. 1231 gains and losses in the Sec. 1231 gain and loss netting process. Each partner’s share of the charitable contribution will be included with other charitable contributions and reported as an itemized deduction.

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BA Partnership - 6c. Ben’s basis at year end: $80,000 + (50% x $21,000) + (50% x $2,000) – (50% x $1,000) = $91,000Ann’s basis at year end: $60,000 + (50% x $21,000) + (50% x $2,000) – (50% x $1,000) = $71,000

Ben

Investment or Beginning Basis 80,000$ Change in share of debt (+ or -)Add: Ordinary Income

Separate Income & gainsTax-free incomeContributions of Capital

Less: Ordinary LossSeparate Exp. & LossesNon-deductible ExpensesPartner Withdrawals

Ending Basis

BA Partnership - 7

Ben

Investment or Beginning Basis 80,000$ Change in share of debt (+ or -)Add: Ordinary Income 10,500

Separate Income & gains 1,000 Tax-free incomeContributions of Capital

Less: Ordinary LossSeparate Exp. & Losses (500) Non-deductible ExpensesPartner Withdrawals

Ending Basis 91,000$

BA Partnership - 7A

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Andrew invested $10,000 for a 25% interest in XYZ Partnership on 12-31-10.

In 2011, XYZ had taxable income of $20,000 and nontaxable income of $8,000.

XYZ Partnership also made a cash distribution to Andrew of $12,000. Assuming no other transactions occurred, what is Andrew's basis in the partnership at the end of 2011?

a. $-0 b. $5,000

c. $10,000 d. $17,000

Andrew

Investment or Beginning Basis 10,000$ Change in share of debt (+ or -)Add: Ordinary Income

Separate Income & gainsTax-free incomeContributions of Capital

Less: Ordinary LossSeparate Exp. & LossesNon-deductible ExpensesPartner Withdrawals

Ending Basis

XYZ Partnership

Andrew

Investment or Beginning Basis 10,000$ Change in share of debt (+ or -)Add: Ordinary Income 5,000

Separate Income & gainsTax-free income 2,000 Contributions of Capital

Less: Ordinary LossSeparate Exp. & LossesNon-deductible ExpensesPartner Withdrawals (12,000)

Ending Basis 5,000$

XYZ Partnership

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Taxation of Partnership Income

C. Partnership Distributions. Distributions are generally tax-free to partners because they already have paid taxes on the earnings of the partnership. Distributions reduce the partner's basis in his partnership interest. If the distribution exceeds basis, it generally will be taxed as capital gain. A loss is recognized when the partner receives only cash, inventory, and unrealized receivables in complete liquidation of their partnership interest.

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Partnership Reporting of Income

A. Partnership Taxable Income.

Ptshp taxable income is calculated like taxable income of individuals with a few differences.

Taxable income is divided into separately stated items and ordinary income or loss. Certain deductions are not allowed to partnerships.

These include income taxes paid or accrued to a foreign country or U.S. possession, charitable contributions, oil and gas depletion, and net operating loss (NOL) carrybacks or carryovers.

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Partnership Reporting of Income

B. Separately Stated Items.

A list of the items that must be separately stated is found on page 10-21.

As a general rule, an item must be separately stated if the income tax liability of any partner that would result from treating the item separately is different from the liability that would result if that item is included with partnership ordinary income. See quote from regs on webpage.

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Reporting Partnership Income

C. Partnership Ordinary Income. All items that are not separately stated are combined into a single amount called partnership ordinary income or loss.

Each individual partner's share of ordinary income or loss is reported on Schedule E of Form 1040.

Partnership Reporting of IncomeD. U.S. Production Activities Deduction. For tax years after 2004, the 2004 Jobs Act added a new deduction for partnerships. In the case of a partnership, the deduction applies at the partner level, so the partnership must report each partner’s share of qualified production activities income on the partner’s Schedule K-1. For the 50% salary limitation, each partner is allocated a share of the partnership’s W-2 wages equal to the lesser of (1) the partner’s allocable share of such wages or (2) 9% of the qualified production activities income allocated to the partner.Sch. K a& Sch. K-1s of a partnership tax return are reproduced in Appendix B.

Partner Reporting of Income

A. Partner's Distributive Share. A partner pays taxes on his distributive share of Ptshp ordinary income or ordinary loss and the separately stated income, gain, loss, deduction or credit items.

Distributive share is normally determined by the terms of the Ptshp agreement or, if Ptshp agreement is silent, by the partner's overall interest in the Ptshp as determined by taking into account all facts and circumstances.

Partner Reporting of Income

A. Partner's Distributive Share.

1. Partnership Agreement. Ptshp agreement may describe a partner's distributive share by indicating the partner's profits and loss interest, or it may indicate separate profits and loss interests. If only one interest percentage is stated, it is used to allocate both profit and loss. 2. Varying Interest Rule. If a partner's ownership interest changes during the partnership tax year, the income or loss allocation takes into account the varying interest. Income is generally allocated under this rule on a pro rata basis.

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B. Special Allocations.

1. Allocations Related to Contributed Property. When property is contributed to a partnership, it takes a substituted basis that references the contributing partner's basis. Pre-contribution gains or losses are allocated to the contributing partner for any property contributed to a partnership after March 31, 1984.

Income and deductions reported in connection with the contributed property (e.g., depreciation) must be allocated to reflect the difference between FMV and adjusted basis on the date of contribution.

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Partner Reporting of IncomeB. Special Allocations.2. Substantial Economic Effect. Special allocations relating to other than contributed property must meet certain criteria designed to ensure that the allocations affect the partner's economic consequences and not just the tax consequences.

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Partner Reporting of IncomeB. Special Allocations.The second requirement for a special allocation to be accepted under the

Regulations is that the economic effect be substantial, which requires that there is a reasonable possibility that the allocation will substantially affect the dollar amounts to be received by the partners independent of tax consequences.

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Basis for Partnership Interest A. Beginning Basis. A partner's beginning basis for a partnership interest acquired through contributing property or services was discussed above. If a partner purchases his partnership interest from another partner, the basis is the purchase price. If the interest is inherited, the basis of the interest is its FMV on the date of death, or alternate valuation date if elected by the executor. If the partnership interest is received as a gift, the basis is generally the donor's basis increased by the portion of any gift tax paid by the donor that relates to appreciation in the partnership interest.

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Basis for Partnership Interest B. Effects of Liabilities.1. Increases and Decreases in Liabilities. Two changes in partnership liabilities are treated as contributions of cash by the partners. The first is an increase in the share of partnership liabilities. The second is for a partner to assume partnership liabilities in an individual capacity.

Two liability changes are treated as distributions of cash to the partners. The first is a decrease in the share of partnership liabilities. The second is a decrease in the partner's individual liabilities caused by the partnership's assumption of a liability of the partner.

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Basis for Partnership Interest B. Effects of Liabilities.1. Increases and Decreases in Liabilities. ……A Partner's Share of Liabilities. A recourse loan is the usual kind of loan for which the borrower remains liable until the loan is paid. A nonrecourse loan is one in which the lender may sell the security if the loan is not paid, but the borrower is not liable for any additional amounts. Recourse liabilities are added to a partner's basis only to the extent that the partner has a risk of economic loss. Most, if not all, recourse liabilities are allocated to general partners. Nonrecourse debts are allocated to general and limited partners based on their profit ratio.

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Basis for Partnership Interest B. Effects of Liabilities.1. Increases and Decreases in Liabilities. ……If the partnership has more than one general partner, the economic risk of loss computation entails computing a hypothetical loss and allocating that loss to the general partners. The hypothetical loss computation assumes the partnership sells all its assets (including cash) for the amount of nonrecourse liabilities. If the partnership does not have nonrecourse liabilities, the assets are deemed sold for zero dollars. The hypothetical loss then is subtracted from the partners’ capital accounts to determine the economic risk of loss.

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Basis for Partnership Interest C. Effects of Operations. A partner's basis is a summary of contributions and the partnership's liabilities, earnings, losses, and distributions. Basis is increased for additional contributions made to the partnership plus the distributive share of a partner's current and prior years' taxable income (both separately stated items and partnership ordinary income) and tax-exempt income of the partnership. Basis is decreased (but not below zero) by distributions from the partnership and the partner's distributive share of losses of the partnership (both separately stated items and partnership ordinary loss) and expenditures that are not deductible for tax purposes and that are not capital expenditures.

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Basis for Partnership Interest C. Effects of Operations. Any distributive share of loss that cannot be deducted because of the basis limit is simply noted in the partner's financial records. It is not reported on the partner's tax return, nor does it reduce the partner's basis. The losses can be carried forward until the partner has positive basis again from capital contributions, additional partnership borrowings, or partnership earnings.

8. Determine the limitations on a partner's deduction of partnership losses.

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Special Loss LimitationsA. At-Risk Loss Limitations. Partnership losses that can be taken as deductions are limited to the at-risk basis. The at-risk basis is essentially the same amount as the regular partnership basis with the exception that liabilities increase the at-risk basis only if the partner is at-risk with respect to the amount. Under the at-risk rules, the amount that a partner can deduct may be considerably less than the amount under the regular (Sec. 704(d)) basis limitation rules. The at-risk rules do not apply to qualified nonrecourse real estate financing. Partner is at risk for his share of nonrecourse real estate financing if all requirements are met.

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Martin & Clark and their equal partnership are on a calendar-year basis. An ordinary loss of $84,000 was sustained in 2010. The partners share profits and losses equally. At 12-31-10, Clark, who materially participates in the partnership's business, had a basis of $36,000 for his partnership interest, before considering the 2010 loss. On his individual income tax return for 2010, Clark should deduct a (n):a. Ordinary loss - $36,000c. Ordinary loss - $36,000, capital loss - $6,000b. Ordinary loss - $42,000d. Capital loss - $42,000.

Ken & Liz each have a 50% interest in KeLi Partnership. All use the calendar year.

In 2009, KeLi had a $30,000 loss. Ken's basis in his partnership interest on 1-1-09 was $8,000.

In 2010, KeLi Partnership had a profit of $28,000. There were NO other adjustments to Ken's basis in the partnership in 2009 & 2010. What amount of partnership income (loss) would Ken show on his 2009 & 2010 individual income tax returns?

2009 2010a. ($8,000) $0 b. ($8,000) $7,000 c. ($15,000) $7,000 d. ($15,000) $14,000 IRS Exam 

Flow through of loss of KeLi Ptshp

Ken's 2009

Total Share Return

Ken's basis 8,000

Loss - 2009 (30,000)

Limit on loss

Suspended Loss

Flow through of loss of KeLi Partnership

Ken's 2009

Total Share Return

Ken's basis 8,000

Loss - 2009 (30,000) (15,000)

Limit on loss. (8,000)

Suspended Loss

Flow through of loss of KeLi Partnership

Ken's 2009

Total Share Return

Ken's basis 8,000

Loss - 2009 (30,000) (15,000)

Limit on loss. (8,000) 8,000

Suspended Loss (7,000)

Flow through of loss of KeLi PartnershipKen's 2009 2010

Total Share Return Return

Ken's basis 8,000 Loss - 2009 (30,000) (15,000) Limit on loss. (8,000) (8,000)

Suspended Loss (7,000) Net income-2010 28,000 14,000 Net income recognized by Ken

Flow through of loss of KeLi Partnership

Ken's 2009 2010

Total Share Return Return

Ken's basis 8,000

Loss - 2009 (30,000) (15,000)

Limit on loss. (8,000) (8,000)

Suspended Loss (7,000)

Net income-2010 28,000 14,000

Net income recognized by Ken 7,000$

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Special Loss LimitationsB. Passive Activity Limitations. Passive activity loss and credit limitations further limit the loss that can be deducted is the Under Sec. 469, all income is divided into (1) amounts derived from passive activities; (2) active income such as salary, bonuses and income from businesses in which the taxpayer materially participates; and (3) portfolio income (e.g., dividends and interest). Generally, losses of a noncorporate partner from a passive activity cannot be used to offset either active income or portfolio income. Special rules apply to passive losses of C corporations.Both of the special loss limitations generally act to severely curtail the use of partnership losses at the partner level, much more than do the general partnership basis rules of Sec. 704(d).

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Bud is single and received wages of $140,000 from IBM in 2010. Bud is a 50% partner in a partnership engaged in a rental real estate activity which generated a $60,000 loss for the partnership. Bud was an active participant in the rental real estate activity. He had no other income.

How much of the partnership rental loss may Bud deduct on his 2010 income tax

return? (Sec. 469(i))a. $0 b. $5,000 c. $15,000 d. $25,000

Bud - Loss from rental activity.

Maximum loss write-off

Threshhold

Phase-out percentage

AGI- above threshhold

Reduction in max loss

Maximum write-off

Bud - Loss from rental activity.

Maximum loss write-off $25,000

Threshhold 100,000

Phase-out percentage 50%

AGI- above threshhold 40,000

Reduction in max loss 20,000

Maximum write-off $5,000

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Transactions Between Partner & PartnershipA. Sales of Property. No loss can be deducted on the sale or exchange of property between a partnership and a person who directly or indirectly owns more than 50% of the partnership's capital or profits interests. Losses are also disallowed on sales or exchanges of property between two partnerships in which the same persons own, directly or indirectly, more than 50% of the capital and profits interests. Gain will be ordinary in a sale of property between a partnership and a person who owns a controlling interest. This rule only applies when the property that is sold or exchanged at a profit is not a capital asset in the transferee's hands.

9. Determine tax consequences of a guaranteed payment.

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Transactions Between a Partner and the Partnership

B. Guaranteed Payments.

A partner is not an employee of his partnership and most fringe benefits are taxable to the partner. Partners, who perform services for their partnership, are sometimes compensated for these services through the use of guaranteed payments.

Guaranteed payments includes more than just salary type of payments. Guaranteed payments can also be made for the use of invested capital that are similar to interest.

1. Determining the Guaranteed Payment. Sometimes the guaranteed payment is expressed as a specific dollar amount. Other times it is expressed as a guaranteed minimum (that may or may not be in excess of the partner's distributive share).

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Transactions Between a Partner and PartnershipB. Guaranteed Payments. 2. Tax Impact of Guaranteed Payments. Like salary & interest income, guaranteed payments are always ordinary income to recipient. The guaranteed payment is included in recipient's tax year during which the partnership tax year-ends and the partnership deducts or capitalizes the payments. For the partnership, the payment is treated as though it were made to an outsider. If the service is of a nature that it must be capitalized, the guaranteed payment must be capitalized. Otherwise the guaranteed payment is deductible from ordinary income.

10. Explain requirements for the holder of a partnership interest to be recognized as a partner in a family partnership.

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Family Partnerships

A. Capital Ownership. Family partnerships allow income from an investment to be spread among family members having low marginal tax rates. The question of whether a family member is a partner is an issue that is frequently litigated. Three tests must be met if a family member is to be considered the owner of a capital interest in a family partnership: (1) the partnership interest must be a capital interest;

(2) capital must be a material income-producing factor in the partnership's business activity; and

(3) the family member must be the true owner of the interest.

11. Determine the allocation

of partnership income between a donor and a donee of a partnership interest.

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Family Partnerships

B. Donor-Donee Allocations of Income. Partnership income must be properly allocated between a donor and a donee in order to be accepted by the IRS.

The donor must be allocated reasonable compensation for services rendered to the partnership.

Any remaining income must be allocated based on relative capital interests.

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On 1-1-Yr1, Mr. A sold 50% of his business to his son B. The resulting partnership had a profit of $100,000. Capital was a material income producing factor. Mr. A performed services worth $50,000, which was reasonable compensation. What is the maximum amount of income B can report from the partnership for the

year? (Sec. 704(e))a. $15,000 b. $30,000

c. $40,000 d. $75,000 e. $25,000

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Profits before partner comp $100,000

Reasonable comp. to A

Reasonable comp. to B

Profit allocated to A & B

Ownership percentage 50%

Profit allocated to B

Profit & comp. allow. to A

Allocation-capital investment is material

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Profits before partner comp $100,000

Reasonable comp. to A (50,000)

Reasonable comp. to B

Profit allocated to A & B $50,000

Ownership percentage 50%

Profit allocated to B $25,000

Profit & comp. allow. to A $75,000

Allocation-capital investment is material

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Tax Planning ConsiderationsA. Timing of Loss Recognition. Loss limitation rules provide a unique opportunity for tax planning. Income can be projected for the current and future tax years to determine when losses can be used to the greatest advantage. A partner can use a loss in the current year if there is sufficient basis in the partnership interest. If basis is not sufficient, an additional contribution of capital can be made by the end of the year, or the partner can convince the partnership to incur additional partnership liabilities in order to obtain the needed basis. If it is desirable to defer the loss until a later year, basis can be kept low so that the distributive share of losses exceeds basis and the loss utilization is deferred to a later tax year.

12. Determine the requirements for filing a partnership tax return.

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Compliance and Procedural ConsiderationsA. Reporting to the IRS and the Partners. 1. Forms. Within 3 1/2 months after the end of the partnership tax year, the partnership must file a Form 1065 with the IRS. Appendix B contains a completed Form 1065. A partnership return is an information return and the partnership pays no taxes. Included on Form 1065 are all the items of income, gain, loss and deduction that are not separately stated by the partners. Schedule K of Form 1065 reports both the summary of ordinary income and loss and the separately stated items. Schedule K-1 is prepared for each partner and reflects that partner's share of ordinary income or loss and separately stated items.

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Compliance and Procedural ConsiderationsA. Reporting to the IRS and the Partners. 2. Sec. 444 Election & Required Payments. The election to use a tax year other than a required year is made by filing an election under Sec. 444 on Form 8716 by the earlier of (1) the 15th day of the fifth month following the month that includes the first day of the tax year for which the election is effective, or (2) the due date of the income tax return resulting from the Sec. 444 election. A partnership making a Sec. 444 election needs to annually make a required payment under Sec. 7519. The required payment has the effect of collecting a deposit from the partnership equal to the tax (at the highest individual tax rate plus one percentage point) on the partnership's deferred income. The required payment is made when Form 8752 is filed along with a computational worksheet, which is illustrated in the instructions to the Form 1065. Refunds of excess required payments are also obtained by filing the Form 8752.

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Compliance and Procedural ConsiderationsA. Reporting to the IRS and the Partners. 3. Estimated Taxes. A partnership pays no income taxes so the partnership makes no estimated tax payments. Partners must make estimated tax payments based on their separate tax positions including their distributive share of partnership income or loss for the current year. Partner's self-employment income is reported on Form 1065. A general partner's self-employment income includes both guaranteed payments of salary, partnership ordinary income and loss and separately stated items, but generally excludes capital gains and losses, Sec. 1231 gains and losses, interest, dividends, and rentals. This self-employment income is included by the partners with their other self-employment income in determining their self-employment tax liability. The distributive share of partnership income allocable to a limited partner is not self-employment income.

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Compliance and Procedural ConsiderationsB. IRS Audit Procedures. After the 1982 Tax Act, partnership items are examined at the partnership level instead of the partner level.

Every partner must report his distributive share of partnership items in conformance with Schedule K-1 or notify the IRS of the inconsistent treatment.

A tax matters partner is generally assigned to facilitate communication between the IRS and the partners of a large partnership, and to serve as primary representative for the partnership.

A single court has jurisdiction to review all partnership items in question for the litigated tax year and the allocation of such items among the partners.

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The

End –

Part B