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Amended 2009 Tax Return

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Amended 2009 Tax Return

Amended 2009 tax return 5. Amended 2009 tax return   Illustrated Examples Table of Contents Illustrated Example of Form 4563Line 1. Amended 2009 tax return Line 2. Amended 2009 tax return Lines 3a and 3b. Amended 2009 tax return Lines 4a and 4b. Amended 2009 tax return Line 5. Amended 2009 tax return Line 6. Amended 2009 tax return Line 7. Amended 2009 tax return Line 9. Amended 2009 tax return Line 15. Amended 2009 tax return Illustrated Example of Form 5074Part I. Amended 2009 tax return Part II. Amended 2009 tax return Part III. Amended 2009 tax return Illustrated Example of Form 8689Part I. Amended 2009 tax return Part II. Amended 2009 tax return Part III. Amended 2009 tax return Part IV. Amended 2009 tax return Use the following examples to help you complete the correct attachment to your Form 1040. Amended 2009 tax return The completed form for each example is shown on the pages that follow. Amended 2009 tax return Illustrated Example of Form 4563 John Black is a U. Amended 2009 tax return S. Amended 2009 tax return citizen, single, and under 65. Amended 2009 tax return He was a bona fide resident of American Samoa during all of 2013. Amended 2009 tax return John must file Form 1040 because his gross income from sources outside the possessions ($10,000 of dividends from U. Amended 2009 tax return S. Amended 2009 tax return corporations) is more than his adjusted filing requirement for single filers under 65. Amended 2009 tax return (See Filing Requirement if Possession Income Is Excluded in chapter 4. Amended 2009 tax return ) Because he must file Form 1040 (not illustrated), he fills out Form 4563 to determine the amount of income from American Samoa he can exclude. Amended 2009 tax return See Bona Fide Resident of American Samoa in chapter 3. Amended 2009 tax return Completing Form 4563. Amended 2009 tax return   John enters his name and social security number at the top of the form. Amended 2009 tax return Line 1. Amended 2009 tax return   On Form 4563 (see later), John enters the date his bona fide residence began in American Samoa, June 2, 2012. Amended 2009 tax return Because he is still a bona fide resident, he enters “not ended” in the second blank space. Amended 2009 tax return Line 2. Amended 2009 tax return   He checks the box labeled “Rented house or apartment” to describe his type of living quarters in American Samoa. Amended 2009 tax return Lines 3a and 3b. Amended 2009 tax return   He checks “No” on line 3a because no family members lived with him. Amended 2009 tax return He leaves line 3b blank. Amended 2009 tax return Lines 4a and 4b. Amended 2009 tax return   He checks “No” on line 4a because he did not maintain a home outside American Samoa. Amended 2009 tax return He leaves line 4b blank. Amended 2009 tax return Line 5. Amended 2009 tax return   He enters the name and address of his employer, Samoa Products Co. Amended 2009 tax return It is a private American Samoa corporation. Amended 2009 tax return Line 6. Amended 2009 tax return   He enters the dates of his 2-week vacation to New Zealand from November 11 to November 25. Amended 2009 tax return That was his only trip outside American Samoa during the year. Amended 2009 tax return Line 7. Amended 2009 tax return   He enters the $24,000 in wages he received from Samoa Products Co. Amended 2009 tax return Line 9. Amended 2009 tax return   He received $220 in dividends from an American Samoa corporation, which he enters here. Amended 2009 tax return He also received $10,000 of dividends from a U. Amended 2009 tax return S. Amended 2009 tax return corporation, but he will enter that amount only on his Form 1040 because the U. Amended 2009 tax return S. Amended 2009 tax return dividends do not qualify for the possession exclusion. Amended 2009 tax return Line 15. Amended 2009 tax return   John totals the amounts on lines 7 and 9 to get the amount he can exclude from his gross income in 2013. Amended 2009 tax return He will not enter his excluded income on Form 1040. Amended 2009 tax return However, he will attach his completed Form 4563 to his Form 1040. Amended 2009 tax return Illustrated Example of Form 5074 Tracy Grey is a U. Amended 2009 tax return S. Amended 2009 tax return citizen who is a self-employed fisheries consultant with a tax home in New York. Amended 2009 tax return Her only income for 2013 was net self-employment income of $80,000. Amended 2009 tax return Of the $80,000, $20,000 was from consulting work in Guam and the rest was earned in the United States. Amended 2009 tax return Thinking she would owe tax to Guam on the $20,000, Tracy made estimated tax payments of $1,409 to Guam. Amended 2009 tax return She was not a bona fide resident of Guam during 2013. Amended 2009 tax return Tracy completes Form 1040 (not illustrated), reporting her worldwide income. Amended 2009 tax return Because the adjusted gross income on her Form 1040 was $50,000 or more and at least $5,000 of her gross income is from Guam, Tracy must file Form 5074 with her Form 1040. Amended 2009 tax return All amounts reported on Form 5074 are also reported on her Form 1040. Amended 2009 tax return See U. Amended 2009 tax return S. Amended 2009 tax return Citizen or Resident Alien (Other Than a Bona Fide Resident of Guam) in chapter 3. Amended 2009 tax return Completing Form 5074. Amended 2009 tax return   Tracy enters her name and social security number at the top of the form. Amended 2009 tax return Part I. Amended 2009 tax return   On Form 5074 (see later), Tracy enters her self-employment income from Guam ($20,000) on line 6. Amended 2009 tax return She has no other income from Guam, so the total on line 16 is $20,000. Amended 2009 tax return Part II. Amended 2009 tax return   Tracy's only adjustment in Part II is the deductible part of the self-employment tax on her net income earned in Guam. Amended 2009 tax return She enters $1,413 on line 21 and line 28. Amended 2009 tax return Her adjusted gross income on line 29 is $18,587. Amended 2009 tax return Part III. Amended 2009 tax return   Tracy made estimated tax payments of $1,409. Amended 2009 tax return She enters this amount on line 30, and again on line 34 as the total payments. Amended 2009 tax return Illustrated Example of Form 8689 Juan and Carla Moreno live and work in the United States. Amended 2009 tax return In 2013, they received $14,400 in income from the rental of a condominium they own in the U. Amended 2009 tax return S. Amended 2009 tax return Virgin Islands (USVI). Amended 2009 tax return The rental income was deposited in a bank in the USVI and they received $500 of interest on this income. Amended 2009 tax return They were not bona fide residents of the USVI during the entire tax year. Amended 2009 tax return The Morenos complete Form 1040 (not illustrated), reporting their income from all sources, including their interest income and the income and expenses from their USVI rental property (reported on Schedule E (Form 1040)). Amended 2009 tax return The Morenos take the standard deduction for married filing jointly, both are under 65, and they have no dependents. Amended 2009 tax return The Morenos also complete Form 8689 to determine how much of their U. Amended 2009 tax return S. Amended 2009 tax return tax shown on Form 1040, line 61 (with certain adjustments), must be paid to the U. Amended 2009 tax return S. Amended 2009 tax return Virgin Islands. Amended 2009 tax return See U. Amended 2009 tax return S. Amended 2009 tax return Citizen or Resident Alien (Other Than a Bona Fide Resident of the USVI) in chapter 3. Amended 2009 tax return The Morenos file their Form 1040, attaching Form 8689 and all other schedules, with the Internal Revenue Service. Amended 2009 tax return At the same time, they send a copy of their Form 1040 with all attachments, including Form 8689, to the Virgin Islands Bureau of Internal Revenue. Amended 2009 tax return The Virgin Islands Bureau of Internal Revenue will process this copy. Amended 2009 tax return Completing Form 8689. Amended 2009 tax return   Juan and Carla enter their names and Juan's social security number at the top of the form. Amended 2009 tax return Part I. Amended 2009 tax return   The Morenos enter their income from the USVI in Part I (see later). Amended 2009 tax return The interest income is entered on line 2 and the net rental income of $6,200 ($14,400 of rental income minus $8,200 of rental expenses) is entered on line 11. Amended 2009 tax return The Morenos' total USVI income of $6,700 is entered on line 16. Amended 2009 tax return Part II. Amended 2009 tax return   The Morenos have no adjustments to their USVI income, so they enter zero (-0-) on line 28, and $6,700 on line 29. Amended 2009 tax return Their USVI adjusted gross income (AGI) is $6,700. Amended 2009 tax return Part III. Amended 2009 tax return   On line 30, the Morenos enter the amount from Form 1040, line 61 ($4,539). Amended 2009 tax return Their Form 1040 does not show any entries required on line 31, so they leave that line blank and enter $4,539 on line 32. Amended 2009 tax return   The Morenos enter their worldwide AGI, $54,901 (Form 1040, line 38), on line 33. Amended 2009 tax return Next, they find what percentage of their AGI is from USVI sources ($6,700 ÷ $54,901 = 0. Amended 2009 tax return 122) and enter that as a decimal on line 34. Amended 2009 tax return They then apply that percentage to the U. Amended 2009 tax return S. Amended 2009 tax return tax entered on line 32 to find the amount of U. Amended 2009 tax return S. Amended 2009 tax return tax allocated to USVI income ($4,539 x 0. Amended 2009 tax return 122 = $554), and enter that amount on line 35. Amended 2009 tax return Part IV. Amended 2009 tax return   Part IV is used to show payments of income tax to the USVI only. Amended 2009 tax return The Morenos had no tax withheld by the U. Amended 2009 tax return S. Amended 2009 tax return Virgin Islands, but made estimated tax payments to the USVI of $400, which they entered on lines 37 and 39. Amended 2009 tax return They include this amount ($400) in the total payments on Form 1040, line 72. Amended 2009 tax return On the dotted line next to the entry space for line 72, they enter “Form 8689” and show the amount. Amended 2009 tax return The Morenos do not complete Form 1116 because they receive credit on Form 1040, line 72, for the tax paid to the USVI. Amended 2009 tax return   The income tax they owe to the USVI ($154) is shown on Form 8689, line 44. Amended 2009 tax return They enter this amount on line 45. Amended 2009 tax return They also include this additional amount ($154) on the dotted line next to the entry space and in the total on Form 1040, line 72. Amended 2009 tax return The Morenos will pay their USVI tax at the same time they file the copy of their U. Amended 2009 tax return S. Amended 2009 tax return income tax return with the U. Amended 2009 tax return S. Amended 2009 tax return Virgin Islands. Amended 2009 tax return This image is too large to be displayed in the current screen. Amended 2009 tax return Please click the link to view the image. Amended 2009 tax return Form 4563, page 1 for John Black This image is too large to be displayed in the current screen. Amended 2009 tax return Please click the link to view the image. Amended 2009 tax return Form 5074, for Tracy Grey This image is too large to be displayed in the current screen. Amended 2009 tax return Please click the link to view the image. 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The Amended 2009 Tax Return

Amended 2009 tax return Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. Amended 2009 tax return Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. Amended 2009 tax return Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. Amended 2009 tax return Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. Amended 2009 tax return However, a joint undertaking merely to share expenses is not a partnership. Amended 2009 tax return For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Amended 2009 tax return The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Amended 2009 tax return Organizations formed after 1996. Amended 2009 tax return   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. Amended 2009 tax return An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Amended 2009 tax return An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Amended 2009 tax return An insurance company. Amended 2009 tax return Certain banks. Amended 2009 tax return An organization wholly owned by a state, local, or foreign government. Amended 2009 tax return An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Amended 2009 tax return Certain foreign organizations identified in section 301. Amended 2009 tax return 7701-2(b)(8) of the regulations. Amended 2009 tax return A tax-exempt organization. Amended 2009 tax return A real estate investment trust. Amended 2009 tax return An organization classified as a trust under section 301. Amended 2009 tax return 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Amended 2009 tax return Any other organization that elects to be classified as a corporation by filing Form 8832. Amended 2009 tax return For more information, see the instructions for Form 8832. Amended 2009 tax return Limited liability company. Amended 2009 tax return   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Amended 2009 tax return Unlike a partnership, none of the members of an LLC are personally liable for its debts. Amended 2009 tax return An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. Amended 2009 tax return 7701-3. Amended 2009 tax return See Form 8832 and section 301. Amended 2009 tax return 7701-3 of the regulations for more details. Amended 2009 tax return A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Amended 2009 tax return Organizations formed before 1997. Amended 2009 tax return   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. Amended 2009 tax return Community property. Amended 2009 tax return    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. Amended 2009 tax return They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. Amended 2009 tax return A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Amended 2009 tax return   A qualified entity is a business entity that meets all the following requirements. Amended 2009 tax return The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. Amended 2009 tax return No person other than one or both spouses would be considered an owner for federal tax purposes. Amended 2009 tax return The business entity is not treated as a corporation. Amended 2009 tax return   For more information about community property, see Publication 555, Community Property. Amended 2009 tax return Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Amended 2009 tax return Family Partnership Members of a family can be partners. Amended 2009 tax return However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Amended 2009 tax return If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. Amended 2009 tax return If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Amended 2009 tax return They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. Amended 2009 tax return Capital is material. Amended 2009 tax return   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Amended 2009 tax return Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Amended 2009 tax return Capital is not material. Amended 2009 tax return   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. Amended 2009 tax return Capital interest. Amended 2009 tax return   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. Amended 2009 tax return The owner withdraws from the partnership. Amended 2009 tax return The partnership liquidates. Amended 2009 tax return   The mere right to share in earnings and profits is not a capital interest in the partnership. Amended 2009 tax return Gift of capital interest. Amended 2009 tax return   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. Amended 2009 tax return It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Amended 2009 tax return The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. Amended 2009 tax return Purchase. Amended 2009 tax return   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. Amended 2009 tax return The fair market value of the purchased interest is considered donated capital. Amended 2009 tax return For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Amended 2009 tax return Example. Amended 2009 tax return A father sold 50% of his business to his son. Amended 2009 tax return The resulting partnership had a profit of $60,000. Amended 2009 tax return Capital is a material income-producing factor. Amended 2009 tax return The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Amended 2009 tax return The $24,000 must be allocated to the father as compensation. Amended 2009 tax return Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. Amended 2009 tax return The son's share of partnership profit cannot be more than $18,000. Amended 2009 tax return Business owned and operated by spouses. Amended 2009 tax return   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. Amended 2009 tax return If so, they should report income or loss from the business on Form 1065. Amended 2009 tax return They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Amended 2009 tax return However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Amended 2009 tax return Qualified Joint Venture Election. Amended 2009 tax return   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. Amended 2009 tax return A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. Amended 2009 tax return   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. Amended 2009 tax return All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Amended 2009 tax return Each spouse takes into account his or her respective share of these items as a sole proprietor. Amended 2009 tax return Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Amended 2009 tax return For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. Amended 2009 tax return e. Amended 2009 tax return , based on their respective interests in the venture). Amended 2009 tax return   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Amended 2009 tax return Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Amended 2009 tax return   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Amended 2009 tax return However, this may not be true if either spouse exceeds the social security tax limitation. Amended 2009 tax return   For more information on qualified joint ventures, go to IRS. Amended 2009 tax return gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Amended 2009 tax return ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Amended 2009 tax return The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Amended 2009 tax return The agreement or modifications can be oral or written. Amended 2009 tax return Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. Amended 2009 tax return This filing date does not include any extension of time. Amended 2009 tax return If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Amended 2009 tax return Terminating a Partnership A partnership terminates when one of the following events takes place. Amended 2009 tax return All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. Amended 2009 tax return At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. Amended 2009 tax return Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. Amended 2009 tax return See section 1. Amended 2009 tax return 708-1(b) of the regulations for more information on the termination of a partnership. Amended 2009 tax return For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Amended 2009 tax return 708-1(c) and 1. Amended 2009 tax return 708-1(d) of the regulations. Amended 2009 tax return Date of termination. Amended 2009 tax return   The partnership's tax year ends on the date of termination. Amended 2009 tax return For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Amended 2009 tax return For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. Amended 2009 tax return Short period return. Amended 2009 tax return   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Amended 2009 tax return The return is due the 15th day of the fourth month following the date of termination. Amended 2009 tax return See Partnership Return (Form 1065), later, for information about filing Form 1065. Amended 2009 tax return Conversion of partnership into limited liability company (LLC). Amended 2009 tax return   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Amended 2009 tax return The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. Amended 2009 tax return   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Amended 2009 tax return Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Amended 2009 tax return If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Amended 2009 tax return For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Amended 2009 tax return   The same rules apply if an LLC classified as a partnership is converted into a partnership. Amended 2009 tax return IRS e-file (Electronic Filing) Please click here for the text description of the image. Amended 2009 tax return e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). Amended 2009 tax return Other partnerships generally have the option to file electronically. Amended 2009 tax return For details about IRS e-file, see the Form 1065 instructions. Amended 2009 tax return Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. Amended 2009 tax return All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. Amended 2009 tax return However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Amended 2009 tax return Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. Amended 2009 tax return Investing partnership. Amended 2009 tax return   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. Amended 2009 tax return They own the property as co-owners. Amended 2009 tax return They reserve the right separately to take or dispose of their shares of any property acquired or retained. Amended 2009 tax return They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Amended 2009 tax return Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. Amended 2009 tax return Operating agreement partnership. Amended 2009 tax return   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. Amended 2009 tax return They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Amended 2009 tax return They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Amended 2009 tax return They do not jointly sell services or the property produced or extracted. Amended 2009 tax return Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. Amended 2009 tax return However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. Amended 2009 tax return Electing the exclusion. Amended 2009 tax return   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. Amended 2009 tax return This filing date includes any extension of time. Amended 2009 tax return See Regulations section 1. Amended 2009 tax return 761-2(b) for the procedures to follow. Amended 2009 tax return Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. Amended 2009 tax return The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Amended 2009 tax return The return must be signed by a general partner. Amended 2009 tax return If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Amended 2009 tax return A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. Amended 2009 tax return See the Instructions for Form 1065 for more information about who must file Form 1065. Amended 2009 tax return Partnership Distributions Partnership distributions include the following. Amended 2009 tax return A withdrawal by a partner in anticipation of the current year's earnings. Amended 2009 tax return A distribution of the current year's or prior years' earnings not needed for working capital. Amended 2009 tax return A complete or partial liquidation of a partner's interest. Amended 2009 tax return A distribution to all partners in a complete liquidation of the partnership. Amended 2009 tax return A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Amended 2009 tax return If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Amended 2009 tax return Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. Amended 2009 tax return Effect on partner's basis. Amended 2009 tax return   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. Amended 2009 tax return See Adjusted Basis under Basis of Partner's Interest, later. Amended 2009 tax return Effect on partnership. Amended 2009 tax return   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Amended 2009 tax return The partnership may be able to elect to adjust the basis of its undistributed property. Amended 2009 tax return Certain distributions treated as a sale or exchange. Amended 2009 tax return   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Amended 2009 tax return Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Amended 2009 tax return Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Amended 2009 tax return   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Amended 2009 tax return   This treatment does not apply to the following distributions. Amended 2009 tax return A distribution of property to the partner who contributed the property to the partnership. Amended 2009 tax return Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. Amended 2009 tax return Substantially appreciated inventory items. Amended 2009 tax return   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. Amended 2009 tax return However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. Amended 2009 tax return Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Amended 2009 tax return Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Amended 2009 tax return If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. Amended 2009 tax return For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Amended 2009 tax return Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Amended 2009 tax return Example. Amended 2009 tax return The adjusted basis of Jo's partnership interest is $14,000. Amended 2009 tax return She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. Amended 2009 tax return Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Amended 2009 tax return Any gain on the land will be recognized when she sells or otherwise disposes of it. Amended 2009 tax return The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Amended 2009 tax return Marketable securities treated as money. Amended 2009 tax return   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Amended 2009 tax return This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Amended 2009 tax return   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). Amended 2009 tax return   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Amended 2009 tax return Loss on distribution. Amended 2009 tax return   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Amended 2009 tax return The adjusted basis of the partner's interest in the partnership exceeds the distribution. Amended 2009 tax return The partner's entire interest in the partnership is liquidated. Amended 2009 tax return The distribution is in money, unrealized receivables, or inventory items. Amended 2009 tax return   There are exceptions to these general rules. Amended 2009 tax return See the following discussions. Amended 2009 tax return Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Amended 2009 tax return Distribution of partner's debt. Amended 2009 tax return   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). Amended 2009 tax return   The partner is treated as having satisfied the debt for its fair market value. Amended 2009 tax return If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. Amended 2009 tax return   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. Amended 2009 tax return Net precontribution gain. Amended 2009 tax return   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. Amended 2009 tax return   The gain recognized is the lesser of the following amounts. Amended 2009 tax return The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. Amended 2009 tax return The “net precontribution gain” of the partner. Amended 2009 tax return This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. Amended 2009 tax return For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Amended 2009 tax return   The character of the gain is determined by reference to the character of the net precontribution gain. Amended 2009 tax return This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. Amended 2009 tax return For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Amended 2009 tax return Effect on basis. Amended 2009 tax return   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Amended 2009 tax return Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Amended 2009 tax return See Basis of Partner's Interest , later. Amended 2009 tax return   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. Amended 2009 tax return Exceptions. Amended 2009 tax return   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. Amended 2009 tax return For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. Amended 2009 tax return   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. Amended 2009 tax return Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. Amended 2009 tax return However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Amended 2009 tax return Example 1. Amended 2009 tax return The adjusted basis of Emily's partnership interest is $30,000. Amended 2009 tax return She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Amended 2009 tax return Her basis for the property is $20,000. Amended 2009 tax return Example 2. Amended 2009 tax return The adjusted basis of Steve's partnership interest is $10,000. Amended 2009 tax return He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Amended 2009 tax return His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Amended 2009 tax return Complete liquidation of partner's interest. Amended 2009 tax return   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. Amended 2009 tax return Partner's holding period. Amended 2009 tax return   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Amended 2009 tax return If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Amended 2009 tax return Basis divided among properties. Amended 2009 tax return   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. Amended 2009 tax return For property distributed after August 5, 1997, allocate the basis using the following rules. Amended 2009 tax return Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. Amended 2009 tax return If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Amended 2009 tax return Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. Amended 2009 tax return If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Amended 2009 tax return If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Amended 2009 tax return Allocating a basis increase. Amended 2009 tax return   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Amended 2009 tax return If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Amended 2009 tax return Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Amended 2009 tax return Example. Amended 2009 tax return Eun's basis in her partnership interest is $55,000. Amended 2009 tax return In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Amended 2009 tax return Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Amended 2009 tax return Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Amended 2009 tax return To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). Amended 2009 tax return This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Amended 2009 tax return She first allocates $35,000 to property A (its unrealized appreciation). Amended 2009 tax return The remaining $5,000 is allocated between the properties based on their fair market values. Amended 2009 tax return $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Amended 2009 tax return Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). Amended 2009 tax return Allocating a basis decrease. Amended 2009 tax return   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Amended 2009 tax return Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Amended 2009 tax return If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. Amended 2009 tax return Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Amended 2009 tax return Example. Amended 2009 tax return Armando's basis in his partnership interest is $20,000. Amended 2009 tax return In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Amended 2009 tax return Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Amended 2009 tax return Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Amended 2009 tax return To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). Amended 2009 tax return This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Amended 2009 tax return He allocates the entire $10,000 to property D (its unrealized depreciation). Amended 2009 tax return Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Amended 2009 tax return Distributions before August 6, 1997. Amended 2009 tax return   For property distributed before August 6, 1997, allocate the basis using the following rules. Amended 2009 tax return Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. Amended 2009 tax return If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. Amended 2009 tax return Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Amended 2009 tax return Partner's interest more than partnership basis. Amended 2009 tax return   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. Amended 2009 tax return Special adjustment to basis. Amended 2009 tax return   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. Amended 2009 tax return To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Amended 2009 tax return Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Amended 2009 tax return   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. Amended 2009 tax return However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. Amended 2009 tax return   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. Amended 2009 tax return If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. Amended 2009 tax return   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. Amended 2009 tax return The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. Amended 2009 tax return Example. Amended 2009 tax return Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Amended 2009 tax return At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. Amended 2009 tax return Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. Amended 2009 tax return Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. Amended 2009 tax return The value of the inventory received was 25% of the value of all partnership inventory. Amended 2009 tax return (It is immaterial whether the inventory he received was on hand when he acquired his interest. Amended 2009 tax return ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. Amended 2009 tax return His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). Amended 2009 tax return The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. Amended 2009 tax return The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). Amended 2009 tax return His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Amended 2009 tax return The remaining $11,500 is allocated to his new basis for the other property he received. Amended 2009 tax return Mandatory adjustment. Amended 2009 tax return   A partner does not always have a choice of making this special adjustment to basis. Amended 2009 tax return The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. Amended 2009 tax return The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Amended 2009 tax return If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. Amended 2009 tax return The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Amended 2009 tax return Required statement. Amended 2009 tax return   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. Amended 2009 tax return The statement must provide information necessary for the partner to compute the special basis adjustment. Amended 2009 tax return Marketable securities. Amended 2009 tax return   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. Amended 2009 tax return See Marketable securities treated as money under Partner's Gain or Loss, earlier. Amended 2009 tax return The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Amended 2009 tax return Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. Amended 2009 tax return These transactions include the following. Amended 2009 tax return Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. Amended 2009 tax return Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. Amended 2009 tax return Payments by accrual basis partnership to cash basis partner. Amended 2009 tax return   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. Amended 2009 tax return However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Amended 2009 tax return Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Amended 2009 tax return A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. Amended 2009 tax return This treatment is for purposes of determining gross income and deductible business expenses only. Amended 2009 tax return For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Amended 2009 tax return Guaranteed payments are not subject to income tax withholding. Amended 2009 tax return The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Amended 2009 tax return They are also listed on Schedules K and K-1 of the partnership return. Amended 2009 tax return The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. Amended 2009 tax return Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Amended 2009 tax return Generally, organizational and syndication expenses are not deductible by the partnership. Amended 2009 tax return However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). Amended 2009 tax return Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. Amended 2009 tax return Minimum payment. Amended 2009 tax return   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Amended 2009 tax return Example. Amended 2009 tax return Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Amended 2009 tax return The partnership has net income of $20,000. Amended 2009 tax return Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Amended 2009 tax return The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Amended 2009 tax return Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. Amended 2009 tax return If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. Amended 2009 tax return Self-employed health insurance premiums. Amended 2009 tax return   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Amended 2009 tax return The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Amended 2009 tax return However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Amended 2009 tax return   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. Amended 2009 tax return The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. Amended 2009 tax return For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Amended 2009 tax return Including payments in partner's income. Amended 2009 tax return   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Amended 2009 tax return Example 1. Amended 2009 tax return Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Amended 2009 tax return Her distributive share of the partnership income is 10%. Amended 2009 tax return The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Amended 2009 tax return She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Amended 2009 tax return Example 2. Amended 2009 tax return Lamont is a calendar year taxpayer who is a partner in a partnership. Amended 2009 tax return The partnership uses a fiscal year that ended January 31, 2013. Amended 2009 tax return Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Amended 2009 tax return He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Amended 2009 tax return Payments resulting in loss. Amended 2009 tax return   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. Amended 2009 tax return The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Amended 2009 tax return Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Amended 2009 tax return Losses. Amended 2009 tax return   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Amended 2009 tax return   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Amended 2009 tax return   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. Amended 2009 tax return   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Amended 2009 tax return If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. Amended 2009 tax return Gains. Amended 2009 tax return   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. Amended 2009 tax return More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Amended 2009 tax return The property in the hands of the transferee immediately after the transfer is not a capital asset. Amended 2009 tax return Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. Amended 2009 tax return More than 50% ownership. Amended 2009 tax return   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Amended 2009 tax return An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. Amended 2009 tax return An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Amended 2009 tax return For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Amended 2009 tax return If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. Amended 2009 tax return However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. Amended 2009 tax return Example. Amended 2009 tax return Individuals A and B and Trust T are equal partners in Partnership ABT. Amended 2009 tax return A's husband, AH, is the sole beneficiary of Trust T. Amended 2009 tax return Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Amended 2009 tax return As a result, A is a more-than-50% partner. Amended 2009 tax return This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. Amended 2009 tax return More information. Amended 2009 tax return   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Amended 2009 tax return Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. Amended 2009 tax return This applies whether a partnership is being formed or is already operating. Amended 2009 tax return The partnership's holding period for the property includes the partner's holding period. Amended 2009 tax return The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. Amended 2009 tax return The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Amended 2009 tax return Disguised sales. Amended 2009 tax return   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Amended 2009 tax return The distribution would not have been made but for the contribution. Amended 2009 tax return The partner's right to the distribution does not depend on the success of partnership operations. Amended 2009 tax return   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Amended 2009 tax return However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. Amended 2009 tax return If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. Amended 2009 tax return Form 8275 required. Amended 2009 tax return   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. Amended 2009 tax return For exceptions to this requirement, see section 1. Amended 2009 tax return 707-3(c)(2) of the regulations. Amended 2009 tax return   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. Amended 2009 tax return   Form 8275 must include the following information. Amended 2009 tax return A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Amended 2009 tax return A description of the transferred property or money, including its value. Amended 2009 tax return A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Amended 2009 tax return See section 1. Amended 2009 tax return 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. Amended 2009 tax return Contribution to partnership treated as investment company. Amended 2009 tax return   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. Amended 2009 tax return   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. Amended 2009 tax return These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Amended 2009 tax return For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Amended 2009 tax return Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Amended 2009 tax return   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Amended 2009 tax return Contribution to foreign partnership. Amended 2009 tax return   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. Amended 2009 tax return Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Amended 2009 tax return The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. Amended 2009 tax return   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. Amended 2009 tax return See the form instructions for more information. Amended 2009 tax return Basis of contributed property. Amended 2009 tax return   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. Amended 2009 tax return Allocations to account for built-in gain or loss. Amended 2009 tax return   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Amended 2009 tax return The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. Amended 2009 tax return This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Amended 2009 tax return   The partnership can use different allocation methods for different items of contributed property. Amended 2009 tax return A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Amended 2009 tax return See section 1. Amended 2009 tax return 704-3 of the regulations for allocation methods generally considered reasonable. Amended 2009 tax return   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Amended 2009 tax return If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. Amended 2009 tax return However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. Amended 2009 tax return Example. Amended 2009 tax return Areta and Sofia formed an equal partnership. Amended 2009 tax return Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. Amended 2009 tax return The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Amended 2009 tax return In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Amended 2009 tax return Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. Amended 2009 tax return To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Amended 2009 tax return However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. Amended 2009 tax return The entire $400 must be allocated to Areta. Amended 2009 tax return Distribution of contributed property to another partner. Amended 2009 tax return   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. Amended 2009 tax return   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. Amended 2009 tax return This amount is the difference between the property's basis and its fair market value at the time of contribution. Amended 2009 tax return The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Amended 2009 tax return Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. Amended 2009 tax return Disposition of certain contributed property. Amended 2009 tax return   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Amended 2009 tax return Unrealized receivables. Amended 2009 tax return If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Amended 2009 tax return Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Amended 2009 tax return When reading the definition, substitute “partner” for “partnership. Amended 2009 tax return ” Inventory items. Amended 2009 tax return If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Amended 2009 tax return Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Amended 2009 tax return Capital loss property. Amended 2009 tax return If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. Amended 2009 tax return The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. Amended 2009 tax return Substituted basis property. Amended 2009 tax return If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. Amended 2009 tax return Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Amended 2009 tax return Capital interest. Amended 2009 tax return   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Amended 2009 tax return This determination generally is made at the time of receipt of the partnership interest. Amended 2009 tax return The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. Amended 2009 tax return The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Amended 2009 tax return   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Amended 2009 tax return Profits interest. Amended 2009 tax return   A profits interest is a partnership interest other than a capital interest. Amended 2009 tax return If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. Amended 2009 tax return However, this does not apply in the following situations. Amended 2009 tax return The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. Amended 2009 tax return Within 2 years of receipt, the partner disposes of the profits interest. Amended 2009 tax return The profits interest is a limited partnership interest in a publicly traded partnership. Amended 2009 tax return   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Amended 2009 tax return Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Amended 2009 tax return If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Amended 2009 tax return Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Amended 2009 tax return Interest acquired by gift, etc. Amended 2009 tax return   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. Amended 2009 tax return Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). Amended 2009 tax return The basis of an interest in a partnership is increased or decreased by certain items. Amended 2009 tax return Increases. Amended 2009 tax return   A partner's basis is increased by the following items. Amended 2009 tax return The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Amended 2009 tax return The partner's distributive share of taxable and nontaxable partnership income. Amended 2009 tax return The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Amended 2009 tax return Decreases. Amended 2009 tax return   The partner's basis is decreased (but never below zero) by the following items. Amended 2009 tax return The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. Amended 2009 tax return The partner's distributive share of the partnership losses (including capital losses). Amended 2009 tax return The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Amended 2009 tax return This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. Amended 2009 tax return The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. Amended 2009 tax return Partner's liabilities assumed by partnership. Amended 2009 tax return   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. Amended 2009 tax return This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Amended 2009 tax return The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Amended 2009 tax return See Effect of Partnership Liabilities , later. Amended 2009 tax return Example 1. Amended 2009 tax return Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. Amended 2009 tax return The partnership assumed payment of the mortgage. Amended 2009 tax return The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. Amended 2009 tax return If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Amended 2009 tax return The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. Amended 2009 tax return However, this gain would not increase the basis of his partnership interest. Amended 2009 tax return Book value of partner's interest. Amended 2009 tax return   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. Amended 2009 tax return Example. Amended 2009 tax return Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Amended 2009 tax return His partner contributes $1,000 cash. Amended 2009 tax return While each partner has increased his capital account by $1,000, which will be re