• not recognized as a taxable entity under income tax laws
• partners divide income and expenses and report their share on individual returns
• organization may be exempt from partnership rules if organized for investment purposes

• must be filed within first 75 days of the tax year
• partnership can elect to be taxed as a corp
• single-owner entities can elect to be taxed as a corp

• can participate in management and have joint and several liability for partnership debts 
• all partneships need atleast one
• partnership loss can be a passive loss if material participation test isnt met

• only liable up to their investment but can't participate in management
• partnership loss will be a passive loss

1. LLC owners are known as "members" and also have limited liability
2. limited liability partnerships file as partnerships for federal tax purposed unless partners elect differently

1. not taxable but require partners to calculate a substituted basis for their interest
2. gain/loss deferred by both parties when contributions exchanged for partnership interest
3. no distinction made between initial and future contributions
4. no deferral available for exchange of property for contributions

1. services contributed for a partnership interest create income in the amount of the value of the interest (also become adjusted basis)
2. no deferral for contributions that are essentially disguised sales or attempts to diversify stock holdings

• aggregate basis of assets in the hands of the partnership
• partnership takes carryover basis for contributed property
• holding periods and depreciation also carryover

• refers to the adjusted basis of each partners' interest in the partnership
• each partner takes a substituted basis in the partnership interest from the assets contributed to the partnership

• distributions, expenses, deductions, losses, nondeductible expenses, and decrease in liabilities (NOT CAPITAL EXPENDITURES)
• basis can't be reduced below 0.  gain will be recognized if need be.

• allocated based on the partners' profit sharing ratios
• allocated to both limited and general partners

1. use same year-end as its majority interest partners (more than 50% capital and P&L)
2. if no majority interest partner, partnership uses same year-end as all of its principal partners (5% P&L interest or more)
3. if neither exist, tax year determined by using least aggregate deferral method
4. fiscal year can be elected if there's a business purpose (with IRS permission)
5. natural business year (25% or more of gross receipts occur in last two months of the year for 3 straight years) can also be elected

• can elect a year-end with no more than 3 months of deferral
• deposit with IRS is required to compensate the government for the deferral benefits to partners if deferral benefit exceeds $500

1. items of income, gain, deduction, loss, or credit which a required to be separately stated, or which are specially allocated are removed from the partnership's ordinary income or loss determination process (each partners proportionate share is reported on schedule k-1)
2. remaining items are lumped together to produce the net ordinary income or loss, which is proportionately reported to each partner

• any tax items which might affect partners differently
• examples: dividends, capital gains and losses, tax-exempt interest, passive losses, charitable contributions, investment income, section 179 expenses, qualified dividends

• cash basis can be used unless it is a tax shelter, or one partner (at least) is a C corporation
• exceptions: farming and small businesses (average anual gross receipts for last 3 prior years is <$5,000)

• same rules as corporations
• up to $5,000 can be deducted but reduced $ for $ if expenses were more than 50,000 
• $10,000/$60,000 in 2010
• excess capitalized and amortized over 180 months
• syndication expenditures capitalized and not amortized

• general partners' shares are subject to self-employment tax
• limited partners' shares usually are not
• guaranteed payments for both generala nd limited are subject to self-employment tax

1. if capital is a material income producing factor, income allocated to a donated interest can't exceed the capital percentage
2. partnership income must be adjusted by the value of any services provided by donor family members

1. must have enough basis to deduct loss
2. can deduct losses only to extent of their at-risk amount (generally at-rick amount=partner basis-partner share of nonrecourse debt)
3. if passive loss, partner can deduct the loss only to the extent of passive income

1. treated as ordinary income to receiving partner at the partnership year-end
2. reduce partnership income and thereby reduce each partner's distributed shares of such income
3. deemed to be paid to the partner on the last day of the tax year

1. sales of contributed ordinary income or loss property (like inventory) generate ordinary income or loss unless sold MORE than 5 years later (except accounts receiveable).  
2. sales of contributed capital assets with built-in capital losses generate capital losses to contributing partner (for up to 5 years after).  for built-in capital losses, the amount of loss that can be recharacterized as capital is limited to the built-in loss

1. no deduction for a payment to a partner can be claimed by an accrual partnership until the cash basis partner includes the payment in income
2. losses on sales to partnership in which the TP is a controlling partner (more than 50% interest) are deferred as related party losses
3. sales of capital gain property by a controlling partner to a partnership will be deemed noncapital if the asset is not capital in the hands of the company
4. rules 2 and 3 also apply for sales between commonly controlled partnerships (brother-sister partnerships)

1. partnership generally don't recognize gain or loss on distributions
2. partners can recognize gains on nonliquidating distributions of cash. cash distributed in excess of outside basis causes gain recognition
3. nonliquidating distributions of property never trigger loss recognition but losses may be recognized for a liquidating distribution

• distribution to a continuing partner, including a draw by the partner
• reduce partners basis

basis effects of non liquidating dividends (specific order)

1. first, adjusted basis is allocated to cash distributions and cash deemed distributed
2. second, partner's adjusted basis is allocated to distributions of unrealized receivables and inventory in an amount equal to the partnership's basis in these assets
3. last, adjusted basis is allocated to other assets distributed.  deficiency in partner's adjusted basis is allocated to properties with unrealized losses and excess basis is allocated to properties with unrealized gains

• occurs when the entire partnership is liquidated or the interest of one partner is redeemed
• may result in gain or loss and it requires the partner to transfer his outside basis to assets received from partnership

1. distributions of cash trigger gain to extent cash exceeds outside basis
2. distributed property retains inside basis but this amount is adjusted depending upon outside basis of the partner (unlikely to be tested)
3. inventory and receivables must be distributed pro rata

1. distribution must consist only of cash, inventory, and unrealized receivables
2. outside basis of the partner's interests exceeds the sum of cash plus the inside basis of the receivables and inventory

1. deemed distributions (reduction in liabilities) are treated as cash distributions
2. distributions of marketable securities (up to the value of the securities less the partner's share of appreciated inherent securities) are treated as deemed distributions
3. distributions of built-in gain property to "other" partners (not contributing partner) within 7 years of original contribution causes gain recognition
4. "disproportionate" distributions of "hot assets" can also trigger income recognition

1. generate ordinary income or loss because the partner has not yet been taxed on accrued, but realized, income
2. inventory and unrealized receivable. for distributions, inventory has to be substantially appreciated (fmv>120% X adjusted basis) to qualify as hot asset
3. unrealized receivables generally are receivables of cash basis taxpayers. (section 1245 and 1250 recapture are also included as unrealized receivable)
4. inventory is defined as any asset other than cash, capital assets, or section 1231 assets

• results in a gain or loss calculated in the manner used for other assets
• portion of gain due to "hot" assets is not eligible for capital gain treatment

1. requires a closing of the partnership tax-year
2. results in a deemed distribution of assets to the partners

1. no part of the business continues to be carried on by any partner in the partnership form
2. there is a sale or exchange of at least a 50% interest in both capital and profits within a 12-month period