Partnerships—Formation and Operation
SUMMARY OF CHAPTER
The partnership form is probably the most common type of business organization involving more
than one owner. The term ‘‘partnership'' is not confined to a partnership as defined under local law. In
income tax law, the term is much broader and includes any unincorporated organization which carries on
any business, financial operation, or venture, unless the Internal Revenue Code defines such an
organization as a trust, estate, or corporation. The income tax reporting process for a partnership and the
income tax reporting of partnership income by a partner are examined in this chapter. Also discussed is
the determination of basis of an interest in a partnership.
Definition of a Partnership
¶19,001 Characteristics of a Partnership
A partnership exists when there is an association of two or more persons who carry on as co-
owners of a business for profit. Prior to 1997, an unincorporated entity was taxed as a corporation if the
entity had more than two of the four corporate characteristics. Treasury has now issued the check-the-
box regulations that allow unincorporated business entities to elect whether they want to be taxed as
corporations or partnerships.
. For tax purposes, a ‘‘partner'' is any member of a partnership, including, of
course, members of joint ventures, syndicates, pools, and like groups classified for tax purposes as
. Since the partnership form enables owners to make special allocations of
certain income, gain, loss, deductions, or credits that are not possible under the C or S corporation forms,
it is always desirable to have a written partnership agreement. However, the parties cannot by their
agreement abrogate the effect of the tax law.
Classification as a Partnership.
Under the check-the-box regulations, business owners that have not
incorporated may elect to be taxed as either a partnership (with two or more owners) or a C corporation.
Exclusion from Partnership Treatment
. The Commissioner may excuse certain partnerships from
the necessity of filing a partnership return. This privilege is available to only a small number of
unincorporated organizations—those which are formed (1) for investment purposes only and (2) for the
joint production, extraction, or use of property.
2007 CCH. All Rights Reserved.