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Unformatted text preview: 299 Chapter 19 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 “partnershipÄ 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. Partner Defined . For tax purposes, a “partnerÄ is any member of a partnership, including, of course, members of joint ventures, syndicates, pools, and like groups classified for tax purposes as partnerships. Partnership Agreements . 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 incorpo- rated 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. Partnership Reporting ¶19,005 Partnership Tax Filing Form 1065 must be filed by the 15th day of the fourth month following the close of the partnership’s tax year. Each partner receives a Schedule K-1, which shows that partner’s share of partnership items. Taxation of Partners. For income tax purposes, partners report these items on their tax returns, even if no distributions have been made to them....
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- Summer '09
- Income tax in the United States