2009 CCH. All Rights Reserved.
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 con
ned to a partnership as de
ned under local law. In income tax
law, the term is much broader and includes any unincorporated organization which carries on any business,
nancial operation, or venture, unless the Internal Revenue Code de
nes 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.
nition 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 pro
t. 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 classi
ed for tax purposes as partnerships.
. 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, and for this
reason and others it is usually desirable to have a written partnership agreement. However, the parties cannot by
their agreement abrogate the effect of the tax law.
cation 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
ling 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.
¶19,005 Partnership Tax Filing
Form 1065 must be
led 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