Chapter 10
Partnership Taxation
Income Tax Fundamentals 2009
Gerald E. Whittenburg
Martha Altus-Buller
Student’s Copy
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A
partnership is a syndicate, group,
pool, joint venture or other
unincorporated organization
• Through which any business, financial
operation or venture is carried on
• Simply co-owning property does not
constitute a partnership
 Many co-owners of real estate choose to operate as a
limited partnership or LLC
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 When
forming a partnership
• Individuals contribute assets to partnership in
exchange for a partnership interest
 No
gain/loss is recognized unless
• Services are performed in exchange for partnership
interest
• Property is contributed with liabilities in excess of
basis, then
Recognized Gain = Liabilities Allocable to Others –
Adjusted Basis of Property Contributed
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 Partner’s
plus:
plus:
less:
equals:
basis in partnership interest
Cash contributed
Basis of property transferred
Gain recognized
Liabilities allocable to other partners
Initial basis
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+
+
+
+/-
Beginning Basis
Additional Contributions
Share of Taxable Income
Share of Capital Gains/Other Income
Distributions of Property or $
Share of Net Loss from Operations*
Share of Capital Losses/Other Deductions
Increase/Decrease in Liabilities
Basis in Partnership Interest (can’t drop below $0)
*Can’t take basis below 0 and must comply with at-risk limitations
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
Partnerships do not pay tax
• All information flows through to be reported by the
partners
• Return is due by 15th of 4th month following close of
partnership tax year

Must report all elements of income and expense
separately on Form 1065 (Partnership Tax Return)
• Schedule K-1 takes total partnership income/expenses
and allocates each item to each partner based upon
their ownership percentage
 Ordinary income/loss
 Special income/deduction items
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 Partnerships
may make distributions of
money or other property to partners
• ‘Current distribution’ does not completely
terminate partner’s interest
• No gain recognized by partner, unless partner’s
basis in partnership has reached zero
 Then only portion of current distribution in excess of
basis is taxable
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Partners cannot deduct losses from activities
in excess of their investment in those activities
 Definitions

• A “nonrecourse liability” is a debt for which the
borrower is not personally liable
• “Encumbered property” is the property pledged for a
liability

Taxpayers are at-risk for an amount equal to:
Cash and property contributed to partnership
+ Liabilities on encumbered properties (recourse debt)
+ Liabilities for which taxpayer is personally liable
(recourse debt)
+ Retained profits in activity
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 Real
estate acquired before 1987 is
not subject to at-risk rules
 For real estate acquired after 1986,
the “qualified nonrecourse financing”
is considered to be the amount at risk
• Defined as debt secured by real estate and
borrowed from person who regularly
engages in the lending of money
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
LLCs are a cross between a partnership and a corporation
• Treated generally as a partnership for tax purposes
• Each owner has limited liability

Advantages
•
•
•
•
•
•
•

Taxable income/loss passes through to owners
There is no general partner requirement
Owners in LLCs can participate in management
Owners have limited liability
LLC ownership interest is not a security
Tax attributes pass through to owners
LLCs offer greater tax flexibility than S corporations
Disadvantages
• Because of newness, limited amount of case law dealing with
LLCs
• States are not uniform in treatment of LLCs
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