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TOC for T65

INTRODUCTORY MATERIAL

ABOUT THE AUTHORS AND REVIEWERS . . .

LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

FORMATION OF PARTNERSHIP

Chapter 1: Organizational, Syndication, and Start-up Expenses (Pre-opening Expenses)

Introduction

KEY ISSUE 1A Understanding the Tax Treatment of Organizational Expenses.

Election to Deduct and Amortize

Election Options and Procedures

Special Rules for Cash-basis Partnerships

Nondeductible and Nonamortizable Organizational Expenses

When Does a Partnership's Business Commence?

Presentation of Deduction or Amortization Expense on Partnership Tax Return

Treatment of Organization Costs When Partnership Liquidates or Terminates

KEY ISSUE 1B Understanding the Tax Treatment of Syndication Costs.

KEY ISSUE 1C Understanding the Tax Treatment of Section 195 Start-up Expenses and Other Preopening Expenditures.

Start-up Period Defined

Election to Deduct and Amortize

Election Options and Procedures

Special Rules for Cash-basis Partnerships

Nondeductible and Nonamortizable Start-up Expenses

Presentation of Deduction or Amortization Expense on Partnership Tax Return

Treatment of Start-up Expenses upon the Disposition of a Trade or Business or Liquidation or Termination of the Partnership

Understanding How the Section 263(a) Regulations Affect Preopening Expenditures

Treatment of Amounts Required to Be Capitalized under the Section 263(a) Regulations

Impact of Section 263(a) Regulations on Preopening Expenditures to Start Up a New Business

Tax Compliance Procedure for Preopening Expenditures to Start Up a New Business

Separate Section 263(a) Capitalization Rules for Certain Costs to Facilitate Acquisitive Transactions

KEY ISSUE 1D Distinguishing Organizational, Syndication, and Start-up Expenses from Other Preopening Expenditures.

KEY ISSUE 1E Summary Table for Tax Treatment of Preopening Expenses.

ILLUSTRATION 1-1: Completed Election Statement to Capitalize Partnership Organizational Expenses

ILLUSTRATION 1-2: Completed Election Statement to Capitalize Partnership Start-up Expenses

ILLUSTRATION 1-3: Schedule K-1 Disclosing Amount of Capitalized Syndication Costs upon Winding Up of Partnership

ILLUSTRATION 1-4: Form 4562 Showing Amortization of Organizational and Start-up Expenses

Chapter 2: Contributions of Property or Services

Introduction

KEY ISSUE 2A Determining the Partnership's Basis in Contributed Property and Contributing Partner's Basis in Partnership Interest Received.

Impact of Gain Recognition by Partner

Single-basis Concept for Partnership Interest

KEY ISSUE 2B Understanding the Tax Effects of Liabilities.

Effect of Partnership Liabilities on Contributing Partner

Contribution of Property Encumbered by Debt

Effect of Liabilities on Existing Partners and the Partnership

Contribution of Cash-basis Receivables and Liabilities

KEY ISSUE 2C Determining Holding Periods of Contributed Property and Partnership Interest.

Holding Period of Partnership Interest

Partnership's Holding Period of Contributed Assets

KEY ISSUE 2D Contributing Recapture Property.

Effect on the Contributing Partner

Effect on the Partnership

KEY ISSUE 2E Characterizing Gain or Loss Recognized upon Contribution of Property.

Character of Gain to Contributing Partner

Character and Reporting of Gain to Other Partners

Character of Gain or Loss upon Partnership's Subsequent Sale of Contributed Property

KEY ISSUE 2F Determining Effect of Contribution on Accounting Methods.

Depreciation Methods

Suspended Losses

KEY ISSUE 2G Contributing Services.

ILLUSTRATION 2-1: Schedule K-1 Showing Contribution of Unencumbered Property

ILLUSTRATION 2-2: Schedule K-1 Showing Contribution of Encumbered Property

ILLUSTRATION 2-3: Schedule K-1 Showing Contribution Resulting in Negative Tax Basis Capital Account

ILLUSTRATION 2-4: Schedule K-1 Showing Contributing Partner's Basis from Preexisting Partnership Liabilities

ILLUSTRATION 2-5: Reporting Partner Recapture Gain Triggered by Contribution of Encumbered Property

ADMINISTRATIVE MATTERS

Chapter 3: Selecting the Tax Year

Introduction

KEY ISSUE 3A Understanding the Partnership Year-end Rules.

Adopting a Tax Year

Limitations on the Use of a Fiscal Year

KEY ISSUE 3B Applying the Required Year Rules.

Tax Years of Partnerships with Foreign or Tax-exempt Partners

Majority Interest Required Year Rule

Principal Partners Required Year Rule

Least Aggregate Deferral of Income Required Year Rule

Impact of Partners' Year-end Changes on Partnership's Required Year

Adoption of a Year-end for a New Partnership

Recognizing When a Partnership's Required Year Changes

Automatic Approval Process for Adoption, Change, or Retention of Tax Year

KEY ISSUE 3C Applying the Nonconforming Tax Year Rules.

Natural Business Year Exception

Facts and Circumstances Business Purpose Exception

Requesting a Year Based on a Business Purpose

Nonconforming Year Based on a Section 444 Election

When Is a Section 444 Election Beneficial?

KEY ISSUE 3D Electing a Tax Year under IRC Sec. 444.

Backup Section 444 Elections

KEY ISSUE 3E Required Payments (or Refunds) after Making the Section 444 Election.

Procedure to Make Required Payment

Required Payments Are Like Prepaid Tax Deposits

Timing of Refund Claim for Excess Required Payments

KEY ISSUE 3F Determining Tax Year of Member of Tiered Partnership.

General Rule

Exceptions

KEY ISSUE 3G Applying the Short Tax Year Rules.

Short Tax Years

Depreciation

ILLUSTRATION 3-1: Form 1128 for Partnership Requesting a Natural Business Year-end

Chapter 4: Accounting Methods

Introduction

KEY ISSUE 4A Knowing the Limitations on Use of the Cash Method.

Tax Shelter Limitation

Qualifying under Rev. Proc. 2001-10

Qualifying under Rev. Proc. 2002-28

Changing to the Cash Method

Handling Cost of Materials under Cash Method

Accounting Methods for Partnerships with Inventories

Choosing a Hybrid Accounting Method

Partnerships Engaged in Farming Business

Using the Nonaccrual Experience (NAE) Method

KEY ISSUE 4B Electing and Using the Accrual Method.

Handling Advance Trade Discounts

Electing to Defer Taxability of Advance Payments

Understanding the Economic Performance Rules

Applying the Three and a Half-month Safe Harbor Rule

Making Payments in Order for Certain Expenses to Be Deducted

Understanding When a Payment Is Considered Made

Recurring Item Exception to Economic Performance Rules

KEY ISSUE 4C Changing from the Cash to Accrual Method.

KEY ISSUE 4D Changing Accounting Methods.

Requesting an Accounting Method Change

Qualifying for a Six-month or 12-month Extension

Knowing When Nonautomatic Extensions Are Available

Computing the Section 481(a) Adjustment

Utilizing the Automatic Change Revenue Procedures

Involuntary Accounting Method Changes

KEY ISSUE 4E Changing Erroneous Methods of Accounting.

KEY ISSUE 4F Correcting Depreciation Deductions.

Applying the Automatic Change Procedures

Property Eligible for the Automatic Change Procedure

Property Not Eligible for the Automatic Change Procedure

ILLUSTRATION 4-1: Requesting a Cash to Accrual Accounting Method Change

ILLUSTRATION 4-2: Requesting an Accrual to Cash Accounting Method Change

Chapter 5: Partnership Tax Elections

Introduction

KEY ISSUE 5A Making the Check-the-box Election.

KEY ISSUE 5B Determining if a Partnership Exists and Electing Out of the Partnership Tax Provisions.

When Does a Partnership Exist for Tax Purposes?

One Method for Determining If a Partnership Exists

Co-owners Can Elect Out of Partnership Status in Some Circumstances

Why Elect Out?

Affirmatively Electing Out (Blank Form 1065 Method)

Electing Out Based on Facts and Circumstances

When Not to Elect Out

Electing Out for Husband-wife Qualified Joint Ventures

Special Rules for Unincorporated Businesses in Community Property States

Beware of Penalty for Failing to File Partnership Returns

KEY ISSUE 5C Using the Simplified Filing Rules for Electing Large Partnerships.

Computation of Taxable Income

Simplified Flow-through

Elections and Limitations

Termination of an Electing Large Partnership

Other Specially Treated Items

KEY ISSUE 5D Extending Time to Make a Partnership Election.

Automatic Extensions

Other (Nonautomatic) Extensions

ILLUSTRATION 5-1: Filing an Entity Classification Election

ILLUSTRATION 5-2: Electing Out of Partnership Tax Status

Chapter 6: The TMP, Amended Returns, and Due Diligence in Form 1065 Preparation

Introduction

KEY ISSUE 6A Identifying the Tax Matters Partner (TMP).

How to Make the TMP Designation

Selection of a New TMP

Revocation of TMP Designation

Resignation of TMP

Merger or Termination

TMP under Criminal Investigation

Termination of TMP Designation

Who Is TMP When the Partnership Has Not Made a Designation?

KEY ISSUE 6B Identifying Partnership versus Nonpartnership Items.

What Is a Partnership Item?

When Does a Partnership Item Become a Nonpartnership Item?

Correcting Schedule K-1 Information with Form 8082 Disclosure

Special Rules for Tiered Ownership Structures

KEY ISSUE 6C Requesting an Administrative Adjustment (Amended Returns).

Form 8082 Is Used to Request Adjustment

Substituted Return (on Behalf of All Partners)

AAR Not Treated as a Substituted Return

What Happens If AAR Is Denied by IRS?

KEY ISSUE 6D Knowing the Statute of Limitations for Partnership Items.

Relationship of Individual and Partnership Statute of Limitations

Fraud

Substantial Understatement

No Return Filed

Partnership Items Become Nonpartnership Items

Extension of Statute

KEY ISSUE 6E Avoiding Form 1065 Preparer Penalties.

Understanding the Basic and Increased Preparer Penalties

Who Is a Preparer?

Exposure to Multiple Preparer Penalties from Pass-through Entity Returns

Meeting the Reliance Exception

Meeting the Adequate Disclosure Exception

Importance of Due Diligence

KEY ISSUE 6F IRS Registration and Regulation of Tax Return Preparers.

KEY ISSUE 6G Handling Conflicts between the Taxpayer Penalty Rules and Preparer Penalty Rules.

KEY ISSUE 6H Failure to File Penalty.

KEY ISSUE 6I Extending Due Date for Filing Partnership Return.

KEY ISSUE 6J Other Return Preparation Considerations.

Checklists for Avoiding a Return Preparer Penalty

Tax Return Preparation Engagement Letter

Other Tax Practice Tools

Circular 230 Tax Advice and Preparation Standards

Use and Disclosure of Tax Return Information

KEY ISSUE 6K Anticipating Partnership Audit Issues.

Package Audit Procedures

Related-party Transactions

Partnership/LLC Audit Issues

Partnership Audit Technique Guide

Schedule K-1 Matching

KEY ISSUE 6L Electronic Filing Requirements.

Available Methods for Signing e-filed Partnership Returns

Practitioner PIN Method

Scanned Form 8453 Method

Other Forms and Elections Requiring Signatures

Including Supporting Data with the Return

Availability to e-file Not Available

IRS Guidance

KEY ISSUE 6M Due Diligence.

ILLUSTRATION 6-1: Filled-in Form 8082 Filed When Partner Has Not Received His Schedule K-1

ILLUSTRATION 6-2: Filled-in Form 8082 Requesting Administrative Adjustment

ILLUSTRATION 6-3: Disclosure to Avoid Substantial Understatement Penalty Made on Form 8275

ORDINARY INCOME

Chapter 7: Trade or Business Income

Introduction

KEY ISSUE 7A Reporting Receipts and Sales from Operations.

KEY ISSUE 7B Reporting Merchant Card and Third-party Payments.

KEY ISSUE 7C Reporting Receipts and Sales under the Cash Method.

KEY ISSUE 7D Reporting Receipts and Sales under the Accrual Method.

Reporting Receipts and Sales in Tax Year Earned

Deferring Taxation of Advance Payments for Services

Reporting Prepaid Inventory Sales

Advance Trade Discounts

Accounting for Returns and Allowances

KEY ISSUE 7E Using a Hybrid Method of Accounting.

KEY ISSUE 7F Reporting Farm Income.

Identifying Who Is a Farmer or Rancher

Proper Determination of Farm Income or Loss

KEY ISSUE 7G Reporting Income from Long-term Contracts.

Recognizing Exceptions to the Percentage-of-completion Method

Accounting for Long-term Contract Income

Applying the Special Rules for Manufacturing Contracts

KEY ISSUE 7H Reporting Income under the Percentage-of-completion Method.

Electing the Exempt Contract Percentage-of-completion Method

Understanding the Importance of the Estimated Cost to Complete Figure

Handling Loss Contracts

Handling Terminated Contracts

Electing to Use the 10% Method

Applying the Percentage-of-completion Method Look-back Rule

Calculating the Look-back Interest Adjustment

Reporting Look-back Interest

KEY ISSUE 7I Reporting Income under the Completed Contract Method.

Qualifying for the Completed Contract Method

Determining the Date of Contract Completion

Computing Income under the Completed Contract Method

KEY ISSUE 7J Reporting Ordinary Income (Loss) from Other Partnerships, Estates, and Trusts.

ILLUSTRATION 7-1: Available Accounting Methods

ILLUSTRATION 7-2: Form 1065 and Schedules K and K-1 showing Income (Loss) from Other Partnerships

Chapter 8: Inventory and Cost of Goods Sold

Introduction

KEY ISSUE 8A Understanding When Inventory Must be Maintained.

Small Taxpayer Exceptions

Service Providers

KEY ISSUE 8B Identifying and Valuing Items in Inventory.

Valuing Inventory under the Cost Method

Valuing Inventory under the Lower of Cost or Market Method

Determining Market Value under the Lower of Cost or Market

Valuing Inventory at Net Realizable Value

Average Cost Method of Inventory Valuation

Identifying Items in Ending Inventory

Automatic Change Procedures for Changes in Inventory Methods

KEY ISSUE 8C Recognizing Alternate Inventory Valuation Methods.

KEY ISSUE 8D Deducting Inventory Shrinkage.

Using Estimates to Determine Inventory Shrinkage

Changing Method of Accounting for Inventory Shrinkage

Using the Retail Safe Harbor Method

KEY ISSUE 8E Deducting Obsolete and Unsalable Inventory.

Identifying Subnormal Goods

Establishing a Bona Fide Selling Price

KEY ISSUE 8F Using the LIFO Method of Accounting.

Technical Requirements for Using LIFO

Electing the LIFO Inventory Method

Making the Section 472(d) Adjustment

Using the Dollar Value LIFO Method

Revoking a LIFO Inventory Election

KEY ISSUE 8G Applying the Section 263A Uniform Capitalization Rules.

Applying the UNICAP Rules to Resellers

Applying the UNICAP Rules to Producers

Applying the UNICAP Rules to Reseller-Producers

Applying IRC Sec. 263A to Real Estate Activities

Identifying Costs Subject to Capitalization

Capitalizing Interest Expense

Allocating Indirect, Administrative, Service, and Support Costs

Adopting or Changing UNICAP Procedures and Methods

KEY ISSUE 8H Using a Simplified Uniform Capitalization Method.

Simplified Production Method

Simplified Service Cost Method

Simplified Allocation Method for Resellers

KEY ISSUE 8I Computing and Reporting Cost of Goods Sold (Form 1125-A).

ILLUSTRATION 8-1: Costs Subject to Capitalization under IRC Sec. 263A

ILLUSTRATION 8-2: Reporting Deductible Materials and Supplies under the Small Taxpayer Exception

ILLUSTRATION 8-3: Electing the LIFO Method

ILLUSTRATION 8-4: Completing Schedule A, Cost of Goods Sold

ILLUSTRATION 8-5: Schedule K-1 Reporting Section 263A Excess Production Expenditures

Chapter 9: Nonbusiness Income

Introduction

KEY ISSUE 9A Reporting Various Items of Nonbusiness Income.

Net Income (Loss) from Rental Real Estate Activities

Other Gross Rental Income (Loss)

Interest Income

Dividends

Royalties

Capital Gain (Loss)

Collectibles (28%) Gain (Loss)

Other Income (Loss)

KEY ISSUE 9B Reporting Portfolio Income.

Distinguishing Portfolio Income from Trade or Business Income

Reporting Portfolio Income and Expenses

Reporting Requirements for Foreign Bank Accounts

KEY ISSUE 9C Reporting Dividends Subject to Capital Gain Rates.

KEY ISSUE 9D Reporting Rental Income.

Advance Rent and Deposits

Leases between Related Parties

Leases with Tax-exempt Entities

Reporting Rental Real Estate Income and Expenses

Reporting Trade or Business Income and Expenses

Relief for Active Participation in Real Estate Rentals

KEY ISSUE 9E Separately Stating Tax-free Income.

Common Types of Tax-free Income

State and Local Tax Incentive Payments

Handling Life Insurance Proceeds

Handling Other Types of Insurance Proceeds

ILLUSTRATION 9-1: Filled-in Form 8825 Reporting Rental Real Estate Income and Expenses

ASSET DISPOSITIONS

Chapter 10: Installment Sales and Like-kind Exchanges

Introduction

KEY ISSUE 10A Understanding the General Installment Sale Rules and Limitations.

Recognizing the Restrictions and Limitations

Selling a Partnership Interest

Handling Installment Sales of Contributed Property

KEY ISSUE 10B Computing and Reporting Installment Sale Gain.

Reporting Installment Sale Gain

Accounting for Depreciation Recapture

Reporting Installment Sales of Depreciable Real Estate

Contingent Payments

Electing Out of the Installment Method

KEY ISSUE 10C Reporting Installment Sales to Related Parties.

Applying the Depreciable Property Rule

Applying the Two-year Resale Rule

KEY ISSUE 10D Applying the Interest-charge Rules for Installment Receivables.

KEY ISSUE 10E Reporting Dealer Income from Installment Sales.

KEY ISSUE 10F Electing out of Installment Reporting.

KEY ISSUE 10G Disposing of Installment Obligations.

Sale, Exchange, or Satisfaction at Other Than Face Value

Disposition Other Than by Sale

Transactions Not Considered Dispositions

KEY ISSUE 10H Handling Installment Notes with Insufficient Interest.

KEY ISSUE 10I Repossessing Property Sold on Installment Basis.

KEY ISSUE 10J Understanding the General Like-kind Exchange Rules.

Identifying Like-kind Property

Handling Partnership-related Property

Giving or Receiving Boot

Reporting Like-kind Exchanges

Like-kind Property with Liabilities Attached

Related-party Exchanges

Depreciating the Acquired Property

KEY ISSUE 10K Reporting Like-kind Exchanges of Personal Property.

Depreciable Tangible Personal Property

Intangible and Nondepreciable Personal Property

KEY ISSUE 10L Handling Like-kind Exchanges of Multiple Properties.

KEY ISSUE 10M Handling Deferred Like-kind Exchanges.

Identification Period

Exchange Period

Reverse Like-kind Exchanges

Treatment of Partnership Liabilities in Deferred Like-kind Exchanges

Like-Kind Exchanges Affected by Disasters

Using Installment Reporting for Deferred Like-kind Exchanges

Using a Qualified Intermediary

Reporting Deferred Like-kind Exchanges

ILLUSTRATION 10-1: Reporting Related Party Installment Sale

ILLUSTRATION 10-2: Like-kind Exchange Worksheet

ILLUSTRATION 10-3: Reporting Like-kind Exchange

ILLUSTRATION 10-4: Reporting Installment Sale Income

Chapter 11: Trade or Business Property Transactions

Introduction

KEY ISSUE 11A Reporting Partnership Capital Gains and Losses.

Preparing the Proper Form

Taxing Capital Gains

Taxing Section 1231 Gains and Losses

Reporting Unrecaptured Section 1250 Gain

Handling Interaction of IRC Secs. 1250 and 751

Reporting Collectibles Gain

Reporting Sale of Qualified Small Business Stock

Rollover of QSBS Gain

KEY ISSUE 11B Computing Depreciation Recapture.

Reporting Section 1245 Recapture

Computing Section 1245 Recapture

Reporting Section 1250 Recapture

Computing Additional Depreciation

KEY ISSUE 11C Computing Amortization Recapture.

KEY ISSUE 11D Understanding Nonrecaptured Section 1231 Loss Carryovers.

Reporting Nonrecaptured Section 1231 Losses

KEY ISSUE 11E Deferring Gain from Involuntary Conversions.

Reporting Requirements

Defining Similar Property

Using Special Like-kind Rule for Condemned Real Property

Determining the Appropriate Replacement Period

Extending the Replacement Period

Reporting Gain when Property Not Replaced within Allowable Period

Replacing Property in Federally Declared Disaster Areas

KEY ISSUE 11F Deducting Casualty and Theft Losses of Business Property.

Computing the Deductible Casualty or Theft Amount

Reducing Loss by Insurance Proceeds or Other Reimbursements

Reporting Casualty and Theft Losses

Deducting Disaster Losses in Previous Tax Year

Fraudulent Investment Schemes

Deducting Section 1231 Gains and Losses

KEY ISSUE 11G Reporting an Abandonment of Business Property.

Abandoning Depreciable Property

Abandoning Nondepreciable Property

Abandoning a Partnership Interest

Proving a Completed Transaction Established by an Identifiable Event

Mineral Property

Determining Year the Loss Is Deductible

KEY ISSUE 11H Allocating Purchase Price When a Business Is Bought or Sold.

Identifying Assets that Constitute a Trade or Business

Allocating Purchase Price to Classes of Assets

Reporting Requirements

ILLUSTRATION 11-1: Partnership Notification of Partner--Sale of Partnership Interest Involving Section 1250 and 751 Property

ILLUSTRATION 11-2: Sample Filled-in Form 8594 for Allocation of Assets

ILLUSTRATION 11-3: Form 4797, Reporting Sale of Depreciable Real Property

ILLUSTRATION 11-4: Form 4797, Reporting Recapture Income

ILLUSTRATION 11-5: Statement Regarding Deferral of Gain on Involuntary Conversion

Chapter 12: Debt Discharge Income and Foreclosures

Introduction

KEY ISSUE 12A Understanding the Basic Debt Discharge Income Rules.

Contested Liability Doctrine

Loan Modifications

Triggering Debt Discharge Income by Transferring a Partnership Interest to a Creditor

Acquiring Related Party Debt

Partnership Allocation of Debt Discharge Income

Determining Insolvency at the Partner Level

Reducing Tax Attributes after Excluding Debt Discharge Income

KEY ISSUE 12B Discharging Qualified Real Property Business Debt.

Qualified Real Property Business Debt

Requirement to Make an Election

Requirement to Reduce Basis of Depreciable Real Property

Limitation on Excludable Income

"Looking Through" Disregarded Single-member LLCs

KEY ISSUE 12C Handling a Foreclosure Involving Recourse Debt.

KEY ISSUE 12D Handling a Foreclosure or Negotiated Principal Reduction Involving Nonrecourse Debt.

KEY ISSUE 12E Applying the Purchase Price Adjustment Rules to Reductions of Seller Financing Debt.

KEY ISSUE 12F Summarizing the Tax Results under Debt Discharge and Foreclosure Rules.

KEY ISSUE 12G Debt Discharge Reporting Requirements.

Information Reporting by Lenders on Form 1099-C

Partnership Reporting on Form 1065

Partner Reporting on Form 982

Reporting a Section 108(i) Election

KEY ISSUE 12H Special Election for Certain 2009 and 2010 Debt Discharge Transactions Has Ongoing Impact.

Section 108(i) Basics

Special Partnership Considerations

Section 108(i) Specifics

Additional Requirements for Partnerships

ILLUSTRATION 12-1: Schedule K-1 Reporting of Debt Discharge Income

ILLUSTRATION 12-2: Partner's Form 982 Reporting Excluded Debt Discharge Income under Qualified Real Property Business Debt Rule

ILLUSTRATION 12-3: Partner's Form 982 Reporting Excluded Debt Discharge Income under Insolvency Exception and Qualified Real Property Business Debt Rule

ILLUSTRATION 12-4: Partner's Form 982 Reporting Excluded Debt Discharge Income from Foreclosure under Insolvency Exception

PARTNERSHIP DEDUCTIONS

Chapter 13: Other Deductions

Introduction

KEY ISSUE 13A Reporting Salaries and Wages (Other than Guaranteed Payments to Partners).

Reporting Salaries and Wages on Form 1065

KEY ISSUE 13B Deducting Guaranteed Payments to Partners.

Handling Medical Insurance Premiums

Reporting Guaranteed Payments on Form 1065

Dealing with Guaranteed Payments Made with Property

KEY ISSUE 13C Reporting Repair and Maintenance Expenses.

Deducting Repair and Maintenance Costs on Form 1065

KEY ISSUE 13D Deducting Business and Nonbusiness Bad Debts.

Proving that a Bona Fide Debt Actually Exists

Making Payment as a Guarantor

Proving Worthlessness

Computing the Amount of the Bad Debt Deduction

Deducting a Partially Worthless Debt

Deducting a Totally Worthless Debt

Bankruptcy of the Debtor

Filing a Claim for Refund

Reporting Business Bad Debts on Form 1065

Deducting Nonbusiness Bad Debts

Statement Required for Bad Debts

Reporting Bad Debt Recoveries

KEY ISSUE 13E Deducting Rent Expense.

Deducting Prepaid Rent

Determining Impact of Section 263(a) Regulations

Other Rent Issues

Reporting Rent Expense on Form 1065

KEY ISSUE 13F Amortizing Intangible Assets.

Disposing of a Section 197 Intangible

Reporting Amortization Expense on Form 1065

KEY ISSUE 13G Claiming Other Deductions.

Chapter 14: Taxes and Interest Expense

Introduction

KEY ISSUE 14A Applying the General Interest Tracing Rules to Partnership-level Interest.

Accounts with Commingled Funds

The 30-day Rule

Ordering Rules When Debt Is Paid Off

Replacement Debt Used to Pay Off Old Debt

Notice 89-35 Exceptions to the Interest Tracing Rules

KEY ISSUE 14B Dealing with Interest Expense That Is Attributable to a Partnership Investment.

Notice 89-35

Partner Debt Allocable to Partnership Contributions

Partner Debt Allocable to Acquisition of Partnership Investment from Another Partner

Partnership-level Debt Used to Make Distributions to Partners

Where to Report on Schedule K-1

Notice 88-37 Covers Partner-level Reporting

KEY ISSUE 14C Identifying Personal Interest Expense (at the Partner Level).

Where to Report on Schedule K-1

KEY ISSUE 14D Identifying Trade or Business Interest Expense (at the Partner Level).

Deducting Prepaid Interest

Partnership/Partner Below-market-interest Loans

Where to Report on Schedule K-1

KEY ISSUE 14E Identifying Passive Activity Interest Expense (at the Partner Level).

Debt to Acquire Interest in a Partnership

Incidental Rental of Property and Other Recharacterization Rules

Where to Report Interest Expense to Carry an Oil and Gas Working Interest

Where to Report on Schedule K-1

KEY ISSUE 14F Identifying Investment Interest Expense.

Where to Report on Schedule K-1

KEY ISSUE 14G Capitalizing Interest Expense.

Exceptions for Certain Small Taxpayers

Interest Expense for Designated Property

De minimis Rule for Interest Capitalization

Eligible Debt

Production Period

Computation Period and Measurement Dates

Accumulated Production Expenditures

Depreciation

Traced Debt Amount

Excess Expenditure Amount

Special Rules for Pass-through Entities

Exceptions under Notice 88-99

Election Out of Interest Tracing

KEY ISSUE 14H Reporting Investment Income and Expenses on Schedules K and K-1.

KEY ISSUE 14I Deducting Real Property Taxes Incurred by Accrual-basis Partnerships.

Economic Performance Rule

Recurring Item Exception Election

Ratable Accrual Election

KEY ISSUE 14J Apportioning Real Property Taxes between Buyer and Seller.

KEY ISSUE 14K Deducting or Capitalizing Other Taxes.

Not All Taxes Are Currently Deductible

Sales Taxes

Assessments for Local Benefits

UNICAP Rules

Election to Capitalize

Payroll Taxes

ILLUSTRATION 14-1: Investment Interest Expense and Related Items

ILLUSTRATION 14-2: Schedule E Reporting Interest Expense Allocable to General Partnership Investment

ILLUSTRATION 14-3: Schedule E Reporting Interest Expense Allocable to Partnership Interest Investment

Chapter 15: Tax Depreciation and Depletion

Introduction

KEY ISSUE 15A Understanding the Tax Depreciation Options for Post-1986 Property.

Using the Proper MACRS Recovery Period

Computer Software

KEY ISSUE 15B Bonus Depreciation.

Qualified Property for 100% Bonus Depreciation

Election to Claim 100% Bonus Depreciation for Self-constructed Components

Qualified Restaurant Property and Qualified Retail Improvement Property Are Potentially Eligible for 100% Bonus Depreciation

Claiming 100% Bonus Depreciation on the Partnership Return

Election to Step-down 100% Bonus Depreciation to 50% Bonus Depreciation for Tax Year That includes 9/9/10

Impact of 100% Bonus Depreciation on Mid-quarter Convention

Impact of 100% Bonus Depreciation on Vehicles Subject to Luxury Auto Depreciation Limits

Impact on New Heavy SUVs

Favorable AMT Treatment

Bonus Depreciation after Technical Termination

Bonus Depreciation in Other Carryover Basis Situations

Short Tax Years

Acquisition and Disposition in Same Year

Electing Out of Bonus Depreciation

Coordination of Bonus Depreciation with Other Depreciation Deductions

Comparing 100% Bonus Depreciation to Section 179 Deduction

KEY ISSUE 15C Applying the ACE Depreciation Computation Rules.

KEY ISSUE 15D Understanding the Form 4562 and Tax Return Presentation Rules.

Depreciation or Amortization of Section 754 Basis Adjustments

Section 179 Expense

Bonus Depreciation

What If the Partnership Has Multiple Trade or Business Activities?

Amounts Capitalized as Depreciable Property under IRC Sec. 263A

KEY ISSUE 15E Applying the MACRS Half-year and Midquarter Conventions.

Applying the Midquarter Convention

Property Acquired and Sold in Same Year

Convention in Year of Disposition

Allocations in Year of Nonrecognition Transaction

KEY ISSUE 15F Claiming the Section 179 Deduction.

Reduced Section 179 Deduction for SUVs

No Proration of Section 179 Deduction Required

Section 179 Deduction Is Not Subject to UNICAP

Property Ineligible for Section 179 Deduction

Applying the Section 179 Deduction Phase-out Rule

Dollar Value Limitation for Partners

Applying the Section 179 Taxable Income Limitation

Taxable Income from Active Conduct of Trade or Business

Application of Taxable Income Limitation to Partnerships and Partners

Carryover of Section 179 Deductions Limited by the Taxable Income Limitation

Special Carryover Rules for Partnerships and Partners

Effect of Property Dispositions on Section 179 Deduction Carryovers

Noncorporate Lessors Are Generally Ineligible for Section 179 Benefits

Trusts and Estates Are Ineligible for Section 179 Benefits

Disposition of Section 179 Property and Recapture of the Section 179 Deduction

Fiscal-year Partnership Issue

Temporary Section 179(f) Deduction for Qualified Real Property

KEY ISSUE 15G Handling Short Year Depreciation.

Depreciation for Property Placed in Service or Disposed of during a Short Year

Computing the Midpoint of the Short Year under the Half-year Convention

Computing the Midpoint of a Short Year Using the Midquarter Convention

No Short Year Adjustment under Midmonth Convention

Computing First-year Depreciation in a Short Year

Computing Subsequent Years' Depreciation

KEY ISSUE 15H Depreciating an Optional Basis Adjustment.

Step-up or Step-down Relates to Section 197 Intangible Asset

Impact of Anti-churning Rules on Basis Adjustments Allocable to Intangibles

Effect of Section 708 Technical Terminations

KEY ISSUE 15I Allocating Depreciation Recapture Income.

Allocations of Unrecaptured Section 1250 Gain

KEY ISSUE 15J Depreciating Assets Acquired in Like-kind Exchange and Involuntary Conversion Transactions.

Depreciating the Exchanged Basis Amount

Depreciating the Excess Basis Amount

Involuntary Conversion Replacement Property Acquired before Disposition of Relinquished Property

Transactions Involving Nondepreciable Property

Depreciating Passenger Automobiles

Using Optional Depreciation Tables

Taking Advantage of the Election Out Privilege

KEY ISSUE 15K Depreciating MACRS Property after Changes in Use.

Shorter Period and/or Faster Method after Change in Use

Longer Period and/or Slower Method after Change in Use

Miscellaneous Rules

KEY ISSUE 15L Oil and Gas Depletion.

Effect of Depletion on Partners' Capital Accounts

Recapture upon Disposition

Percentage Depletion Preference

Schedule K-1 Reporting Issues

ILLUSTRATION 15-1: Filled-out Form 4562 Showing Depreciation and Section 179 Deduction

ILLUSTRATION 15-2: Filled-out Form 4562 Showing Change in Use

ILLUSTRATION 15-3: Partner's Schedule K-1 Reporting Disposition of Section 179 Property and Recapture of Section 179 Deductions

Chapter 16: Partnership Retirement Plans and Fringe Benefits

Introduction

KEY ISSUE 16A Reporting Retirement Plan Contributions.

Reporting for Employees and Partners

KEY ISSUE 16B Deducting Retirement Plan Contributions.

Deadline for Making Contributions

KEY ISSUE 16C Handling Partnership Fringe Benefits.

Partner Fringe Benefits Treated as Guaranteed Payments

Partner Fringe Benefits Treated as Employee Fringe Benefits

Partner Health Insurance Premiums

Partnership Contributions to Health Savings Accounts (HSAs)

Transportation Fringe Benefits

ILLUSTRATION 16-1: Comparison of Requirements for Various Plan Types for 2011

ILLUSTRATION 16-2: Schedule K-1 Reporting Health Insurance Premiums Paid for Partner

Chapter 17: Travel and Entertainment Expenses

Introduction

KEY ISSUE 17A Using Employee Reimbursement and Other Expense Allowance Arrangements.

Partnership Expenses Incurred by Partners

Reimbursements and Other Expense Allowance Arrangements

Substantiation Requirements

Per Diem Method of Substantiating Travel Expenses

Cell Phones and Similar Devices

KEY ISSUE 17B Applying the 50% Limitation on Meal and Entertainment Deductions.

50% Limitation Rules

Reporting the Disallowed Portion of Meals and Entertainment Expenses

Summary Table

KEY ISSUE 17C Limiting Deductions for Entertainment Facilities, Club Dues, and Gifts.

Entertainment Expenses

Entertainment Facilities

Clubs as Entertainment Facilities

Club Dues

Business Gifts

KEY ISSUE 17D Deducting Cost of Tickets to Athletic Events and Skybox Rentals.

KEY ISSUE 17E Travel and Transportation Expenses.

Travel Expenses

Substantiating and Reimbursing for Business Travel Expenses

Partner Travel Expenses

Employee's Personal Auto Used for Business

Partnership Deduction for Employer-provided Autos

Accounting for a Partner's Use of a Company Car

Reporting Taxable Fringe Benefits to Partners

Valuation Methods for Personal Use of Employer-provided Autos

Reporting Requirements

KEY ISSUE 17F Limiting Deductions for Leased Automobiles.

Inclusion Amount

Partial Business Use of Leased Auto

KEY ISSUE 17G Valuing Personal Use of Employer-provided Aircraft.

ILLUSTRATION 17-1: Completed Form 4562 Showing Business and Commuting Usage of Employer-provided Car

Chapter 18: Domestic Production Activities Deduction (Section 199)

Introduction

KEY ISSUE 18A Recognizing and Understanding the Key Terms and Abbreviations.

KEY ISSUE 18B Identifying Activities Eligible for the Deduction.

Identifying Manufactured, Produced, Grown, or Extracted (MPGE) Activities

Meeting the "In Significant Part" Requirement

Meeting the "In the United States" Requirement

KEY ISSUE 18C Determining Domestic Production Gross Receipts.

Computing Gross Receipts

Allocating Gross Receipts

Guaranteed Payments

Construction Gross Receipts

KEY ISSUE 18D Allocating Costs to Gross Receipts.

Allocating Cost of Goods Sold

Allocating Other Deductions and Costs

Allocations Using Statistical Sampling

Determining Qualified Production Activities Income

KEY ISSUE 18E Calculating the Deduction.

Determining W-2 Wages

AMT Implications

Computing the Deduction

Handling Losses

KEY ISSUE 18F Applying the Special Section 199 Pass-through Rules.

Determining a Partner's Share of W-2 Wages

Using the Small Business Simplified Overall Method

Using the Simplified Deduction Method

Determining QPAI and W-2 Limitations at the Entity Level

Handling Expanded Affiliated Groups

Disposing of a Partnership Interest

Reporting the Deduction

ILLUSTRATION 18-1: Schedule K-1 Reporting Domestic Production Activities Deductions

ILLUSTRATION 18-2: Sample Completed Form 8903

Chapter 19: Charitable Contributions

Introduction

KEY ISSUE 19A Charitable Contributions Are Not Deducted at the Partnership Level.

KEY ISSUE 19B Applying the Percentage of Contribution Base Rule.

The 50% Limitations for Individuals

The 30% Limitations for Individuals

The 20% Limitation for Individuals

KEY ISSUE 19C Passing Through Property Contributions Other Than Cash.

Charitable Contributions of Appreciated Property

Contributions of Used Clothing and Household Items

Contributions of Food Inventory

Donations of Patents and Other intellectual Property

Special Rules for Charitable Contributions of Automobiles, Boats, and Airplanes

Contributions of Facade Easements for Buildings in Registered Historic Districts

Limited Partnerships and LLC Interests

Recapture Rule for Donations of Tangible Personal Property

Contributions of Fractional Interests in Tangible Personal Property

Contributions of Taxidermy Property

KEY ISSUE 19D Meeting the Charitable Contribution Substantiation Requirements.

KEY ISSUE 19E Limiting the Deduction When the Donor Receives Something in Return--Deducting Quid Pro Quo Contributions.

Valuing Goods or Services Received in Return

Items That Can Be Ignored

Possible Deduction Other Than as Charitable Donation

KEY ISSUE 19F Determining When a Payment Is Deductible.

Payment by Check

Payment by Credit Card

ILLUSTRATION 19-1: Reporting Partners' Charitable Contributions

ILLUSTRATION 19-2: Completed Form 1125-A and Supporting Statement for an Inventory Contribution

BALANCE SHEET AND CAPITAL ACCOUNTS

Chapter 20: Schedule K-1, Capital Account Reconciliation with Schedules M-1, M-2, and M-3

Introduction

KEY ISSUE 20A Completing Schedule L--the Balance Sheet Per Books.

Tying Schedule L to the Books and Records

Reporting Assets on Schedule L

Reporting Liabilities on Schedule L

Reporting Partner's Capital on Schedule L

KEY ISSUE 20B Maintaining Tax-basis Capital Accounts.

KEY ISSUE 20C Responsibility for Maintaining Capital Accounts.

KEY ISSUE 20D Reporting Capital Accounts on Partnership Tax Returns.

KEY ISSUE 20E Identifying Differences between Book and Tax Income.

Schedule M-1

Permanent Differences

Timing Differences

Uncertain Tax Positions

KEY ISSUE 20F Reconciling Income Included in the Tax Return but Not Recorded on Books.

KEY ISSUE 20G Reconciling Expenses Recorded on Books but Not Included in the Tax Return.

KEY ISSUE 20H Reconciling Income Recorded on Books but Not Included in the Tax Return.

KEY ISSUE 20I Reconciling Expenses Included in the Tax Return but Not Recorded on Book Income.

KEY ISSUE 20J Reconciling Schedule K-1 Capital Accounts with Schedules L, M-1, and M-2.

Relationships between Schedules L, M-1, and M-2 of Form 1065 and the Schedule K-1 Capital Account Reconciliation

Schedule M-1

Schedule M-2

Disclosure of Basis of Schedule K-1 Capital Account Presentation

Purpose of the Schedule K-1 Capital Account Analysis

Sample Schedule K-1 in This Book

KEY ISSUE 20K Preparing Schedule M-3.

Introduction

Schedule C--Additional Information for Schedule M-3 Filers

When Must a Partnership File Schedule M-3?

Reportable Entity Partner (REP)

Schedule M-3 Preparation Details in a Nutshell

Book vs. Tax Assets

Preparing Part I of Schedule M-3--Financial Information and Net Income (Loss) Reconciliation

Preparing Part II of Schedule M-3--Reconciliation of Net Income (Loss) per Income Statement of Partnership with Income (Loss) per Return

Preparing Part III of Schedule M-3--Reconciliation of Net Income (Loss) per Income Statement of Partnership with Income (Loss) per Return--Expense/Deduction Items

Items Must Be Separately Stated and Adequately Disclosed

Reconciling Cost of Goods Sold, Interest Income, and Interest Expense

KEY ISSUE 20L Using Schedule M-3 to Decrease Exposure to the Substantial Understatement Penalty.

Adequate Disclosure for Tax Position

ILLUSTRATION 20-1: Schedule K-1 with Statement Showing Reconciliation of Capital Account to Schedule K-1 Line Items and Reconciliation to Schedules M-1, M-2, and K

ILLUSTRATION 20-2: Reporting Book-tax Differences on Schedule M-1

ILLUSTRATION 20-3: Reporting Book-tax Difference on Schedule M-3

PASS THROUGH TO PARTNERS

Chapter 21: Partnership Pass-through Items

Introduction

KEY ISSUE 21A Summarizing What Is New on the Schedule K-1 (and Form 1065).

Schedule K-1 Changes

Other Form Changes

KEY ISSUE 21B Understanding the Purpose of Schedule K-1 (and Schedule K).

KEY ISSUE 21C Nonseparately Stated Income or Loss and Separately Stated Items.

Cross-reference to Schedule K-1 Topics

Nonseparately Stated Income or Loss

Separately Stated Items

KEY ISSUE 21D Reporting Results of Operations.

When Pass-through Is Reported by the Partner

Allocating Pass-through Items to Partners

Reporting Multiple Activities on Schedule K-1

KEY ISSUE 21E Knowing Where to Report (or Find) Income and Deductions on a Properly Prepared Schedule K-1.

Where to Report Regular Tax "P&L Items"

Where to Report (or Find) Commonly Encountered Items on a Schedule K-1

Take Advantage of the Sample Schedules K-1 in This Publication

KEY ISSUE 21F Reporting Separately Stated Partnership Items.

Determination of Items Required to Be Separately Stated

Reporting Specially Allocated Items

Reporting Portfolio Income on Schedule K-1

Medical, Dental, and Accident and Health Insurance Expenses under IRC Secs. 213 and 162(l)

Guaranteed Payments Related to Rental Properties

Other Partnership Items That Should Be Separately Reported

Self-employment Earnings under IRC Sec. 1402

Definition of Limited Partner for Self-employment Tax Purposes

Partnership Distributions

KEY ISSUE 21G Limitations on Losses and Deductions.

KEY ISSUE 21H Reporting Foreign Transactions.

Taxation of Foreign Owners

Foreign Tax Credits

Passing Foreign Taxes through to Partners

Substantiation Requirements

Categories of Foreign Source Income

Properly Allocating Foreign Taxes

KEY ISSUE 21I Reporting Partner's Share of Partnership Gross Income.

ILLUSTRATION 21-1: Revised Schedule K-1 for 2011 with Codes

ILLUSTRATION 21-2: Schedule K-1 Reporting Distribution of Marketable Securities

ILLUSTRATION 21-3: Reporting Foreign Tax Information to Partners

ILLUSTRATION 21-4: Sample Schedule K-1 Attachment Reporting By-activity Information Needed to Comply with Passive Loss Rules

ILLUSTRATION 21-5: Blank Schedule K-1 Attachment Reporting By-activity Information

ILLUSTRATION 21-6: Form 1065 Filing Requirements for Foreign Partnership

Chapter 22: Alternative Minimum Tax

Introduction

KEY ISSUE 22A Applying AMT Rules to Depreciation Adjustments and Preferences.

Depreciation of Property Placed in Service after 1986

Regular Tax and AMT Depreciation Recovery Periods--Property Placed in Service after 1998

Elections to Eliminate AMT Depreciation Adjustments--Property Placed in Service before 1999

Property Subject to the Bonus Depreciation Deduction

ACE Depreciation

KEY ISSUE 22B Impact of Partner Section 59(e) Elections to Minimize AMT.

Section 59(e) Election Made at the Partner Level

Circulation Expenditures

Research and Experimental Expenditures

Mining Exploration and Development Costs.

Intangible Drilling and Development Costs (IDC)

Disposition of Property Subject to the Section 59(e) Election.

KEY ISSUE 22C Gross Income and Deductions Allocable to Oil, Gas, and Geothermal Properties.

KEY ISSUE 22D Corporate Tax Preferences under IRC Sec. 291.

KEY ISSUE 22E Adjustments and Preferences from Passive Activities.

ILLUSTRATION 22-1: Schedule K-1 Reporting AMT and ACE Depreciation and Gain (Loss) Adjustments

ILLUSTRATION 22-2: Schedule K-1 Reporting Expenses to Which Optional 10-year Write-off Election Applies

ILLUSTRATION 22-3: Schedule K-1 Notification Regarding Disposition of Property to Which an Optional Five-year or 10-year Write-off Election May Apply

ILLUSTRATION 22-4: Reporting AMT Depreciation and Gain (Loss) Adjustments

ILLUSTRATION 22-5: Reporting R&D Expenses from Passive Activity

ILLUSTRATION 22-6: Schedule K-1 Statements Showing Alternative Treatments of IDC

Chapter 23: Reporting Credits Allocated to Partners

Introduction

KEY ISSUE 23A Identifying the Credits Composing the General Business Credit.

Tax Credit Recapture

KEY ISSUE 23B Low-income Housing Credit.

KEY ISSUE 23C Rehabilitation Credit.

KEY ISSUE 23D Passive Activity Credits.

KEY ISSUE 23E Other Credits.

Undistributed Capital Gains Credit--Code H

Alcohol and Cellulosic Biofuel Fuels Credit--Code I

Work Opportunity Credit--Code J

Disabled Access Credit--Code K

Empowerment Zone and Renewal Community Employment Credit--Code L

Credit for Increasing Research Activities--Code M

Credit for Employer Social Security and Medicare Taxes--Code N

Backup Withholding--Code O

Other Credits--Code P

ILLUSTRATION 23-1: Quick Reference to Other Credits Reported by Partnerships on Schedule K-1 Line 15, Code P

ILLUSTRATION 23-2: Partnership Reporting Pass-through of Credit to Partner

ILLUSTRATION 23-3: Sample Statement Reporting Recapture of Credits on a Partner's Schedule K-1

BASIS, ALLOCATIONS, AND LOSS LIMITATIONS

Chapter 24: Basis in the Partnership Interest (Outside Basis)

Introduction

KEY ISSUE 24A Knowing the Exceptions to the Equality of Inside and Outside Basis.

Knowing When Temporary Basis Imbalances Occur

Rebalancing Inside and Outside Basis

KEY ISSUE 24B Determining a Partner's Initial Outside Basis (No Liabilities Involved).

Outside Basis of Transferred Partnership Interest

Deficit Restoration Obligation

Staged Pay-in Arrangements

KEY ISSUE 24C The Effect of Liabilities on Initial Outside Basis.

Contingent Liabilities in Basis

KEY ISSUE 24D Adjusting a Partner's Initial Outside Basis.

Contributing Corporate Partner's Own Stock

The Zero Basis Rule

Effect of Deferred Losses on Outside Basis

KEY ISSUE 24E Outside Basis Adjustment Ordering Rules.

Allocation of Suspended Loss Among Separate Components and Impact on AMT Items

Outside Basis Adjustment from Noncash Distribution

KEY ISSUE 24F Alternative Method of Determining a Partner's Outside Basis.

KEY ISSUE 24G Partner's Outside Basis versus Partner's Capital Account.

ILLUSTRATION 24-1: Determination of Outside Basis from Partner's Schedule K-1

ILLUSTRATION 24-2: Carryforward Worksheet--Partner's Outside Basis Calculation

Chapter 25: Partner's Basis from Partnership Liabilities

Introduction

KEY ISSUE 25A Identifying What Constitutes a Partnership Liability.

KEY ISSUE 25B Applying Old Rules versus New Rules for Allocating Liabilities to Partners.

Effective Dates

Direct Partner Nonrecourse Loans and Guarantees

KEY ISSUE 25C Distinguishing between Recourse and Nonrecourse Liabilities under the New Rules.

Recourse Liabilities

Nonrecourse Liabilities

Qualified Nonrecourse Financing

Exculpatory Liabilities

Bifurcated Debt

Nonrecourse Loans from Partners

Favorable De Minimis Rule for Certain Partner Nonrecourse Loans and Guarantees

Favorable Wrapped Indebtedness Rule

Impact of Partner Affiliate Loans and Guarantees

Definition of Partner Affiliate

KEY ISSUE 25D Allocating Recourse Liabilities.

Determining a Partner's Economic Risk of Loss--No Value Liquidation Is Assumed

No Value Liquidation Defined

Timing of Payment Obligation

Payment Obligation Limited to Property

Allocations of Recourse Liabilities to Limited Partners

KEY ISSUE 25E Allocating True Nonrecourse Liabilities.

Partners' Shares of Minimum Gain

Partners' Shares of Section 704(c) Minimum Gain

Partners' Shares of Excess Nonrecourse Liabilities

Allocating Exculpatory Debts

KEY ISSUE 25F Handling Guarantees and Similar Arrangements.

Guarantee of Recourse Debt

Guarantee of Nonrecourse Debt or When Guarantor Partner Waives Subrogation Rights

De Minimis Rule

Tantamount to a Guarantee

Interest Guarantees

KEY ISSUE 25G Applying the Look-through Concept to Tiered Partnership Liabilities.

KEY ISSUE 25H Recognizing Transactions That Reallocate Partnership Liabilities.

Contributions and Distributions of Encumbered Property

Changes in Profit and Loss Sharing Ratios and Admission of New Partners

Payment of Partnership Liabilities

Changes in Partnership Minimum Gain

Changes in Partner or Partnership Status from General to Limited or Vice Versa

Like-kind Exchange of Partnership Properties Burdened by Liabilities

KEY ISSUE 25I Applying the Regulations on Liability Assumptions.

Determining the Amount of a Reg. 1.752-7 Liability

Contributing Reg. 1.752-7 Liabilities

Transfer of Interest by Partner Contributing Reg. 1.752-7 Liabilities

Liquidating Distribution to Partner Contributing Reg. 1.752-7 Liabilities

ILLUSTRATION 25-1: How to Classify Partnership Liabilities on Schedule K-1, Item K

ILLUSTRATION 25-2: Allocating Recourse Debt

ILLUSTRATION 25-3: Worksheet Allocating Nonrecourse Debt

Chapter 26: Making Valid Partnership Tax Allocations

Introduction

KEY ISSUE 26A Recognizing the Two Methods for Making Valid Tax Allocations.

Targeted Allocations

KEY ISSUE 26B Application of Economic Substance Requirement.

KEY ISSUE 26C The Practitioner's Role in Reviewing Partnership Allocations.

Amendments to the Partnership Agreement

Reviewing the Partnership Agreement

Reviewing the Partnership Tax Return

KEY ISSUE 26D Economic Effect Under the Safe Harbor Rules.

Deficit Capital Account Restoration Requirement

Qualified Income Offset as Alternative to Deficit Capital Account Restoration Requirement

KEY ISSUE 26E Maintaining Book Capital Accounts Under the Safe Harbor Rules.

Book Capital Account Maintenance Rules for Specific Items

Allocations of Depreciation and Amortization

KEY ISSUE 26F Revaluations of Partnership Property and Capital Accounts Under the Safe Harbor Rules.

Mandatory Revaluations

Optional Revaluations

Revaluations in a Depressed Market

Revaluation Mechanics

KEY ISSUE 26G Applying the Ceiling Rule.

KEY ISSUE 26H Substantial Effect Under the Safe Harbor Rules.

Shifting Allocations

Transitory Allocations

Chargebacks of Gain from Property Sales

Special Rules for Partners That Are Look-through Entities or Members of Consolidated Groups

KEY ISSUE 26I Allocating Nonrecourse Deductions.

Option to Use Safe Harbor Rules Instead of PIP

The Concept of Minimum Gain

Calculating Partnership Minimum Gain

Allocation of Nonrecourse Deductions

Determining the Amount of Partnership Nonrecourse Deductions

Minimum Gain Chargeback Provision

Exceptions to Minimum Gain Chargeback Requirements

Distributions of Proceeds from Nonrecourse Liabilities

Effect of Revaluing Book Capital Accounts

KEY ISSUE 26J Validating Partnership Tax Allocations Using the Partners' Interests in the Partnership (PIP) Concept.

Determining a Partner's Interest in the Partnership

Using Capital Accounts to Analyze PIP

Allocation of Nonrecourse Deductions

KEY ISSUE 26K Allocating Tax Credits.

KEY ISSUE 26L Interaction of Allocation Rules with Loss Limitation Provisions.

Chapter 27: When FMV and Basis of Contributed Property Differ--Section 704(c) Allocations

Introduction

KEY ISSUE 27A Understanding the Reason for IRC Sec. 704(c).

Reporting Requirements

Effective Date Rules

KEY ISSUE 27B Applying the Section 704(c) Ceiling Rule.

KEY ISSUE 27C Identifying the Permissible Section 704(c) Allocation Methods.

Anti-abuse Rule

Exception for Small Disparities

The Traditional Method

The Traditional Method with Curative Allocations

The Remedial Allocation Method

Depreciation Calculations under the Remedial Allocation Method

Aggregation of Contributed Property

Tiered Partnerships

KEY ISSUE 27D Allocating Gain/Loss upon Dispositions of Partnership Property.

Background

Allocating Gain/Loss When Basis Adjustment Applies to Section 704(c) Property

Contributions of Cash-basis Receivables and Liabilities

Installment Sale of Contributed Property

KEY ISSUE 27E Allocating Gain/Loss Triggered by Certain Distributions of Partnership Property.

Distributions of Contributed Property

Distribution of Built-in Loss Property

Exceptions for Certain Distributions

Installment Note Received from the Disposition of Section 704(c) Property

Impact of Assets-over Partnership Merger

Distributions to Partners that Previously Contributed Appreciated Property

Schedule K-1 Reporting Requirements

KEY ISSUE 27F Allocating Depreciation and Gains/Losses under IRC Sec. 704(c) and the Ceiling Rule.

Background

How to Report on Return

Allocating DD&A When Basis Adjustment Applies to Section 704(c) Property

Allocating Depreciation Recapture from Contributed Property

Allocations of Unrecaptured Section 1250 Gain

KEY ISSUE 27G Applying Section 704(c) Principles under the Safe Harbor Tax Allocation Rules.

KEY ISSUE 27H Applying IRC Sec. 704(c) to Technical Terminations.

ILLUSTRATION 27-1: Completed Section 704(c) Carryforward Worksheet

ILLUSTRATION 27-2: Completed Worksheet--Computing Contributing Partner's Section 704(c)(1)(B) Gain or Loss and Distributee's Basis in Property

ILLUSTRATION 27-3: Schedule K-1 Reporting of Distribution Affected by Section 704(c)(1)(B) Rules

Chapter 28: Allocations When Partners' Interests Change During the Year

Introduction

KEY ISSUE 28A Allocations When the Partnership Tax Year Terminates.

KEY ISSUE 28B Allocations When a Partner's Interest Changes.

Proposed Regulations on Varying Interest Rule

Partial Sales, Exchanges, and Liquidations

Abandonment of a Partnership Interest

Transfers at Death

Liquidation Payments to Retiring Partners

Transfers by Gift

KEY ISSUE 28C Applying the Varying Interests Rule--Retroactive Allocations.

Special Rules for Cash-basis Items

Varying Interests Rules May Be at Odds with Economic Deal

Retroactive Allocations of Service Partnership Income

ILLUSTRATION 28-1: Sample Schedule K-1 Illustrating the Installment Liquidation of a Partner's Interest

ILLUSTRATION 28-2: How to Prepare Schedules K-1 for a Donor and Donee Partner for an Interest That Has Been Gifted

Chapter 29: At-risk Activities

Introduction

KEY ISSUE 29A Identifying Taxpayers Affected by the At-risk Rules.

KEY ISSUE 29B Identifying Activities Covered by the At-risk Rules; Partner and Partnership Reporting Requirements.

Segregation and Aggregation of Activities

Applying the At-risk Limits

Partner Recordkeeping and Reporting

Partnership Reporting

KEY ISSUE 29C Determining a Partner's Amount at Risk.

Impact of Partnership Debt on Amount at Risk

Use of Partner Guarantees to Provide At-risk Basis

Deficit Restoration Obligations

KEY ISSUE 29D Analyzing Nonrecourse Financing Secured by Real Estate.

Qualified Nonrecourse Financing

Debt for Which Only Partnership Is Liable

Loans from Related Persons

Commercially Reasonable Loans from Related Persons

KEY ISSUE 29E Carrying Over and Deducting Suspended At-risk Losses.

Effect of Transfer of Interest on Suspended At-risk Losses

KEY ISSUE 29F Recapturing Previously Deducted At-risk Losses.

KEY ISSUE 29G Understanding Interaction Between At-risk Limits and Basis and Passive Limits.

ILLUSTRATION 29-1: Filled-in Form 6198 Showing Partner's At-risk Calculation

ILLUSTRATION 29-2: Computing Amount at Risk When Liabilities Are Involved

ILLUSTRATION 29-3: Calculating Amount at Risk on Form 6198

ILLUSTRATION 29-4: Schedule K-1 Reporting At-risk Information

Chapter 30: Passive Activities

Introduction

KEY ISSUE 30A Understanding the Passive Activity Rules and Grouping of Activities.

Why Activity Groupings Matter

Any Reasonable Grouping Method Is Allowed Based on Facts and Circumstances

Trade or Business Activities

Rental Activities

Some Rental Activities Are Not Passive

Factors for Grouping Activities

Consistency Rule

Restrictions on Grouping Certain Limited Partner Interests

IRS Has the Right to Challenge Taxpayer Activity Groupings

Groupings by Partnerships

Required Partner-level Disclosures When Groupings Change

Reporting Passive Losses by an Electing Large Partnership

KEY ISSUE 30B Disposing of Passive Activities and Deducting Suspended Passive Losses.

Deduction of Suspended Passive Losses

KEY ISSUE 30C Determining Partners' Participation in Partnership Activities.

Material Participation Determines Whether Nonrental Activity Is Passive or Nonpassive

Participation in Partnership Activities

LLC Members and LLP Partners

Documenting Participation in an Activity

Reclassifying Activity as Passive or Nonpassive Is Not an Accounting Method Change

KEY ISSUE 30D Reporting Passive Activity Information to Partners.

Reporting Partner Participation

Reporting Multiple Trade or Business Activities

Reporting Multiple Rental Real Estate Activities

Disposing of Partnership Interest

Passive Debt Discharge Income

Effect of Passive Activity Loss Limitations on Self-employment Tax Calculation

KEY ISSUE 30E Applying the Self-charged Interest Rules.

Summary of the Self-charged Interest Rules

Loans from Partners to Partnerships

Loans from Partnerships to Partners

Other Self-charged Items

KEY ISSUE 30F Handling Partner-partnership Transactions under the Passive Activity Rules.

General Considerations for Transactions between a Partnership and Its Partners

Payments in Liquidation of a Partnership Interest

Recharacterization of Income

Developer Sales of Rental Property

Rental of Property from a Partner

Rental of Nondepreciable Property

Special Rule for Oil and Gas Working Interests

Distribution of Money in Excess of Basis

Exception for Casualty and Theft Losses

KEY ISSUE 30G Illustrating the Passive Activity Rules with a Comprehensive Example.

ILLUSTRATION 30-1: Completed Form 8825 Reporting Income and Expenses from Rental Real Estate

TRANSACTIONS WITH PARTNERS

Chapter 31: Transactions between Partners and Partnerships

Introduction

KEY ISSUE 31A Reviewing the Rules Governing Transactions between Partners and Partnerships.

Partner Acting as a Third Party (Nonpartner)

Guaranteed Payments to Partners

Partner Acting as a Partner

Related-party Rules

Partnership Expenses Incurred by Partners

Use of Office in Partner's Home

KEY ISSUE 31B Handling Payments to Partners for Services.

Individual Partners Who Provide Services Are Treated as Self-employed Persons for Most Federal Tax Purposes

Services Provided by a Partner Acting as a Third Party

Services Provided by a Partner Acting as a Partner

Recharacterization of Payments for Services as Payments to Nonpartners

KEY ISSUE 31C Analyzing Loans between Partners and Partnerships.

Treatment of Partner as a Third-party Creditor

Treatment of Interest Expense Paid by Accrual-basis Partnership to Cash-basis Partner

KEY ISSUE 31D Dealing with the Disguised Sale Rules.

Disguised Sale Rules

General Rule

Nonsimultaneous Transfers--the Two-year Rule

Disguised Sales Can Go Both Ways

Special Rules for Priority or Preferential Distributions

Treatment of Liabilities under the Disguised Sale Rules

Exception for Debt-financed Distributions

Tax Return Disclosure Requirements

KEY ISSUE 31E Handling Guaranteed Payments.

Guaranteed Payments Computed as a Percentage of Income

Self-employment Tax on Guaranteed Payment Income

Timing of Guaranteed Payment Income Recognition

Treatment of Guaranteed Payments under PAL Rules

Payment of Health Insurance Premiums Treated as Guaranteed Payments

Payment of Health Savings Account (HSA) Contribution for a Partner

KEY ISSUE 31F Recognizing and Applying the Special Rules for Related Parties.

Loss Disallowance Rules

Proportionate Disallowance of Losses under IRC Sec. 267

Capital Gain Disallowance Rule

Installment Gain Deferral Disallowance Rule

Like-kind Exchanges between Partners and Partnerships

ILLUSTRATION 31-1: Recipient Partner's Schedule K-1 Reporting Guaranteed Payment Income

ILLUSTRATION 31-2: Schedule K-1 Reporting Guaranteed Payment Determined by Reference to Partnership Gross Income

ILLUSTRATION 31-3: Schedule K-1 Reporting Distributive Share of Partnership Income

ILLUSTRATION 31-4: Schedule K-1 Reporting Self-employment Income from Guaranteed Payment

ILLUSTRATION 31-5: Form 8275-R, Disclosure Statement for Potential Disguised Sale Transaction

ILLUSTRATION 31-6: Calculating Gain on a Disguised Sale

TRANSFERS AND DISTRIBUTIONS

Chapter 32: Transfers of Partnership Interests and Basis Adjustments

Introduction

KEY ISSUE 32A Handling Taxable Sales and Exchanges of Partnership Interest.

Single-basis Concept

Partial Disposition of an Interest

Calculating the Holding Period When Partnership Interests Are Sold

Gain When Partner Has a Negative Tax-basis Capital Account

Effect of Taxable Disposition on Losses Suspended for Lack of At-risk Basis

Effect of Disposition on Suspended Passive Losses

Effect of Disposition on Losses Suspended for Lack of Outside Basis

Related-party Transactions

Reporting Requirements upon Transfers of Interests in Collapsible Partnerships

Capital Gain Regulations for Sellers of Partnership Interests

KEY ISSUE 32B Making Section 754 Basis Adjustments after a Sale or Exchange.

General Rule

Section 754 Election Can Alleviate Problems Caused by Inside/Outside Basis Differences

Special Rules Applicable upon Death of a Partner

Making the Section 754 Election

Late Elections

Calculating the Optional Basis Adjustment

Computing the Optional Basis Adjustment When There Is a Negative Capital Account

Recapture Allocation to a Partner with a Basis Adjustment

Revocation of the Section 754 Election

Depreciation of Basis Increases or Decreases

Changes in Recovery Methods

Basis Adjustment Case Study

Basis Adjustment Case Study: Active Trade or Business

Allocations of Basis to Partnership Goodwill

Basis Adjustment Recordkeeping for a Gift of a Partnership Interest

Tracking Depreciation on an Optional Adjustment

Mandatory Basis Adjustments

Exceptions to the Mandatory Basis Reductions

Reporting by an Electing Investment Partnership

Failure to Provide the Required Statement

KEY ISSUE 32C Understanding the Tax Consequences When a Retiring Partner's Interest Is Liquidated by Payments from the Partnership.

KEY ISSUE 32D Claiming a Deduction for a Worthless Partnership Interest.

Nature of Abandonment or Worthlessness Loss

ILLUSTRATION 32-1: Reporting Depreciation of Section 754 Basis Adjustment to Partner

ILLUSTRATION 32-2: Transferee Partner's Notice to Partnership of Sale or Exchange of Partnership Interest

ILLUSTRATION 32-3: Partnership Return Section 754 Election Statement [Pursuant to Reg. 1.754-1(b)(1)]

ILLUSTRATION 32-4: Partnership Return Statement Required by Reg. 1.743-1(k)(1)(i)

ILLUSTRATION 32-5: Determining Gain or Loss on Disposition of a Partnership Interest by Sale or Exchange of the Interest

Chapter 33: Distributions and Basis Adjustments

Introduction

KEY ISSUE 33A Identifying and Reporting Distributions.

Loans versus Distributions

Deemed Distributions Resulting from Reduced Share of Partnership Debt

Substance over Form Considerations

Distributions of Stock in Controlled Corporation to Corporate Partner

Form 1065 and Schedule K-1 Reporting Requirements

KEY ISSUE 33B Taxing Current Distributions.

Cash Distribution Can Result in Taxable Gain

Distribution of Property Other Than Cash

Current Distributions of Unrealized Receivables, Recapture Property, and Inventory

Current Distribution of Recapture Property

Timing of Current Distributions

Character of Distribution Gain as Passive or Nonpassive

KEY ISSUE 33C Understanding Basis Computations and Adjustments Resulting from Current Distributions.

Special Rules When Partner's Basis Is Less than Partnership's Basis in Distributed Assets

Optional Adjustments to Partnership Basis Resulting from Current Distributions

Allocating Optional Basis Adjustments Resulting from Distributions

Allocating Optional Basis Adjustments to Intangible Assets

Reporting Optional Basis Adjustments Resulting from Distributions

Partner's Basis Adjustment for Distributed Property When No Section 754 Election Applies

Mandatory Adjustment for Distributed Property When No Section 754 Election Applies

KEY ISSUE 33D Understanding Rules and Basis Adjustments Applicable to Liquidating Distributions.

Recognition of Taxable Loss in a Liquidating Distribution

Partner's Basis in Distributed Assets Obtained via Liquidating Distribution

Special Rules When Partner's Basis Is Less Than Partnership's Basis in Distributed Assets

Optional Adjustments to Partnership Basis Resulting from Liquidating Distributions

Allocating Optional Basis Adjustments to Intangible Assets

Reporting Optional Basis Adjustments Resulting from Distributions

Partner's Basis Adjustment for Distributed Property When No Section 754 Election Applies

Character of Distribution Gain as Passive or Nonpassive

Liquidating Distribution of Partner Indebtedness

Liquidating Distribution after Partnership Technical Termination

Special Partnership Basis Adjustment Rules for Certain Liquidating Distributions

KEY ISSUE 33E Recognizing Precontribution Gains on Certain Partner Distributions.

Basis Increases Resulting from Gain Recognition

Distribution of Property Previously Contributed by the Same Partner

Interaction of IRC Secs. 737 and 704(c)(1)(B)

Exceptions to the Section 737 Rules

Impact of Assets-over Partnership Merger

Partnership Terminations

Schedule K-1 Reporting Requirements

KEY ISSUE 33F Recognizing Gains on Distributions of Marketable Securities Treated as Cash.

Definition of Marketable Securities

Limitation on Amount of Gain Recognized

Exceptions and Coordination with Other Partnership Tax Rules

Reporting Distributions of Marketable Securities

KEY ISSUE 33G Determining the Partner's Holding Period for Distributed Property.

ILLUSTRATION 33-1: Partner's Schedule D Reporting Gain from Current Cash Distribution

ILLUSTRATION 33-2: Partner's Schedule D Reporting Loss from Liquidating Distribution

ILLUSTRATION 33-3: Flowchart Explaining Tax Rules for Partnership Distributions

ILLUSTRATION 33-4: Making Partner-level Election to Adjust Basis of Distributed Partnership Assets

ILLUSTRATION 33-5: Computing Partner's Basis in Property Received in Partnership Distribution

ILLUSTRATION 33-6: Partnership Reporting of Optional Basis Adjustment Resulting from Current Distribution

ILLUSTRATION 33-7: Partnership Reporting of Optional Basis Adjustment Resulting from Liquidating Distribution

STATE SUMMARIES

Chapter 34: State Summaries

Introduction

KEY ISSUE 34A Identifying Differences between Federal and State Taxable Income.

KEY ISSUE 34B Dealing with Multistate Partnerships and Multistate Partners.

KEY ISSUE 34C Obtaining a Waiver of Requirements for Filing a State Return.

KEY ISSUE 34D Filing Composite Returns.

KEY ISSUE 34E Meeting the Filing Requirements for Limited Liability Companies.

ILLUSTRATION 34-1: State Tax Information

SPECIAL CONSIDERATIONS

Chapter 35: Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs)

Introduction

KEY ISSUE 35A Knowing the Basics about Limited Liability Companies.

Structure and Operation

LLC Classification for Federal Income Tax Purposes

Single-member LLCs

Treatment of LLC Members under Passive Activity Loss Rules

SE Tax Treatment of LLC Members

Series LLCs

Sale of LLC Interests

State Tax Considerations

KEY ISSUE 35B LLP Formation and Operations.

Liability of LLP Partners

Legal Formation

Insurance/Capital Requirements

Failure to Meet State Law Requirements

Operations Outside the State of Formation

Entering and Exiting Partners

Federal Tax Treatment of LLPs

ILLUSTRATION 35-1: Liability Protection Provided under State LLP Statutes

ILLUSTRATION 35-2: Reporting LLC Debt on a Schedule K-1

Chapter 36: The Hot Asset Rules--Collapsible Partnerships

Introduction

KEY ISSUE 36A Understanding the Hot Asset Rules and What Hot Assets Are.

Definition of Hot Assets

Transactions to Which the Hot Asset Rules Apply

Unrealized Receivables

Inventory

KEY ISSUE 36B Determining the FMV of Hot Assets.

General Rule for Allocating FMV to Partnership Assets

Partner Owning Different Interests in Capital, Profits, and Losses

Determining the FMV of Unrealized Receivables

Costs That Can Reduce the Value of Unrealized Receivables

KEY ISSUE 36C Analyzing a Partnership Interest Sale under the Hot Asset Rules.

General Rule for Computing Ordinary Income under IRC Sec. 751

Applying Self-employment Income to Ordinary Income under IRC Sec. 751

Reporting Requirements

KEY ISSUE 36D Analyzing a Disproportionate Distribution of Partnership Property under the Hot Asset Rules.

Determining When a Disproportionate Distribution Occurs

Applying Self-employment Income to Ordinary Income under IRC Sec. 751

Analyzing Disproportionate Distributions

KEY ISSUE 36E Applying the Hot Asset Rules to Tiered Partnerships.

ILLUSTRATION 36-1: Completed Form 8308, Report of a Sale or Exchange of Certain Partnership Interests

THE WINDING UP PHASE

Chapter 37: Death or Retirement of a Partner

Introduction

KEY ISSUE 37A Determining Effect of Partner's Death or Retirement on Partnership Return.

Continuation of the Partnership after the Partner's Death

Distribution of Partnership Interest to Estate's Beneficiary--Effect on Partnership Continuation

Allocation of Partnership Income and Losses in the Year of Death

Deceased Partner's Final Schedule K-1

Effect of Estate's Distribution of Partnership Interest on Allocation of Partnership Income

Partnership Income and Losses in Year of Retirement

KEY ISSUE 37B Recognizing Other Tax Consequences of Partner's Death or Retirement.

Treatment of Suspended At-risk Losses upon Partner's Death

Treatment of Other Suspended Losses upon Partner's Death

Death of a Partner in a Two-person Partnership

When the Remaining Partner is the Beneficiary of the Deceased Partner's Estate

KEY ISSUE 37C Liquidating a Deceased or Retired Partner's Interest.

Liquidation versus Sale of a Partnership Interest

Treatment of Payments in Liquidation of Retiring (or Deceased) Partner's Interest

When Retirement Payments Are Not Subject to SE Tax

Treatment of Variable Liquidating Payments

Treatment of Liquidating Payments That Are Fixed in Total But That Vary from Year to Year

Significance of a Written Separation Agreement

Allocating Section 736(a) and 736(b) Payments by Agreement

Treatment of Retiring Partner's Share of Partnership Liabilities

Noncash Payments in Liquidation of Retiring Partner's Interest

Partnership Basis Adjustments Resulting from Section 736(b) Liquidation Payments

KEY ISSUE 37D Adjusting Inside and Outside Basis upon Partner's Death.

Adjustments to Outside Basis of Partnership Interests

Effect of IRD Rules in Determining the Outside Tax Basis of an Inherited Partnership Interest

Outside Basis Step-up When Deceased Partner Had a Negative Capital Account

Adjustments to Inside Bases of Partnership Assets upon Partner's Death

Adjustments to Inside Basis When Estate Distributes Partnership Interest to Satisfy a Pecuniary Bequest

ILLUSTRATION 37-1: Summary Table for Tax Treatment of Partnership's Cash Payments in Liquidation of Deceased or Retiring Partner's Interest

ILLUSTRATION 37-2: Estate's Schedule K-1 for Year of Distribution of Partnership Interest to Beneficiary to Satisfy Specific Bequest

ILLUSTRATION 37-3: Beneficiary's Schedule K-1 for Year of Distribution of Partnership Interest to Beneficiary to Satisfy Specific Bequest

ILLUSTRATION 37-4: Reporting Payments to a Retired Partner

Chapter 38: Partnership Terminations, Mergers, and Divisions

Introduction

KEY ISSUE 38A Determining When a Partnership Terminates.

Cessation of Partnership Business Activities

Technical Termination Caused by Sale or Exchange of Partnership Interests

Tax versus Legal Termination

KEY ISSUE 38B Determining Whether a Partnership's Business Activities Have Ceased.

Cessation of the Partnership's Business Activities

Treatment of Organizational, Start-up, and Syndication Costs

Change from Partnership to Another Form of Doing Business

Tax Treatment of Partnership Liquidations

Estate Continues as Partner

Liquidating Payments Made under IRC Sec. 736

Tax Return and Reporting Issues

KEY ISSUE 38C Accounting for Technical Termination Caused by Sale or Exchange of 50% or More of Partnership Interests within 12 Months.

What Constitutes a Sale or Exchange?

When Does a Sale or Exchange Trigger a Partnership Termination?

KEY ISSUE 38D Understanding the Tax Consequences of a Technical Termination.

Holding Period

Depreciation Methods

Tax Year of the Partnership

Partnership Tax Elections and Accounting Methods

Federal Tax ID Number of New Partnership

Treatment of Organizational, Start-up, and Syndication Costs

Section 704(b) Book Capital Accounts

Tax Return and Reporting Issues

Carryover of Section 754 Adjustments

Suspended Losses

Minimum Gain

Retirement Payments to Partners

Installment Sale Receivables

Retirement Plans

Impact of Technical Terminations When Partners Have Precontribution Gain or Loss

KEY ISSUE 38E Handling Partnership Mergers.

Deemed Sequence of Events

Basis and Gain Recognition Issues

Additional Gain Recognition Issues for Assets-up Mergers

Tax Return Implications

Impact of Merger on Depreciation Methods

Impact of Merger on Optional Basis Adjustments

Impact of Assets-over Merger on IRC Secs. 704(c)(1)(B) and 737

Tax Return and Reporting Issues

KEY ISSUE 38F Handling Partnership Divisions.

50% Rule Determines Treatment of Postdivision Partnerships

Tax Return and Reporting Issues

Assets-over Form for Partnership Division

Assets-up Form for Partnership Division

ILLUSTRATION 38-1: Statement Disclosing a Partnership Technical Termination

ILLUSTRATION 38-2: Schedule K-1 Disclosing Technical Termination

ILLUSTRATION 38-3: Schedule K-1 Showing New Partnership after Technical Termination

ILLUSTRATION 38-4: Statement Required to Be Filed by Continuing Partnership after a Merger

ILLUSTRATION 38-5: Statement Required to Be Filed by Divided Partnership after a Partnership Division

ELECTIONS

ELECTION E101: Deducting and Amortizing Partnership Organizational Expenditures

ELECTION E102: Electing to Capitalize Partnership Organizational Expenses

ELECTION E103: Deducting and Amortizing Start-up Expenditures

ELECTION E104: Electing to Capitalize Start-up Expenses

ELECTION E105: Selecting a Tax Year Other Than a Required Tax Year

ELECTION E201: Electing to Be Excluded from the Partnership Rules ("Electing Out" of Subchapter K)

ELECTION E202: Making the Section 754 Optional Basis Adjustment Election

ELECTION E203: Adjusting the Basis of Distributed Partnership Assets

ELECTION E204: Prorating Basis Recovery upon Liquidation of a Partnership Interest

ELECTION E205: Electing to Notify the IRS of Return Filed Consistent with an Incorrect Schedule K-1

ELECTION E206: Applying the Consolidated Audit Rules to Small Partnerships

ELECTION E207: Election to Be Treated as an Electing Investment Partnership (EIP) under IRC Sec. 743(e)

ELECTION E208: Electing to Be an Electing Large Partnership

ELECTION E209: Spousal Joint Venture Election Out of Partnership Treatment

ELECTION E301: Expensing Depreciable Property (Section 179)

ELECTION E302: Electing the Alternative Minimum Tax (AMT) Depreciation Method for Regular Tax

ELECTION E303: Adopting the Alternative Depreciation System (ADS) for Regular Tax

ELECTION E304: Electing Out of MACRS Depreciation

ELECTION E305: Using Straight-line in Lieu of MACRS Depreciation

ELECTION E306: Electing Out of Bonus Depreciation

ELECTION E307: Electing to Apply 100% Bonus Depreciation to Acquired or Self-constructed Components of a Larger Self-constructed Property

ELECTION E401: Electing Out of the Self-charged Interest Rules

ELECTION E501: Interest Expense Traced under the 30-day Rule

ELECTION E502: Allocating Interest Expense Incurred to Finance Distributions

ELECTION E601: Ratable Accrual of Real Property Taxes

ELECTION E602: Electing to Capitalize Carrying Charges

ELECTION E701: Deducting Intangible Drilling Costs

ELECTION E702: Deducting Intangible Drilling Costs on Nonproductive Wells

ELECTION E703: Treating Operating Interests in Oil, Gas, and Geothermal Deposits as Separate Properties

ELECTION E704: Deducting Mining Exploration Expenditures

ELECTION E705: Recapturing Mining Exploration Expenditures

ELECTION E706: Deferring Mining Development Expenditures

ELECTION E707: Amortizing Mining Exploration Expenditures over 10 Years

ELECTION E708: Amortizing Mining Development Expenditures over 10 Years

ELECTION E801: Deducting Research and Experimental Expenditures

ELECTION E802: Amortizing Research and Experimental Expenditures over 10 Years

ELECTION E803: Capitalizing and Amortizing Research and Experimental Expenditures

ELECTION E804: Section 59(e) Optional Amortization for Certain AMT Preferences

ELECTION E805: To Request Extension of Time for Making an Election (Reg. 301.9100 Relief)

ELECTION E806: Reporting Original Issue Discount (OID) Using the Cash Method

ELECTION E807: Adopting the Recurring Item Method for Certain Expenses

ELECTION E808: Reducing Depreciable Asset Basis First for Excluded Debt Discharge Income

ELECTION E809: Excluding Discharge of Indebtedness Income with Respect to Qualified Real Property Business Indebtedness

ELECTION E810: Consent to Treating a Partnership Interest as Depreciable Property

ELECTION E811: Treating Real Property Held as Inventory as Depreciable Property

ELECTION E812: Requesting a Change in Accounting Method

ELECTION E813: Taking a Section 481(a) Adjustment into Income in One Year

ELECTION E814: Amortizing Intangibles Subject to the Anti-churning Rules

ELECTION E815: Electing Entity Tax Status

ELECTION E816: Qualified Small Business Stock (QSBS) Capital Gain Rollover

ELECTION E817: Electing out of Credit for Social Security Taxes Paid on Employee Tips

ELECTION E818: Deferring Income on Livestock Sold because of Drought, Floods, or Other Weather-related Conditions

ELECTION E819: Deferring Gain from Involuntary Conversions

ELECTION E820: Deducting Disaster Losses in Previous Tax Year

CHECKLISTS

CHECKLIST C101: Form 1065 Overall Due Diligence Review Checklist

CHECKLIST C102: Long-form 1065 Preparation Checklist

CHECKLIST C103: Short-form 1065 Preparation Checklist

CHECKLIST C104: Initial Year Checklist--Form 1065

CHECKLIST C105: Final Year Checklist--Form 1065

CHECKLIST C106: Installment Sale Checklist for Form 1065

CHECKLIST C107: Checklist for Preparing Forms 8275 and 8275-R

CHECKLIST C108: Avoiding a Section 6694 Return Preparer Penalty

CHECKLIST C201: Checklist to Determine Permissible Year-ends for a Newly Formed (First-year) Partnership

CHECKLIST C202: Checklist to Determine If Existing Partnership Can Change (or Retain) Its Year-end

CHECKLIST C203: Checklist for Property Contributions to Partnerships

CHECKLIST C204: Partnership Termination Checklist

CHECKLIST C205: Domestic Production Activities Deduction

CHECKLIST C206: Checklist for Determining Validity of Partnership Tax Allocations

CHECKLIST C207: Requirements for Deferred Like-kind Exchange

CHECKLIST C208: Checklist of Expenditures Capitalized under UNICAP (IRC Sec. 263A)

CHECKLIST C209: Checklist for Retroactive Changes in Accounting Method

WORKSHEETS

WORKSHEET W101: Client Data Sheet

WORKSHEET W102: Partner Active/Passive Classification Confirmation

WORKSHEET W103: Client Tax Compliance Sheet

WORKSHEET W104: Grouping Activities for Passive Loss Rules

WORKSHEET W201: Carryforward Worksheet--Partner's Outside Basis Calculation

WORKSHEET W202: Carryforward Balance Sheet for Tracking the Inside Basis of Partnership Assets

WORKSHEET W203: Transfers of Partnership Interests--Determining and Allocating Basis Adjustments Resulting from Section 754 Elections for Sales or Exchanges [IRC Sec. 743(b)]

WORKSHEET W204: Allocation of Basis Adjustment to Goodwill for Partnerships under IRC Sec. 755

WORKSHEET W205: Distributions of Property--Determining and Allocating Basis Adjustments under IRC Sec. 754 Resulting from Distributions

WORKSHEET W206: Computation of Section 444 Required Payment

WORKSHEET W207: Partner Debt Classification

WORKSHEET W208: Section 704(c) Carryforward

WORKSHEET W209: Computing Partner's Basis in Property Received in Partnership Distribution

WORKSHEET W210: Distribution of Section 751 Hot Assets

WORKSHEET W211: Oil and Gas Depletion Schedule

WORKSHEET W212: Carryforward Worksheet for Determining Partner's Amount at Risk

WORKSHEET W213: Determining Applicability of IRC Sec. 751 Hot Asset Rules to Sale, Exchange, or Distribution

WORKSHEET W214: Computing Gain on Contribution of Debt Encumbered Property

WORKSHEET W215: Distributions of Contributed Property--Computing Contributing Partner's Section 704(c)(1)(B) Gain or Loss and Distributee's Basis in Property

WORKSHEET W216: Distributions to Contributors of Appreciated Property--Computing Gain to Distributee Partner and Tax Basis of Property

WORKSHEET W217: Allocating Nonrecourse Debt under IRC Sec. 752

WORKSHEET W218: Determining Continuing Entity after Partnership Merger or Division

WORKSHEET W219: Calculating Gain on a Disguised Sale

WORKSHEET W220: Determining Qualification for and Calculating the Exclusion for Discharged Qualified Real Property Business Debt

WORKSHEET W221: Calculating the Amount of a Partner's Insolvency Upon Discharge of Debt

WORKSHEET W222: Worksheet for Calculating Reduction of Partner's Tax Attributes after Exclusion of Debt Discharge Income

WORKSHEET W223: Worksheet for Determining Gain or Loss on Disposition of a Partnership Interest by Gift

WORKSHEET W224: Worksheet for Determining Gain or Loss on Disposition of a Partnership Interest by Contribution to Another Partnership

WORKSHEET W225: Worksheet for Determining Gain or Loss on Disposition of a Partnership Interest by Sale or Exchange

WORKSHEET W226: Carryforward Worksheet for Calculating Deductible At-risk Losses and Tracking Suspended At-risk Losses

WORKSHEET W227: Computational Worksheet for Like-kind Exchanges

WORKSHEET W228: Worksheet to Compute Section 704(b) Book Capital Account

WORKSHEET W229: Section 704(b) Minimum Gain Calculation

WORKSHEET W230: Gain on Repossession of Real Property and Basis of Repossessed Real Property

WORKSHEET W231: Accrual to Cash Worksheet for Form 1065

WORKSHEET W232: Cash to Accrual Worksheet for Form 1065

WORKSHEET W233: Fringe Benefit Compensation Value for Employer-provided Auto

WORKSHEET W234: Allocation of Partnership Retirement Payments between Sections 736(a) and 736(b)--Fixed Payments

WORKSHEET W235: Allocation of Partnership Retirement Payments between Sections 736(a) and 736(b)--Variable Payments

WORKSHEET W236: Percentage-of-completion Calculation Worksheet

WORKSHEET W237: Depreciation and Basis--Vehicle Trade-in: Replacement Vehicle Depreciated under Reg. 1.168(i)-6

WORKSHEET W238: Depreciation and Basis--Vehicle Trade-In: New Asset Treatment Election Made

WORKSHEET W301: Record of Partnership Interest Transfers

WORKSHEET W302: Interest Expense Allocation

WORKSHEET W303: Carryforward Worksheet for Contributed Property

WORKSHEET W304: Permanent File Worksheet: Partnership Liability Records

QUICK REFERENCE TABLES

TABLE T101: Recovery Periods for Common Assets

TABLE T201: Summary of Regular Tax Depreciation Rules

TABLE T202: Summary of AMT Depreciation Rules

TABLE T203: Summary of Depreciation Allowable in Year of Disposition

TABLE T204: Summary of Depreciation Recapture Rules

TABLE T301: MACRS Personal Property, Half-year Convention

TABLE T302: MACRS Personal Property, Midquarter Convention--1st Quarter

TABLE T303: MACRS Personal Property, Midquarter Convention--2nd Quarter

TABLE T304: MACRS Personal Property, Midquarter Convention--3rd Quarter

TABLE T305: MACRS Personal Property, Midquarter Convention--4th Quarter

TABLE T401: MACRS Residential Rental Property and AMT Residential Rental Property (27.5-year Property)

TABLE T402: MACRS Nonresidential Real Property (31.5-year Property)

TABLE T403: MACRS Nonresidential Real Property and AMT Nonresidential Property (39-year Property)

TABLE T404: MACRS Qualified Leasehold Improvement Property, Qualified Restaurant Property, and Qualified Retail Improvement Property [IRC Sec. 168(e)(3)(E)]

TABLE T501: Partial Business Use of Listed Property

TABLE T601: Luxury Auto Depreciation Dollar Limits

TABLE T602: MACRS Depreciation Rates for Autos

TABLE T701: T&E Substantiation Requirements

TABLE T702: Quick Guide to Subchapter K

TABLE T703: Summary of Tax Allocation Rules When Partners' Interests Change

TABLE T704: Commonly Encountered Section 195 Start-up Expense Items

TABLE T705: Standard Mileage Rate Method for Vehicle Usage Deductions

TABLE T706: Valuing Personal Use of Employer-provided Auto

TABLE T707: Reporting for Employer-provided Auto

TABLE T708: Deductions for Leased Autos

TABLE T709: Treatment of Commonly Encountered Items under Cash and Accrual Accounting

TABLE T710: Tax Rates on Capital Gains and Dividends

TABLE T711: Partnership Income and Expense Chart (Form 1065)

TABLE T712: Recommended Document Retention

TABLE T713: Taxpayer and Return Preparer Penalties

TABLE T714: Deductible Travel Expenses

TABLE T715: Summary of Effective Date Provisions for Safe Harbor Nonrecourse Deduction Allocation Rules

TABLE T716: Documentation Required for Charitable Contributions

TABLE T717: Treatment of Partners for Various Fringe Benefits

TABLE T718: Summary of Elections to Minimize AMT

TABLE T719: Limits on Excludable Transportation-related Fringe Benefits

TABLE T720: Summary Fringe Benefit Exclusion Provisions

TABLE T721: Tax Treatment for Computer Software

TABLE T722: When Meal and Entertainment Expenses Are Deductible

TABLE T723: Below-market Loans between Partnerships and Their Partners

OTHER PRACTICE AIDS

PRACTICE AID O101: Tax Return Engagement Letter

PRACTICE AID O102: Partner Schedule K-1 Transmittal Letter (Standard)

PRACTICE AID O103: Partner Schedule K-1 Transmittal Letter (Basis Limitation)

PRACTICE AID O104: Partnership Return Filing Instructions

PRACTICE AID O105: Designation of Tax Matters Partner (TMP)

PRACTICE AID O106: Transmittal Letter for Partnership Tax Organizer (Form 1065)

PRACTICE AID O107: Partnership Organizer (Form 1065)

PRACTICE AID O108: Short-form Organizer (Form 1065)

PRACTICE AID O201: How to Interpret Schedule K-1

PRACTICE AID O301: Record of Telephone Conversation/Meeting

PRACTICE AID O302: Client Tax Research Documentation

PRACTICE AID O303: Interim Tax File Review Form--Business Clients

PRACTICE AID O304: New Tax Client Acceptance Form

PRACTICE AID O305: Tax Client Evaluation (Continuance) Form

PRACTICE AID O306: Tax Return Fee Estimate Worksheet

PRACTICE AID O307: Travel and Entertainment--Confirmation of Client Documentation

PRACTICE AID O308: Documentation of Below-market Loan

PRACTICE AID O401: When the 50% Limit Applies to Meal and Entertainment Expenses

PRACTICE AID O402: Mapping of Schedule M-3 to Schedule M-1

PRACTICE AID O403: Reporting Sales of Business Property

PRACTICE AID O404: Guidelines for Application of the Economic Substance Doctrine by IRS Examiners

PRACTICE AID O501: Transferee Partner Statement Required by Reg. 1.743-1(k)(1)(ii) for Oil and Gas Partnership

PRACTICE AID O502: Statement for Transfers of Interests in Partnerships Holding Section 751 Hot Assets

ROADMAP RM: Roadmap to Partnership Tax Planning

ROADMAP RM-1: Introduction

ROADMAP RM-2: Form 1065 Roadmap--Client Summary Worksheet

ROADMAP RM-3: Roadmap to Form 1065 and Schedule K

ROADMAP RM-4: Roadmap Guidance

ROADMAP RM-4a: Section 1: Heading

ROADMAP RM-4b: Section 2: Income/Deductions

ROADMAP RM-4c: Section 3: Schedule K

ROADMAP RM-4d: Section 4: Analysis of Net Income (Loss)

ROADMAP RM-4e: Section 5: Schedule L--Balance Sheets

ROADMAP RM-4f: Section 6: Schedule M-2--Analysis of Partners' Capital Accounts

ROADMAP RM-4g: Section 7: Information about the Partner

ROADMAP RM-4h: Section 8: Analysis of Partner's Capital Account

ROADMAP RM-4i: Section 9: Income/Loss, Deductions, and Credits

ROADMAP RM-4j: Section 10: Self-employment Earnings

ROADMAP RM-4k: Section 11: Other

CPE & Training Solutions

INDEX

INTRODUCTORY MATERIAL ABOUT THE AUTHORS AND REVIEWERS . . . LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

CPE & Training Solutions

INDEX

INTRODUCTORY MATERIAL

ABOUT THE AUTHORS AND REVIEWERS . . .

LIST OF SUBSTANTIVE CHANGES AND ADDITIONS