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Qualified Joint Venture Election. A ‘‘quali-

use of capital. Capital is ordinarily an in-

Terminating a

come-producing factor if the operation of the

fied joint venture,’’ whose only members are a

business requires substantial inventories or in-

husband and a wife filing a joint return, can elect

Partnership

vestments in plants, machinery, or equipment.

not to be treated as a partnership for federal tax

purposes. A qualified joint venture conducts a

Capital is not material. In general, capital is

trade or business where: the only members of

A partnership terminates when one of the follow-

not a material income-producing factor if the

ing events takes place.

the joint venture are husband and wife; the filing

income of the business consists principally of

status of the husband and wife is married filing

fees, commissions, or other compensation for

1. All its operations are discontinued and no

jointly; both spouses elect not to be treated as a

part of any business, financial operation, or

personal services performed by members or

partnership; both spouses materially participate

venture is continued by any of its partners

employees of the partnership.

in the trade or business (see Passive Activity

in a partnership.

Limitations in the Instructions for Form 1065 for

Capital interest. A capital interest in a part-

2. At least 50% of the total interest in partner-

a definition of material participation); and the

nership is an interest in its assets that is distrib-

ship capital and profits is sold or ex-

business is co-owned by both spouses and is

utable to the owner of the interest in either of the

changed within a 12-month period,

not held in the name of a state law entity such as

following situations.

including a sale or exchange to another

a partnership or LLC.

•

partner.

The owner withdraws from the partner-

Under this election, a qualified joint venture

ship.

conducted by a husband and wife who file a joint

Unlike other partnerships, an electing large part-

•

nership does not terminate on the sale or ex-

The partnership liquidates.

return is not treated as a partnership for federal

change of 50% or more of the partnership

tax purposes and therefore does not have a

interests within a 12-month period.

The mere right to share in earnings and profits

Form 1065 filing requirement. All items of in-

is not a capital interest in the partnership.

See section 1.708-1(b) of the regulations for

come, gain, deduction, loss, and credit are di-

more information on the termination of a partner-

vided between the spouses based on their

Gift of capital interest. If a family member (or

ship. For special rules that apply to a merger,

respective interests in the venture. Each spouse

any other person) receives a gift of a capital

consolidation, or division of a partnership, see

takes into account his or her respective share of

interest in a partnership in which capital is a

sections 1.708-1(c) and 1.708-1(d) of the regu-

these items as a sole proprietor. Each spouse

material income-producing factor, the donee’s

lations.

would account for his or her respective share on

distributive share of partnership income is sub-

the appropriate form, such as Schedule C (Form

ject to both of the following restrictions.

Date of termination. The partnership’s tax

1040). For purposes of determining net earnings

•

year ends on the date of termination. For the

It must be figured by reducing the partner-

from self-employment, each spouse’s share of

event described in (1), above, the date of termi-

ship income by reasonable compensation

income or loss from a qualified joint venture is

nation is the date the partnership completes the

for services the donor renders to the part-

taken into account just as it is for federal income

winding up of its affairs. For the event described

nership.

tax purposes (i.e., based on their respective

in (2), above, the date of termination is the date

•

interests in the venture).

The donee’s distributive share of partner-

of the sale or exchange of a partnership interest

If the husband and wife do not make the

ship income attributable to donated capital

that, by itself or together with other sales or

election to treat their respective interests in the

must not be proportionately greater than

exchanges in the preceding 12 months, trans-

the donor’s distributive share attributable

joint venture as sole proprietorships, each

fers an interest of 50% or more in both capital

to the donor’s capital.

spouse should carry his or her share of the

and profits.

partnership income or loss from Schedule K-1

Purchase. For purposes of determining a

(Form 1065) to their joint or separate Form(s)

Short period return. If a partnership is termi-

partner’s distributive share, an interest pur-

1040. Each spouse should include his or her

nated before the end of what would otherwise be

chased by one family member from another

respective share of self-employment income on

its tax year, Form 1065 must be filed for the

family member is considered a gift from the

a separate Schedule SE (Form 1040),

short period, which is the period from the begin-

seller. The fair market value of the purchased

Self-Employment Tax.

ning of the tax year through the date of termina-

interest is considered donated capital. For this

tion. The return is due the 15th day of the fourth

This generally does not increase the total tax

purpose, members of a family include only

month following the date of termination. See

on the return, but it does give each spouse credit

spouses, ancestors, and lineal descendants (or

Partnership Return (Form 1065), later, for infor-

for social security earnings on which retirement

a trust for the primary benefit of those persons).

mation about filing Form 1065.

benefits are based. However, this may not be

true if either spouse exceeds the social security

Example. A father sold 50% of his business

Conversion of partnership into limited liabil-

tax limitation.

to his son. The resulting partnership had a profit

ity company (LLC). The conversion of a part-

of $60,000. Capital is a material in-

For more information on qualified joint ven-

nership into an LLC classified as a partnership

come-producing factor. The father performed

tures, go to IRS.gov. Enter “QJV election” in the

for federal tax purposes does not terminate the

services worth $24,000, which is reasonable

search box and select “Benefits of Qualified

partnership. The conversion is not a sale, ex-

compensation, and the son performed no serv-

Joint Ventures for Family Businesses.”

change, or liquidation of any partnership inter-

ices. The $24,000 must be allocated to the fa-

est; the partnership’s tax year does not close;

Partnership Agreement

ther as compensation. Of the remaining $36,000

and the LLC can continue to use the partner-

of profit due to capital, at least 50%, or $18,000,

ship’s taxpayer identification number.

must be allocated to the father since he owns a

The partnership agreement includes the original

However, the conversion may change some

50% capital interest. The son’s share of partner-

agreement and any modifications. The modifica-

of the partners’ bases in their partnership inter-

ship profit cannot be more than $18,000.

tions must be agreed to by all partners or

ests if the partnership has recourse liabilities

adopted in any other manner provided by the

that become nonrecourse liabilities. Because

Husband-wife partnership. If spouses carry

partnership agreement. The agreement or modi-

the partners share recourse and nonrecourse

on a business together and share in the profits

fications can be oral or written.

liabilities differently, their bases must be ad-

and losses, they may be partners whether or not

Partners can modify the partnership agree-

justed to reflect the new sharing ratios. If a

they have a formal partnership agreement. If so,

ment for a particular tax year after the close of

decrease in a partner’s share of liabilities ex-

they should report income or loss from the busi-

the year but not later than the date for filing the

ceeds the partner’s basis, he or she must recog-

ness on Form 1065. They should not report the

partnership return for that year. This filing date

nize gain on the excess. For more information,

income on a Schedule C (Form 1040) in the

does not include any extension of time.

see Effect of Partnership Liabilities under Basis

name of one spouse as a sole proprietor. How-

of Partner’s Interest, later.

If the partnership agreement or any modifica-

ever, the husband and wife can elect not to treat

tion is silent on any matter, the provisions of

the joint venture as a partnership by making a

The same rules apply if an LLC classified as

Qualified Joint Venture Election.

local law are treated as part of the agreement.

a partnership is converted into a partnership.

Publication 541 (December 2010)

Page 3

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 3

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