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IRS e-file (Electronic Filing)

Effect on partner’s basis. A partner’s ad-

his or her account, but not for a period of

time in excess of the minimum needs of

justed basis in his or her partnership interest is

the industry, and in no event for more than

decreased (but not below zero) by the money

one year.

and adjusted basis of property distributed to the

partner. See Adjusted Basis under Basis of Part-

However, this exclusion does not apply to an

ner’s Interest, later.

unincorporated organization one of whose prin-

Certain partnerships with more than 100 part-

cipal purposes is cycling, manufacturing, or

Effect on partnership. A partnership gener-

ners are required to file Form 1065, Schedules

processing for persons who are not members of

ally does not recognize any gain or loss because

K-1, and related forms and schedules electroni-

the organization.

of distributions it makes to partners. The part-

cally (e-file). Other partnerships generally have

nership may be able to elect to adjust the basis

Electing the exclusion. An eligible organiza-

the option to file electronically. For details about

of its undistributed property.

tion that wishes to be excluded from the partner-

IRS e-file, see the Form 1065 instructions.

ship rules must make the election not later than

Certain distributions treated as a sale or ex-

the time for filing the partnership return for the

change. When a partnership distributes the

first tax year for which exclusion is desired. This

Exclusion From

following items, the distribution may be treated

filing date includes any extension of time. See

as a sale or exchange of property rather than a

section 1.761-2(b) of the regulations for the pro-

Partnership Rules

distribution.

cedures to follow.

•

Unrealized receivables or substantially ap-

Certain partnerships that do not actively conduct

preciated inventory items distributed in ex-

a business can choose to be completely or par-

change for any part of the partner’s

Partnership Return

tially excluded from being treated as partner-

interest in other partnership property, in-

ships for federal income tax purposes. All the

cluding money.

(Form 1065)

partners must agree to make the choice, and the

•

Other property (including money) distrib-

partners must be able to compute their own

uted in exchange for any part of a part-

Every partnership that engages in a trade or

taxable income without computing the partner-

ner’s interest in unrealized receivables or

business or has gross income must file an infor-

ship’s income. However, the partners are not

substantially appreciated inventory items.

mation return on Form 1065 showing its income,

exempt from the rule that limits a partner’s dis-

deductions, and other required information. The

tributive share of partnership loss to the ad-

See Payments for Unrealized Receivables

partnership return must show the names and

justed basis of the partner’s partnership interest.

and Inventory Items under Disposition of Part-

addresses of each partner and each partner’s

Nor are they exempt from the requirement of a

ner’s Interest, later.

distributive share of taxable income. The return

business purpose for adopting a tax year for the

This treatment does not apply to the follow-

must be signed by a general partner. If a limited

partnership that differs from its required tax

ing distributions.

liability company is treated as a partnership, it

year.

must file Form 1065 and one of its members

•

A distribution of property to the partner

Investing partnership. An investing partner-

must sign the return.

who contributed the property to the part-

ship can be excluded if the participants in the

A partnership is not considered to engage in

nership.

joint purchase, retention, sale, or exchange of

a trade or business, and is not required to file a

•

Payments made to a retiring partner or

investment property meet all the following re-

Form 1065, for any tax year in which it neither

successor in interest of a deceased part-

quirements.

receives income nor pays or incurs any ex-

ner that are the partner’s distributive share

penses treated as deductions or credits for fed-

•

They own the property as co-owners.

of partnership income or guaranteed pay-

eral income tax purposes.

•

ments.

They reserve the right separately to take

See the instructions for Form 1065 for more

or dispose of their shares of any property

information about who must file Form 1065.

Substantially appreciated inventory items.

acquired or retained.

Inventory items of the partnership are consid-

•

They do not actively conduct business or

ered to have appreciated substantially in value

irrevocably authorize some person acting

Partnership

if, at the time of the distribution, their total fair

in a representative capacity to purchase,

market value is more than 120% of the partner-

sell, or exchange the investment property.

Distributions

ship’s adjusted basis for the property. However,

Each separate participant can delegate

if a principal purpose for acquiring inventory

authority to purchase, sell, or exchange

property is to avoid ordinary income treatment

Partnership distributions include the following.

his or her share of the investment property

by reducing the appreciation to less than 120%,

for the time being for his or her account,

•

A withdrawal by a partner in anticipation of

that property is excluded.

but not for a period of more than a year.

the current year’s earnings.

Partner’s Gain or Loss

•

A distribution of the current year’s or prior

Operating agreement partnership. An oper-

years’ earnings not needed for working

ating agreement partnership group can be ex-

A partner generally recognizes gain on a part-

capital.

cluded if the participants in the joint production,

nership distribution only to the extent any money

•

extraction, or use of property meet all the follow-

A complete or partial liquidation of a part-

(and marketable securities treated as money)

ing requirements.

ner’s interest.

included in the distribution exceeds the adjusted

basis of the partner’s interest in the partnership.

•

They own the property as co-owners, ei-

A distribution to all partners in a complete

Any gain recognized is generally treated as cap-

ther in fee or under lease or other form of

liquidation of the partnership.

ital gain from the sale of the partnership interest

contract granting exclusive operating

on the date of the distribution. If partnership

rights.

A partnership distribution is not taken into

property (other than marketable securities

account in determining the partner’s distributive

•

They reserve the right separately to take

treated as money) is distributed to a partner, he

share of partnership income or loss. If any gain

in kind or dispose of their shares of any

or she generally does not recognize any gain

or loss from the distribution is recognized by the

property produced, extracted, or used.

until the sale or other disposition of the property.

partner, it must be reported on his or her return

•

For exceptions to these rules, see Distribu-

They do not jointly sell services or the

for the tax year in which the distribution is re-

property produced or extracted. Each sep-

ceived. Money or property withdrawn by a part-

tion of partner’s debt and Net precontribution

arate participant can delegate authority to

ner in anticipation of the current year’s earnings

gain, later. Also, see Payments for Unrealized

sell his or her share of the property pro-

is treated as a distribution received on the last

Receivables and Inventory Items under Disposi-

duced or extracted for the time being for

day of the partnership’s tax year.

tion of Partner’s Interest, later.

Publication 541 (December 2010)

Page 4

Form 541 - Partnerships - Department Of The Treasury - Internal Revenue Service - 2010 Page 4

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