Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

interests or interests in the same or different

following partnership property were sold at its

Notification required of partner. If a partner

partnerships. However, under certain circum-

fair market value on the date of the payment.

exchanges a partnership interest attributable to

stances, such an exchange may be treated as a

unrealized receivables or inventory for money or

•

Mining property for which exploration ex-

tax-free contribution of property to a partnership.

property, he or she must notify the partnership in

penses were deducted.

See Contribution of Property under Transac-

writing. This must be done within 30 days of the

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tions Between Partnership and Partners, earlier.

transaction or, if earlier, by January 15 of the

Stock in a Domestic International Sales

calendar year following the calendar year of the

An interest in a partnership that has a valid

Corporation (DISC).

exchange. A partner may be subject to a $50

election in effect under section 761(a) of the

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Certain farm land for which expenses for

penalty for each failure to notify the partnership

Internal Revenue Code to be excluded from the

soil and water conservation or land clear-

about such a transaction, unless the failure was

partnership rules of the Code is treated as an

ing were deducted.

due to reasonable cause and not willful neglect.

interest in each of the partnership assets and not

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as a partnership interest. See Exclusion From

Franchises, trademarks, or trade names.

Partnership Rules, earlier.

Information return required of partnership.

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Oil, gas, or geothermal property for which

When a partnership is notified of an exchange of

intangible drilling and development costs

Installment reporting for sale of partnership

partnership interests involving unrealized re-

were deducted.

interest. A partner who sells a partnership in-

ceivables or inventory items, the partnership

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terest at a gain may be able to report the sale on

Stock of certain controlled foreign corpora-

must file Form 8308. Form 8308 is filed with

the installment method. For requirements and

tions.

Form 1065 for the tax year that includes the last

other information on installment sales, see Pub-

•

day of the calendar year in which the exchange

Market discount bonds and short-term ob-

lication 537.

took place. If notified of an exchange after filing

ligations.

Part of the gain from the installment sale may

Form 1065, the partnership must file Form 8308

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Property subject to recapture of deprecia-

be allocable to unrealized receivables or inven-

separately, within 30 days of the notification.

tion under sections 1245 and 1250 of the

tory items. See Payments for Unrealized Re-

On Form 8308, the partnership states the

Internal Revenue Code. Depreciation re-

ceivables and Inventory Items, later. The gain

date of the exchange and the names, ad-

capture is discussed in chapter 3 of Publi-

allocable to unrealized receivables and inven-

dresses, and taxpayer identification numbers of

cation 544.

tory items must be reported in the year of sale.

the partnership filing the return and the trans-

The gain allocable to the other assets can be

feree and transferor in the exchange. Also, the

Determining gain or loss. The income or

reported under the installment method.

partnership provides their telephone number.

loss realized by a partner upon the sale or ex-

The partnership must provide a copy of Form

change of its interest in unrealized receivables

Payments for Unrealized

8308 (or a written statement with the same infor-

and inventory items, discussed below, is the

Receivables and Inventory

mation) to each transferee and transferor by the

amount that would have been allocated to the

later of January 31 following the end of the

Items

partner if the partnership had sold all of its prop-

calendar year or 30 days after it receives notice

erty for cash at fair market value, in a fully

of the exchange.

If a partner receives money or property in ex-

taxable transaction, immediately prior to the

The partnership may be subject to a penalty

change for any part of a partnership interest, the

partner’s transfer of interest in the partnership.

of up to $50 for each failure to timely file Form

amount due to his or her share of the

Any gain or loss recognized that is attributable to

8308 and a $50 penalty for each failure to fur-

partnership’s unrealized receivables or inven-

the unrealized receivables and inventory items

nish a copy of Form 8308 to a transferor or

tory items results in ordinary income or loss.

will be ordinary gain or loss.

transferee, unless the failure is due to reasona-

This amount is treated as if it were received for

ble cause and not willful neglect. If the failure is

the sale or exchange of property that is not a

Example. You are a partner in ABC Partner-

intentional, a higher penalty may be imposed.

capital asset.

ship. The adjusted basis of your partnership

See the form instructions for details.

This treatment applies to the unrealized re-

interest at the end of the current year is zero.

ceivables part of payments to a retiring partner

Your share of potential ordinary income from

Statement required of partner. If a partner

or successor in interest of a deceased partner

partnership depreciable property is $5,000. The

sells or exchanges any part of an interest in a

only if that part is not treated as paid in ex-

partnership has no other unrealized receivables

partnership having unrealized receivables or in-

change for partnership property. See Liquida-

or inventory items. You sell your interest in the

ventory, he or she must file a statement with his

tion at Partner’s Retirement or Death, later.

partnership for $10,000 in cash and you report

or her tax return for the year in which the sale or

the entire amount as a gain since your adjusted

exchange occurs. The statement must contain

Unrealized receivables. Unrealized receiv-

basis in the partnership is zero. You report as

the following information.

ables include any rights to payment not already

ordinary income your $5,000 share of potential

included in income for the following items.

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ordinary income from the partnership’s depre-

The date of the sale or exchange.

ciable property. The remaining $5,000 gain is a

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Goods delivered or to be delivered to the

The amount of any gain or loss attributa-

capital gain.

extent the payment would be treated as

ble to the unrealized receivables or inven-

received for property other than a capital

tory.

Inventory items. Inventory items are not just

asset.

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stock-in-trade of the partnership. They also in-

The amount of any gain or loss attributa-

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clude the following property.

Services rendered or to be rendered.

ble to capital gain or loss on the sale of

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the partnership interest.

Property that would properly be included

These rights must have arisen under a con-

in the partnership’s inventory if on hand at

tract or agreement that existed at the time of

the end of the tax year or that is held

Partner’s disposition of distributed unreal-

sale or distribution, even though the partnership

primarily for sale to customers in the nor-

ized receivables or inventory items. In gen-

may not be able to enforce payment until a later

mal course of business.

eral, any gain or loss on a sale or exchange of

date. For example, unrealized receivables in-

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unrealized receivables or inventory items a part-

clude accounts receivable of a cash method

Property that, if sold or exchanged by the

ner received in a distribution is an ordinary gain

partnership and rights to payment for work or

partnership, would not be a capital asset

or loss. For this purpose, inventory items do not

goods begun but incomplete at the time of the

or section 1231 property (real or deprecia-

include real or depreciable business property,

sale or distribution of the partner’s share.

ble business property held more than one

even if they are not held more than 1 year.

year). For example, accounts receivable

The basis for any unrealized receivables in-

acquired for services or from the sale of

cludes all costs or expenses for the receivables

Example. Mike, a distributee partner, re-

inventory and unrealized receivables are

that were paid or accrued but not previously

ceived his share of accounts receivable when

inventory items.

taken into account under the partnership’s

his law firm dissolved. The partnership used the

method of accounting.

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Property held by the partnership that

cash method of accounting, so the receivables

Other items treated as unrealized receiv-

would be considered inventory if held by

had a basis of zero. If Mike later collects the

receivables or sells them, the amount he re-

ables. Unrealized receivables include poten-

the partner selling the partnership interest

tial gain that would be ordinary income if the

or receiving the distribution.

ceives will be ordinary income.

Page 11

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 11

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