Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Exception for inventory items held more

partner’s interest in the partnership was binding

Contacting your Taxpayer Advocate. If you

than 5 years. If a distributee partner sells in-

on January 4, 1993, and at all times thereafter).

have attempted to deal with an IRS problem

ventory items held for more than 5 years after

unsuccessfully, you should contact your Tax-

Unrealized receivables are defined earlier

the distribution, the type of gain or loss depends

payer Advocate.

under Payments for Unrealized Receivables

on how they are being used on the date sold.

The Taxpayer Advocate independently rep-

and Inventory Items. However, for this purpose,

The gain or loss is capital gain or loss if the

resents your interests and concerns within the

they do not include the items listed in that dis-

property is a capital asset in the partner’s hands

IRS by protecting your rights and resolving

cussion under Other items treated as unrealized

at the time sold.

problems that have not been fixed through nor-

receivables.

mal channels. While Taxpayer Advocates can-

Partners’ valuation. Generally, the part-

Example. Ann receives, through dissolution

not change the tax law or make a technical tax

ners’ valuation of a partner’s interest in partner-

of her partnership, inventory that has a basis of

decision, they can clear up problems that re-

ship property in an arm’s-length agreement will

$19,000. Within 5 years, she sells the inventory

sulted from previous contacts and ensure that

be treated as correct. If the valuation reflects

for $24,000. The $5,000 gain is taxed as ordi-

your case is given a complete and impartial

only the partner’s net interest in the property

nary income. If she had held the inventory for

review.

(total assets less liabilities), it must be adjusted

more than 5 years, her gain would have been

To contact your Taxpayer Advocate:

so that both the value of and the basis for the

capital gain, provided the inventory was a capital

•

Call the Taxpayer Advocate toll free at

partner’s interest include the partner’s share of

asset in her hands at the time of sale.

1-877-777-4778.

partnership liabilities.

Substituted basis property. If a distributee

•

Call, write, or fax the Taxpayer Advocate

Gain or loss on distribution. Upon the re-

partner disposes of unrealized receivables or

office in your area.

ceipt of the distribution, the retiring partner or

inventory items in a nonrecognition transaction,

successor in interest of a deceased partner will

•

Call 1-800-829-4059 if you are a

ordinary gain or loss treatment applies to a later

recognize gain only to the extent that any money

TTY/TDD user.

disposition of any substituted basis property re-

(and marketable securities treated as money)

•

sulting from the transaction.

Visit

distributed is more than the partner’s adjusted

basis in the partnership. The partner will recog-

Liquidation at Partner’s

For more information, see Publication 1546,

nize a loss only if the distribution is in money,

Retirement or Death

How To Get Help With Unresolved Tax

unrealized receivables, and inventory items. No

Problems (now available in Chinese, Korean,

loss is recognized if any other property is re-

Payments made by the partnership to a retiring

Russian, and Vietnamese, in addition to English

ceived. See Partner’s Gain or Loss under Part-

partner or successor in interest of a deceased

and Spanish).

nership Distributions, earlier.

partner in return for the partner’s entire interest

Free tax services. To find out what services

in the partnership may have to be allocated

Other payments. Payments made by the

are available, get Publication 910, IRS Guide to

between payments in liquidation of the partner’s

partnership to a retiring partner or successor in

Free Tax Services. It contains a list of free tax

interest in partnership property and other pay-

interest of a deceased partner that are not made

publications and an index of tax topics. It also

ments. The partnership’s payments include an

in exchange for an interest in partnership prop-

describes other free tax information services,

assumption of the partner’s share of partnership

erty are treated as distributive shares of partner-

including tax education and assistance pro-

liabilities treated as a distribution of money.

ship income or guaranteed payments. This rule

grams and a list of TeleTax topics.

applies regardless of the time over which the

For income tax purposes, a retiring partner

payments are to be made. It applies to payments

Internet. You can access the IRS

or successor in interest of a deceased partner is

made for the partner’s share of unrealized re-

website 24 hours a day, 7 days a

treated as a partner until his or her interest in the

ceivables and goodwill not treated as a distribu-

week, at to:

partnership has been completely liquidated.

tion.

•

If the amount is based on partnership in-

E-file your return. Find out about com-

Liquidating payments. Payments made in

come, the payment is taxable as a distributive

mercial tax preparation and e-file serv-

liquidation of the interest of a retiring or de-

share of partnership income. The payment re-

ices available free to eligible taxpayers.

ceased partner in exchange for his or her inter-

•

tains the same character when reported by the

est in partnership property are considered a

Check the status of your refund. Click on

recipient that it would have had if reported by the

distribution, not a distributive share or guaran-

Where’s My Refund. Be sure to wait at

partnership.

teed payment that could give rise to a deduction

least 6 weeks from the date you filed

If the amount is not based on partnership

(or its equivalent) for the partnership.

your return (3 weeks if you filed electroni-

income, it is treated as a guaranteed payment.

cally). Have your tax return available be-

Unrealized receivables and goodwill.

The recipient reports guaranteed payments as

cause you will need to know your social

Payments made for the retiring or deceased

ordinary income. For additional information on

security number, your filing status, and

partner’s share of the partnership’s unrealized

guaranteed payments, see Transactions Be-

the exact whole dollar amount of your

receivables or goodwill are not treated as made

tween Partnership and Partners, earlier.

refund.

in exchange for partnership property if both of

•

These payments are included in income by

Download forms, instructions, and publi-

the following tests are met.

the recipient for his or her tax year that includes

cations.

•

the end of the partnership tax year for which the

•

Capital is not a material income-producing

Order IRS products online.

payments are a distributive share or in which the

factor for the partnership. (Whether capital

•

Research your tax questions online.

partnership is entitled to deduct them as guaran-

is a material income-producing factor is

•

Search publications online by topic or

teed payments.

explained in the discussion under Family

keyword.

Former partners who continue to make guar-

Partnership near the beginning of this pub-

•

View Internal Revenue Bulletins (IRBs)

anteed periodic payments to satisfy the

lication.)

published in the last few years.

partnership’s liability to a retired partner after the

•

The retiring or deceased partner was a

•

partnership is terminated can deduct the pay-

Figure your withholding allowances using

general partner in the partnership.

ments as a business expense in the year paid.

our Form W-4 calculator.

•

However, this rule does not apply to payments

for goodwill to the extent that the partnership

news by email.

•

agreement provides for a reasonable payment

Get information on starting and operating

How To Get Tax Help

to a retiring partner for goodwill.

a small business.

Phone. Many services are available

Payments for unrealized receivables

You can get help with unresolved tax issues,

by phone.

or goodwill are not treated as made in

order free publications and forms, ask tax ques-

exchange for partnership property

tions, and get information from the IRS in sev-

CAUTION

under any circumstance if the partner retired or

eral ways. By selecting the method that is best

•

died before January 5, 1993 (or retired on or

for you, you will have quick and easy access to

Ordering forms, instructions, and publica-

after that date if a written contract to buy the

tax help.

tions. Call 1-800-829-3676 to order

Page 12

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 12

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