Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

expenses paid to partners must be reported on

Payments resulting in loss. If guaranteed

person is not treated as actually owning

the partners’ Schedule K-1 as guaranteed pay-

payments to a partner result in a partnership

that interest in reapplying rule (2) to make

ments.

loss in which the partner shares, the partner

another person the constructive owner.

must report the full amount of the guaranteed

Minimum payment. If a partner is to receive a

payments as ordinary income. The partner sep-

Example. Individuals A and B and Trust T

minimum payment from the partnership, the

arately takes into account his or her distributive

are equal partners in Partnership ABT. A’s hus-

guaranteed payment is the amount by which the

share of the partnership loss, to the extent of the

band, AH, is the sole beneficiary of Trust T.

minimum payment is more than the partner’s

adjusted basis of the partner’s partnership inter-

Trust T’s partnership interest will be attributed to

distributive share of the partnership income

est.

AH only for the purpose of further attributing the

before taking into account the guaranteed pay-

interest to A. As a result, A is a more-than-50%

ment.

Sale or Exchange

partner. This means that any deduction for

of Property

losses on transactions between her and ABT will

Example. Under a partnership agreement,

not be allowed, and gain from property that in

Sandy is to receive 30% of the partnership in-

Special rules apply to a sale or exchange of

come, but not less than $8,000. The partnership

the hands of the transferee is not a capital asset

property between a partnership and certain per-

has net income of $20,000. Sandy’s share, with-

is treated as ordinary, rather than capital, gain.

sons.

out regard to the minimum guarantee, is $6,000

(30% × $20,000). The guaranteed payment that

More information. For more information on

Losses. Losses will not be allowed from a sale

these special rules, see Sales and Exchanges

can be deducted by the partnership is $2,000

or exchange of property (other than an interest

($8,000 − $6,000). Sandy’s income from the

Between Related Persons in chapter 2 of Publi-

in the partnership) directly or indirectly between

cation 544.

partnership is $8,000, and the remaining

a partnership and a person whose direct or indi-

$12,000 of partnership income will be reported

rect interest in the capital or profits of the part-

Contribution of Property

by the other partners in proportion to their

nership is more than 50%.

shares under the partnership agreement.

If the sale or exchange is between two part-

If the partnership net income had been

Usually, neither the partner nor the partnership

nerships in which the same persons directly or

$30,000, there would have been no guaranteed

recognizes a gain or loss when property is con-

indirectly own more than 50% of the capital or

payment since her share, without regard to the

tributed to the partnership in exchange for a

profits interests in each partnership, no deduc-

guarantee, would have been greater than the

partnership interest. This applies whether a part-

tion of a loss is allowed.

guarantee.

nership is being formed or is already operating.

The basis of each partner’s interest in the

The partnership’s holding period for the property

partnership is decreased (but not below zero) by

Self-employed health insurance premiums.

includes the partner’s holding period.

the partner’s share of the disallowed loss.

Premiums for health insurance paid by a part-

The contribution of limited partnership inter-

If the purchaser later sells the property, only

nership on behalf of a partner for services as a

ests in one partnership for limited partnership

the gain realized that is greater than the loss not

partner are treated as guaranteed payments.

interests in another partnership qualifies as a

allowed will be taxable. If any gain from the sale

The partnership can deduct the payments as a

tax-free contribution of property to the second

of the property is not recognized because of this

business expense and the partner must include

partnership if the transaction is made for busi-

rule, the basis of each partner’s interest in the

them in gross income. However, if the partner-

ness purposes. The exchange is not subject to

partnership is increased by the partner’s share

ship accounts for insurance paid for a partner as

the rules explained later under Disposition of

of that gain.

a reduction in distributions to the partner, the

Partner’s Interest.

partnership cannot deduct the premiums.

Gains. Gains are treated as ordinary income

A partner who qualifies can deduct 100% of

in a sale or exchange of property directly or

Disguised sales. A contribution of money or

the health insurance premiums paid by the part-

indirectly between a person and a partnership,

other property to the partnership followed by a

nership on his or her behalf as an adjustment to

or between two partnerships, if both of the fol-

distribution of different property from the part-

income. The partner cannot deduct the premi-

lowing tests are met.

nership to the partner is treated not as a contri-

ums for any calendar month or part of a month in

•

bution and distribution, but as a sale of property,

More than 50% of the capital or profits

which the partner is eligible to participate in any

if both of the following tests are met.

interest in the partnership(s) is directly or

subsidized health plan maintained by any em-

•

indirectly owned by the same person(s).

ployer of the partner or the partner’s spouse. For

The distribution would not have been

•

more information on the self-employed health

made but for the contribution.

The property in the hands of the trans-

insurance deduction, see chapter 7 in Publica-

•

feree immediately after the transfer is not

The partner’s right to the distribution does

tion 535.

a capital asset. Property that is not a capi-

not depend on the success of partnership

tal asset includes accounts receivable, in-

Including payments in partner’s income.

operations.

ventory, stock-in-trade, and depreciable or

Guaranteed payments are included in income in

real property used in a trade or business.

the partner’s tax year in which the partnership’s

All facts and circumstances are considered in

tax year ends.

determining if the contribution and distribution

More than 50% ownership. To determine if

are more properly characterized as a sale. How-

Example 1. Under the terms of a partner-

there is more than 50% ownership in partnership

ever, if the contribution and distribution occur

ship agreement, Erica is entitled to a fixed an-

within 2 years of each other, the transfers are

capital or profits, the following rules apply.

nual payment of $10,000 without regard to the

presumed to be a sale unless the facts clearly

income of the partnership. Her distributive share

1. An interest directly or indirectly owned by

indicate that the transfers are not a sale. If the

or for a corporation, partnership, estate, or

of the partnership income is 10%. The partner-

contribution and distribution occur more than 2

trust is considered to be owned proportion-

ship has $50,000 of ordinary income after de-

years apart, the transfers are presumed not to

ately by or for its shareholders, partners, or

ducting the guaranteed payment. She must

be a sale unless the facts clearly indicate that

include ordinary income of $15,000 ($10,000

beneficiaries.

the transfers are a sale.

guaranteed payment + $5,000 ($50,000 × 10%)

2. An individual is considered to own the in-

Form 8275 required. A partner must attach

distributive share) on her individual income tax

terest directly or indirectly owned by or for

Form 8275, Disclosure Statement, (or other

return for her tax year in which the partnership’s

the individual’s family. For this rule, “fam-

statement) to his or her return if the partner

tax year ends.

ily” includes only brothers, sisters,

contributes property to a partnership and, within

half-brothers, half-sisters, spouses, ances-

2 years (before or after the contribution), the

Example 2. Mike is a calendar year tax-

tors, and lineal descendants.

partnership transfers money or other considera-

payer who is a partner in a partnership. The

tion to the partner. For exceptions to this require-

partnership uses a fiscal year that ended Janu-

3. If a person is considered to own an interest

ment, see section 1.707-3(c)(2) of the

ary 31, 2005. Mike received guaranteed pay-

using rule (1), that person (the “construc-

regulations.

ments from the partnership from February 1,

tive owner”) is treated as if actually owning

A partnership must attach Form 8275 (or

2004, until December 31, 2004. He must include

that interest when rules (1) and (2) are

other statement) to its return if it distributes prop-

these guaranteed payments in income for 2005

applied. However, if a person is consid-

and report them on his 2005 income tax return.

ered to own an interest using rule (2), that

erty to a partner, and, within 2 years (before or

Page 7

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2006 Page 7

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