Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

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$400 or more for the year, the partner must

The interests of all partners in economic

tion, the partner’s death, or otherwise, his or her

figure self-employment tax on Schedule SE

profits and losses (if different from inter-

distributive share of partnership items must be

(Form 1040). For more information on self-em-

ests in taxable income or loss) and in cash

included in the partner’s income for the tax year

ployment tax, see Publication 533.

flow and other nonliquidating distributions.

in which membership in the partnership ends.

To compute the distributive share of these

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The rights of the partners to distributions

Alternative minimum tax. To figure alterna-

items, the partnership’s tax year is considered

of capital upon liquidation.

tive minimum tax, a partner must separately

ended on the date the partner disposed of the

take into account any distributive share of items

interest. To avoid an interim closing of the part-

of income and deductions that enter into the

Varying interests. A change in a partner’s

nership books, the partners can agree to esti-

computation of alternative minimum taxable in-

interest during the partnership’s tax year re-

mate the distributive share by taking the

come. For information on which items of income

quires the partner’s distributive share of partner-

prorated amount the partner would have in-

and deductions are affected, see the Form 6251

ship items to be determined by taking into

cluded in income if he or she had remained a

instructions.

account his or her varying interests in the part-

partner for the entire partnership tax year.

nership during the tax year. Partnership items

Partners of electing large partnerships

Self-employment income of deceased

are allocated to the partner only for the portion of

should see the Partner’s Instructions

partner. A different rule applies in computing a

the year in which he or she is a member of the

for Schedule K – 1 (Form 1065 – B), for

CAUTION

deceased partner’s self-employment income for

partnership.

information on alternative minimum tax.

the year of death. The partner’s self-employ-

This rule applies to a partner who sells or

ment income includes the partner’s distributive

exchanges part of an interest in a partnership, or

share of income earned by the partnership

whose interest is reduced or increased (whether

Figuring Distributive Share

through the end of the month in which the

by entry of a new partner, partial liquidation of a

partner’s death occurs. This is true even though

partner’s interest, gift, additional contributions,

the deceased partner’s estate or heirs may suc-

Generally, the partnership agreement deter-

or otherwise).

ceed to the decedent’s rights in the partnership.

mines a partner’s distributive share of any item

For this purpose, partnership income for the

or class of items of income, gain, loss, deduc-

Example. ABC is a calendar year partner-

partnership’s tax year in which a partner dies is

tion, or credit. However, the allocations provided

ship with three partners, Alan, Bob, and Cathy.

considered to be earned equally in each month.

for in the partnership agreement or any modifi-

Under the partnership agreement, profits and

cation will be disregarded if they do not have

losses are shared in proportion to each partner’s

Example. Larry, a partner in WoodsPar, is a

substantial economic effect. If the partnership

contributions. On January 1 the ratio was 90%

calendar year taxpayer. WoodsPar’s fiscal year

agreement does not provide for an allocation, or

for Alan, 5% for Bob, and 5% for Cathy. On

ends June 30. For the partnership year ending

an allocation does not have substantial eco-

December 1 Bob and Cathy each contributed

June 30, 2002, Larry’s distributive share of part-

nomic effect, the partner’s distributive share of

additional amounts. The new profit and loss

nership profits is $2,000. On August 18, 2002,

the partnership items is generally determined by

sharing ratios were 30% for Alan, 35% for Bob,

Larry dies and his estate succeeds to his part-

the partner’s interest in the partnership. For spe-

and 35% for Cathy. For its tax year ended De-

nership interest. For the partnership year ending

cial allocation rules for items attributable to

cember 31, the partnership had a loss of $1,200.

June 30, 2003, Larry and his estate’s distributive

built-in gain or loss on property contributed by a

This loss occurred equally over the partnership’s

share is $3,000.

partner, see Contribution of Property under

tax year. The loss is divided among the partners

Larry’s self-employment income to be re-

Transactions Between Partnership and Part-

as follows:

ported on Schedule SE (Form 1040) for 2002 is

ners, later.

$2,500. This consists of his $2,000 distributive

Profit

Part

Substantial economic effect. An allocation

share for the partnership tax year ending June

× $3,000) of the distribu-

has substantial economic effect if both of the

30, 2002, plus $500 (

Loss

Year

Total

following tests are met.

tive share for the tax year ending June 30, 2003.

Partner %

x Held x Loss = Loss

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There is a reasonable possibility that the

Reporting Distributive Share

allocation will substantially affect the dollar

Alan

x 11/12 x $1,200 = $990

amount of the partners’ shares of partner-

1/12 x

1,200 =

A partner must report his or her distributive

ship income or loss independently of tax

share of partnership items on his or her tax

consequences.

return, whether or not it is actually distributed.

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Bob

x 11/12 x $1,200 = $55

The partner to whom the allocation is

(However, a partner’s deduction for his or her

1/12 x

1,200 =

made actually receives the economic ben-

distributive share of a loss may be limited. See

efit or bears the economic burden corre-

Limits on Losses, later.) These items are re-

sponding to that allocation.

ported to the partner on Schedule K – 1 (Form

Cathy

x 11/12 x $1,200 = $55

1065).

1/12 x

1,200 =

The following discussions explain how part-

Allocation attributable to a nonrecourse

nership items are treated on a partner’s return.

liability. An allocation of a loss, deduction, or

See the Partner’s Instructions for Schedule

expense attributable to a partnership nonre-

Certain cash basis items prorated daily.

K – 1 (Form 1065) for more information.

course liability does not have any economic

If any partner’s interest in a partnership changes

effect because the partner does not bear the

during the tax year, each partner’s share of

Character of items. The character of each

economic burden corresponding to that alloca-

certain cash basis items of the partnership must

item of income, gain, loss, deduction, or credit

tion. (See Effect of Partnership Liabilities under

be determined by prorating the items on a daily

included in a partner’s distributive share is deter-

Basis of Partner’s Interest, later.) Therefore, the

basis. That daily portion is then allocated to the

mined as if the partner realized the item directly

partner’s distributive share of the item must be

partners in proportion to their interests in the

from the same source as the partnership or

determined by his or her interest in the partner-

partnership at the close of each day. This rule

incurred the item in the same manner as the

ship. For more information, see section 1.704 – 2

applies to the following items for which the part-

partnership.

of the regulations.

nership uses the cash method of accounting.

For example, a partner’s distributive share of

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gain from the sale of partnership depreciable

Partner’s interest in partnership. If a

Interest.

property used in the trade or business of the

partner’s distributive share of a partnership item

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Taxes.

partnership is treated as gain from the sale of

cannot be determined under the partnership

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depreciable property the partner used in a trade

agreement, it is determined by his or her interest

Payments for services or for the use of

or business.

in the partnership. The partner’s interest is de-

property.

termined by taking into account all the following

Inconsistent treatment of items. Partners

items.

Distributive share in year of disposition. If a

must generally treat partnership items the same

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The partners’ relative contributions to the

partner’s entire interest in a partnership is dis-

way on their individual tax returns as they are

partnership.

posed of, whether by sale, exchange, liquida-

treated on the partnership return. If a partner

Page 7

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 7

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