Documente Academic
Documente Profesional
Documente Cultură
2
Internal
Revenue Terminating a Partnership ................ 3
Service
For use in preparing Exclusion From Partnership Rules .. 3
Penalties .............................................. 5
Index .................................................... 27
Introduction
This publication explains how the tax law ap-
plies to partnerships and to partners. A part-
nership does not pay tax on its income but
“passes through” any profits or losses to its
partners. Partners must include partnership
items on their tax returns.
For a discussion of business expenses a
partnership can deduct, see Publication 535.
Members of oil and gas partnerships should
read about the deduction for depletion in
chapter 13 of that publication.
Certain partnerships must have a tax
matters partner (TMP) who is also a general
partner. For information on the rules for des-
ignating a TMP, see the instructions for
Schedule B of Form 1065 and Regulations
section 301.6231(a)(7)–1.
an interest in a partnership. An interest in a partnership that has a valid under any circumstance if the partner retired
election in effect under section 761(a) of the or died before January 5, 1993 (or retired on
Internal Revenue Code to be excluded from or after that date if a written contract to buy
Abandoned or worthless partnership in- the partnership rules of the Code is treated the partner's interest in the partnership was
terest. A loss incurred from the abandon- as an interest in each of the partnership as- binding on January 4, 1993, and at all times
ment or worthlessness of a partnership inter- sets and not as a partnership interest. See thereafter).
est is an ordinary loss only if both of the Exclusion From Partnership Rules, earlier.
following tests are met. Unrealized receivables are defined later
Installment reporting for sale of partner- under Payments for Unrealized Receivables
1) The transaction is not a sale or ex- ship interest. A partner who sells a part- and Inventory Items. However, for this pur-
change. nership interest at a gain may be able to re- pose, they do not include the items listed in
port the sale on the installment method. For that discussion under Other items treated as
2) The partner has not received an actual requirements and other information on an in- unrealized receivables.
or deemed distribution from the partner- stallment sale, see Publication 537, Install- Partners' valuation. Generally, the part-
ship. ment Sales. ners' valuation of a partner's interest in part-
The gain from the installment sale is nership property in an arm's-length agree-
If the partner receives even a de minimis ac- treated as part capital gain and part ordinary ment will be treated as correct. If the valuation
tual or deemed distribution, the entire loss is income if the partnership's assets included reflects only the partner's net interest in the
a capital loss. unrealized receivables or inventory items. property (total assets less liabilities), it must
Page 15
be adjusted so that both the value of and the times thereafter before the sale or exchange. come from partnership depreciable property
basis for the partner's interest include the For the definition of “substantially appreci- is $5,000. The partnership has no other un-
partner's share of partnership liabilities. ated,” see Certain distributions treated as a realized receivables or inventory items. You
Gain or loss on distribution. Upon the sale or exchange under Partnership Distribu- sell your interest in the partnership for
receipt of the distribution, the retiring partner tions, earlier. $10,000 in cash and you report the entire
or successor in interest of a deceased partner amount as a gain since your adjusted basis
will recognize gain only to the extent that any Unrealized receivables. Unrealized receiv- in the partnership is zero. You report as ordi-
money (and marketable securities treated as ables include any rights to payment not al- nary income your $5,000 share of potential
money) distributed is more than the partner's ready included in income for the following ordinary income from the partnership's
adjusted basis in the partnership. The partner items. depreciable property. The remaining $5,000
will recognize a loss only if the distribution is gain is a capital gain.
in money, unrealized receivables, and inven- • Goods delivered or to be delivered to the
tory items. No loss is recognized if any other extent the payment would be treated as Inventory items. Inventory items are not just
property is received. received for property other than a capital stock-in-trade of the partnership. They also
asset. include the following property.
Other payments. Payments made by the • Services rendered or to be rendered.
partnership to a retiring partner or successor 1) Property that would properly be included
in interest of a deceased partner that are not These rights must have arisen under a in the partnership's inventory if on hand
made in exchange for an interest in partner- contract or agreement that existed at the time at the end of the tax year or that is held
ship property are treated as distributive of sale or distribution, even though the part- primarily for sale to customers in the
shares of partnership income or guaranteed nership may not be able to enforce payment normal course of business.
payments. This rule applies regardless of the until a later date. For example, unrealized
time over which the payments are to be receivables include accounts receivable of a 2) Property that, if sold or exchanged by the
made. It applies to payments made for the cash method partnership and rights to pay- partnership, would not be a capital asset
partner's share of unrealized receivables and ment for work or goods begun but incomplete or section 1231 property (real or depre-
goodwill not treated as a distribution. at the time of the sale or distribution of the ciable business property held more than
If the amount is based on partnership in- partner's share. one year). For example, accounts
come, the payment is taxable as a distributive The basis for any unrealized receivables receivable acquired for services or from
share of partnership income. The payment includes all costs or expenses for the receiv- the sale of inventory and unrealized
retains the same character when reported by ables that were paid or accrued but not pre- receivables are inventory items.
the recipient that it would have had if reported viously taken into account under the partner- 3) Property held by the partnership that
by the partnership. For more information, see ship's method of accounting. would be considered inventory if held by
Partner's Distributive Share, earlier. Other items treated as unrealized the partner selling the partnership inter-
If the amount is not based on partnership receivables. Unrealized receivables include est or receiving the distribution.
income, it is treated as a guaranteed pay- potential gain that would be ordinary income
ment. The recipient reports guaranteed pay- if the following partnership property were sold
ments as ordinary income. For additional in- Notification of partnership. If a partner ex-
at its fair market value on the date of the
formation on guaranteed payments, see changes a partnership interest attributable to
payment.
Transactions Between Partnership and Part- unrealized receivables or inventory for money
ners, earlier. • Mining property for which exploration ex- or property, he or she must notify the part-
These payments are included in income penses were deducted. nership in writing. This must be done within
by the recipient for his or her tax year that 30 days of the transaction or, if earlier, by
includes the end of the partnership tax year • Stock in a Domestic International Sales January 15 of the calendar year following the
for which the payments are a distributive Corporation (DISC). calendar year of the exchange. A partner may
share or in which the partnership is entitled • Certain farm land for which expenses for be subject to a $50 penalty for each failure to
to deduct them as guaranteed payments. soil and water conservation or land notify the partnership about such a trans-
Former partners who continue to make clearing were deducted. action, unless the failure was due to reason-
guaranteed periodic payments to satisfy the able cause and not willful neglect.
partnership's liability to a retired partner after
• Franchises, trademarks, or trade names.
the partnership is terminated can deduct the • Oil, gas, or geothermal property for which Information return required of partnership.
payments as a business expense in the year intangible drilling and development costs When a partnership is notified of an exchange
paid. were deducted. of partnership interests involving unrealized
receivables or inventory items, the partner-
• Stock of certain controlled foreign corpo-
ship must file Form 8308, Report of a Sale
rations.
Payments for Unrealized or Exchange of Certain Partnership Interests.
• Market discount bonds and short-term Form 8308 is filed with Form 1065 for the tax
Receivables and Inventory obligations. year that includes the last day of the calendar
Items • Property subject to recapture of depreci- year in which the exchange took place. If no-
If a partner receives money or property in ation under sections 1245 and 1250 of tified of an exchange after filing Form 1065,
exchange for any part of a partnership inter- the Internal Revenue Code. Depreciation the partnership must file Form 8308 sepa-
est, the amount due to his or her share of the recapture is discussed in chapter 3 of rately, within 30 days of the notification.
partnership's unrealized receivables or in- Publication 544. On Form 8308, the partnership states the
ventory items results in ordinary income or date of the exchange and the names, ad-
loss. This amount is treated as if it were re- Determining value. Generally, the sales dresses, and taxpayer identification numbers
ceived for the sale or exchange of property price of unrealized receivables, or their value of the partnership filing the return and the
that is not a capital asset. if received in a distribution treated as a sale transferee and transferor in the exchange.
This treatment applies to the unrealized or exchange, is determined by any arm's- The partnership must also provide a copy of
receivables part of payments to a retiring length agreement between the buyer and the Form 8308 (or a written statement with the
partner or successor in interest of a deceased seller (or between the partnership and the same information) to each transferee and
partner only if that part is not treated as paid partner receiving the distribution). transferor by the later of January 31 following
in exchange for partnership property. See If no agreement exists, the price or value the end of the calendar year or 30 days after
Liquidation at Partner's Retirement or Death, must be determined by taking into account it receives notice of the exchange.
earlier. both the estimated cost to complete perform- The partnership may be subject to a pen-
ance of the contract or agreement and the alty of up to $50 for each failure to timely file
For a sale or exchange of a partner- time between the sale or distribution and the Form 8308 and a $50 penalty for each failure
! ship interest before August 6, 1997,
CAUTION inventory must be substantially ap-
time of payment. to furnish a copy of Form 8308 to a transferor
or transferee, unless the failure is due to
preciated before it generates ordinary income Example. You are a partner in ABC reasonable cause and not willful neglect. If
(rather than capital gain). This also applies to Partnership. The adjusted basis of your part- the failure is intentional, a higher penalty may
any sale or exchange under a written contract nership interest at the end of the current year be imposed. See the form instructions for
that is in effect on June 8, 1997, and at all is zero. Your share of potential ordinary in- details.
Page 16
Statement required of partner. If a partner a) The transferee's basis for his or her
sells or exchanges any part of an interest in partnership interest, over
a partnership having unrealized receivables Adjusting the Basis of b) The transferee's share of the ad-
or inventory, he or she must file a statement
with his or her tax return for the year in which Partnership Property justed basis of all partnership prop-
erty, or
the sale or exchange occurs. The statement Generally, a partnership cannot adjust the
must contain the following information. basis of its property because of a distribution 2) Decreasing the adjusted basis of part-
of property to a partner or because of a nership property by the excess of:
• The date of the sale or exchange, the transfer of an interest in the partnership, a) The transferee partner's share of
partner's adjusted basis for the partner- whether by sale or exchange or because of the adjusted basis of all partnership
ship interest, and the part of the basis the death of a partner. The partnership can property, over
that represents the unrealized receiv- adjust the basis only if it files an election to
make an optional adjustment to the basis of b) The transferee's basis for his or her
ables or inventory items. partnership interest.
its property upon all distributions and trans-
• The money and fair market value of any fers. A partnership does not adjust the basis
These adjustments affect the basis of
other property the partner received or will of partnership property for a contribution of
partnership property for the transferee partner
receive for the interest in the partnership, property, including money, to the partnership.
only. They become part of his or her share
and the part for the unrealized receiv- of the common partnership basis.
ables or inventory items. Distributions. When there is a distribution
of partnership property to a partner, the part- Making the election. The optional adjust-
• The statement described earlier in Spe- nership makes the optional adjustment by:
cial adjustment to basis of property re- ment to basis is made by filing a written
ceived under Partner's Basis for Distrib- statement with Form 1065 for the tax year in
1) Increasing the adjusted basis of the re- which the distribution or transfer occurs. For
uted Property, if the partner computes the
tained partnership property by: the election to be valid, the return must be
basis for the unrealized receivables or
inventory items under that provision. filed on time, including extensions. The
a) Any gain recognized by the
statement must include the name and ad-
distributee partner on the distribu-
• If the partnership used the optional basis tion, plus
dress of the partnership, be signed by one of
adjustment, the computation described the partners, and state that the partnership
later under Adjusting the Basis of Part- b) The excess, if any, of the partner- elects under section 754 to apply sections
nership Property and a list of the part- ship's adjusted basis for the distrib- 734(b) and 743(b) of the Internal Revenue
nership properties to which the adjust- uted property (immediately before Code. Once a valid election has been made,
ment has been allocated. the distribution) over the basis of it applies in succeeding years until it is re-
the property to the distributee, or voked.
If the election cannot be made with the
Partner's disposition of distributed unre- 2) Decreasing the adjusted basis of the re- return, a partner or the partnership can re-
alized receivables or inventory items. In tained partnership property by: quest an automatic extension of 12 months
general, any gain or loss on a sale or ex- to make the election. See sections
a) Any loss recognized by the
change of unrealized receivables or inventory 301.9100–1T through 301.9100–3T of the
distributee partner on the distribu-
items a partner receives in a distribution is Regulations for more information.
tion, plus
an ordinary gain or loss. For this purpose,
inventory items do not include real or depre- b) The excess, if any, of the distributee Revoking the election. The election can be
ciable business property, even if they are not partner's basis for the distributed revoked only with the approval of the IRS. An
held more than 1 year. property over the partnership's ad- application to revoke the election must be
justed basis for the property (im- filed with the director for the district in which
Example. Mike, a distributee partner, re- mediately before the distribution). the partnership return must be filed. This ap-
ceived his share of accounts receivable when plication must be filed within 30 days after the
his law firm dissolved. The partnership used Timing of adjustment. If a partnership close of the partnership tax year for which the
the cash method of accounting, so the completely liquidates the interest of a partner change is to be effective. The application
receivables had a basis of zero to Mike. If the by making a series of cash payments treated must be signed by one of the partners and
receivables are later collected, or if Mike sells as distributions of the partner's interest in state why the partnership wishes to revoke
them, the amount received will be ordinary partnership property, the basis adjustments the election.
income. to partnership property must correspond in Examples of sufficient grounds for ap-
timing and amount with the recognition of gain proving the application include the following.
or loss by the retiring partner, or a deceased
Exception for inventory items held partner's successor in interest, with respect • A change in the nature of the business.
more than 5 years. If a distributee partner to those payments.
sells inventory items held for more than 5 • A substantial increase in assets.
years after the distribution, the type of gain Example. Alan owns a one-third interest • A change in the character of the assets.
or loss depends on how they are being used in the partnership Sylvan Associates. Sylvan • An increased frequency of retirements or
on the date sold. The gain or loss is capital has an optional adjustment to basis election shifts of partnership interests.
gain or loss if the property is a capital asset in effect. When Alan retires, Sylvan continues
in the partner's hands at the time sold. without dissolution and agrees to liquidate However, the IRS will not approve an ap-
Alan's one-third interest in the partnership plication to revoke the election if its primary
Example. Ann receives, through dissol- property by making a series of cash payments purpose is to avoid decreasing the basis of
ution, inventory that has a basis of $19,000. to Alan that are treated as distributions. The partnership assets upon a transfer or distri-
Within 5 years, she sells the inventory for total amount of payments Alan will receive is bution.
$24,000. The $5,000 gain is taxed as ordinary fixed and exceeds the adjusted basis of
income. If she had held the inventory for Alan's interest in the partnership.
more than 5 years, her gain would have been Sylvan increases the adjusted basis of its
capital gain, provided the inventory was a property by Alan's recognized gain in each Form 1065
capital asset in her hands at the time of sale. partnership tax year during which Alan re-
cognizes gain with respect to the payments. Example
Substituted basis property. If a This filled-in Form 1065 is for the AbleBaker
distributee partner disposes of unrealized Transfers. When there is a transfer of a Book Store, a partnership composed of Frank
receivables or inventory items in a nonrecog- partnership interest because of a sale or ex- Able and Susan Baker. The partnership uses
nition transaction, ordinary gain or loss treat- change or a partner's death, the partnership an accrual method of accounting and a cal-
ment applies to a later disposition of any makes the optional adjustment by: endar year for reporting income and loss.
substituted basis property resulting from the Frank works full time in the business, while
transaction. 1) Increasing the adjusted basis of the Susan works approximately 25% of her time
partnership property by the excess of: in it. Both partners are general partners.
Page 17
The partnership agreement states that (Line 16b is left blank because there is no
Frank will receive a yearly guaranteed pay- depreciation listed elsewhere on the return.)
Page 4
ment of $20,000 and Susan will receive Frank does not need to attach Form 4562 Schedules L, M–1, and M–2
$5,000. Any profit or loss will be shared because the partnership did not place prop- Partnerships do not have to complete
equally by the partners. The partners are erty in service during 1998 or depreciate a car Schedules L, M–1, or M–2 if all of the tests
personally liable for all partnership liabilities. or other listed property. listed under question 5 of Schedule B are met
Both partners materially participate in the op- Line 20. Other allowable deductions of and question 5 is marked “Yes.” The
eration of the business. $8,003 not listed elsewhere on the return and AbleBaker Book Store does not meet all of
In addition to income and expenses from for which a separate line is not provided on the tests, so these schedules must be com-
partnership operations, AbleBaker made a page 1 are included on this line. Frank at- pleted.
$650 cash charitable contribution, received taches a schedule that lists each deduction
$150 from dividends, and received $50 tax- and the amount included on line 20. This
exempt interest from municipal bonds. schedule is not shown. Schedule L
Frank completes the partnership's Form Line 21. The total of all deductions, Schedule L contains the partnership's bal-
1065 as explained next. $89,648 (lines 9 through 20), is entered on ance sheets at the beginning and end of the
this line. tax year. All information shown on the bal-
Line 22. The amount on line 21 is sub- ance sheets for the AbleBaker Book Store
Page 1 tracted from the amount on line 8. The result, should agree with its books of record.
The IRS sent Frank a postcard with his pre- $49,370, is entered here and on line 1 of The entry in column (d) of line 14 for total
addressed label, asking if he needed a Form Schedule K. The amount allocated to each assets at the end of the year, $45,391, is
1065 package. He returned the postcard and partner is listed on line 1 of Schedule K–1. carried to item F at the top of page 1 since the
the IRS sent him the package. When Frank answer to question 5 on Schedule B was
completes the return, he places the label in “No.”
the address area on page 1.
Signatures
Frank supplies all the information re- Frank signs the return as a general partner.
quested at the top of the page. The AbleBaker Book Store did not have a Schedule M–1
paid preparer.
Schedule M–1 is the reconciliation of income
Income per the partnership books with income per
The partnership's ordinary income from the Page 2 Form 1065.
trade or business activity is shown on lines Line 1. This line shows the net income
1a through 8.
Schedule A per books of $48,920. This amount is from the
Line 1. Gross sales of $409,465 are en- Schedule A shows the computation of cost profit and loss account (not shown in this ex-
tered on line 1a. Returns and allowances of of goods sold. Beginning inventory, $18,125, ample).
$3,365 are entered on line 1b, resulting in net is entered on line 1 and net purchases, Line 3. This line shows the guaranteed
sales of $406,100, entered on line 1c. $268,741, are entered on line 2. The total, payments to partners.
Line 2. Cost of goods sold, $267,641, $286,866, is entered on line 6. Ending inven- Line 5. This is the total of lines 1 through
from Schedule A, line 8, is entered here. tory, $19,225 (entered on line 7), is sub- 4 of $73,920.
Line 3. Gross profit of $138,459 is shown tracted from line 6 to arrive at cost of goods Line 6. Shown here is the $50 tax-exempt
on this line. sold, $267,641 (entered on line 8 and on page interest income from municipal bonds re-
Line 7. Interest income on accounts 1, line 2). corded on the books but not included on
receivable, $559, is entered on this line. The Frank answers all applicable questions for Schedule K, lines 1 through 7. This interest
schedule that must be attached for this line item 9. is reported on Schedule K, line 19.
is not shown. Line 9. This is line 5 less line 8, $73,870.
Line 8. Total income, $139,018 (lines 3 This line is the same as line 1 of the Analysis
through 7), is shown here. Schedule B of Net Income (Loss) section of Schedule K
Schedule B contains 11 questions about the at the top of page 4.
Deductions partnership. Frank answers question 1 by
marking the “General partnership” box. He Schedule M–2
The partnership's allowable deductions are answers questions 2 through 11 by marking
shown on lines 9 through 21. the “No” boxes. Schedule M–2 is an analysis of the partners'
Line 9. All salaries and wages are in- Question 5 asks if the partnership meets capital accounts. It shows the total equity of
cluded here except guaranteed payments to all the requirements listed in items 5a, b, and all partners at the beginning and end of the
partners (shown on line 10). Frank enters the c. Because the partnership's total receipts tax year and the adjustments that caused any
$29,350 wages paid to the partnership's em- were not less than $250,000, all three of increase or decrease. The total of all the
ployees. The partnership had no employment these requirements are not met. Frank must partners' capital accounts is the difference
credits to reduce that amount. complete Schedules L, M–1, M–2, and item between the partnership's assets and liabil-
Line 10. Guaranteed payments of F on page 1 of Form 1065 and item J on ities shown on Schedule L. A partner's capital
$25,000 to partners Frank ($20,000) and Schedule K–1. account does not necessarily represent the
Susan ($5,000) are entered here. tax basis for an interest in the partnership.
Line 11. Repairs of $1,125 made to Line 1. As of January 1, the total of the
partnership equipment are entered on this Pages 3 – 4 partners' capital accounts was $27,550
line. (Frank — $14,050; Susan — $13,500). This
Line 12. During the year, $250 owed to Schedule K amount should agree with the beginning bal-
the partnership was determined to be a wholly On Schedule K, Frank lists the total of both ance shown on line 21 of Schedule L for the
worthless business bad debt. The $250 is partners' shares of income, deductions, partners' capital accounts.
shown on this line. (If this had been a non- credits, etc. Each partner's distributive share Line 3. This is the net income per books.
business bad debt, it would have been re- of income, deductions, credits, etc., is re- Line 5. This is the total of lines 1 through
ported in Part I of Schedule D (Form 1065) ported on Schedule K–1. The line items for 4.
and included separately on Schedules K and Schedule K are discussed in combination with Line 6. Each partner withdrew $26,440
K-1, line 7, as a stated short-term capital the Schedule K–1 line items, later. (totaling $52,880) from the partnership. These
loss.) withdrawals are shown here and on Schedule
Line 13. Rent paid for the business K, line 22. The partners' guaranteed pay-
premises, $20,000, is listed on this line.
Page 4—Analysis of Net Income ments, which were actually paid, are not in-
Line 14. Deductible taxes of $3,295 are (Loss) cluded because they were deducted when
entered on this line. An analysis must be made of the distributive figuring the amount shown on line 3.
Line 15. Interest paid to suppliers during items on Schedule K. This analysis is based Line 9. This shows the total equity of all
the year totaled $1,451. This is business in- on the type of partner. Since the AbleBaker partners as shown in the books of record as
terest, so it is entered here. Book Store has two individual partners, both of December 31. This amount should agree
Lines 16a and 16c. Depreciation of of whom are “active” general partners, the with the year-end balance shown on line 21
$1,174 claimed on assets used in the part- total on line 1, $73,870, is entered on line 2a, of Schedule L for the partners' capital ac-
nership's business is entered on these lines. column ii. counts.
Page 18
Item J on Schedule K–1 reflects each 1, line 22. This line on Schedule K–1 shows the partner's share is shown on this line of
partner's share of the amounts shown on lines Frank's share, $75. This line on Schedule K Schedule K–1.
1 through 9 of Schedule M–2. shows the total dividends of $150.
Line 5. This line on Schedule K–1 shows Self-Employment
only the guaranteed payments to Frank of
Schedule K–1 $20,000. This line on Schedule K shows the
Line 15a. Net earnings (loss) from self-
employment are figured using the worksheet
Schedule K–1 lists each partner's share of total guaranteed payments to both partners in the Form 1065 instructions for Schedule K
income, deductions, credits, etc. It also shows of $25,000. (not shown). Frank and Susan's net earnings
where to report the items on the partner's in-
from self-employment are the total of the
dividual income tax return. Illustrated is a
partnership income shown on line 1 of
copy of the Schedule K–1 for Frank W. Able. Deductions Schedule K and the guaranteed payments
All information asked for at the top of Sched-
Line 8. During the year, the partnership shown on line 5. This total, $74,370, is en-
ule K–1 must be supplied for each partner.
made a $650 cash contribution to the Ameri- tered on Schedule K, and each individual
can Lung Association. Each partner may be partner's share is shown on his or her
Allocation of able to deduct his or her share of the part- Schedule K–1. Each partner uses his or her
nership's charitable contribution on his or her share to figure his or her self-employment tax
Partnership Items individual income tax return if the partner on Schedule SE (Form 1040), Self-
The partners' shares of income, deductions, itemizes deductions. Frank's share of the Employment Tax (not shown).
etc., are shown next. contribution, $325, is entered on this line of
Schedule K–1. This line on Schedule K shows Other
Income (Loss) the total contribution. Line 19. Frank enters the $50 municipal
Line 1. This line on Schedule K–1 shows bond interest received by the partnership on
Frank's share ($24,685) of the income from this line of Schedule K and $25 on this line
the partnership shown on Form 1065, page Investment Interest of each partner's Schedule K–1.
1, line 22. The total amount of income to both Line 14b. The partnership had no interest Line 22. Frank enters the $52,880 cash
partners is shown on line 1, Schedule K. expense on investment debts, but it had in- withdrawals made by the partners during the
Line 4b. Dividends must be separately vestment income (dividends) of $150 as year on this line of Schedule K. He enters the
stated. They are not included in the income shown on line 4b, Schedule K. That amount amount each partner withdrew on this line of
(loss) of the partnership on Form 1065, page is also shown on this line of Schedule K, and the partner's Schedule K–1.
Page 19
Form 1065 U.S. Partnership Return of Income OMB No. 1545-0099
G Check applicable boxes: (1) Initial return (2) Final return (3) Change in address (4) Amended return
H Check accounting method: (1) Cash (2) u Accrual (3) Other (specify) ©
I Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year © 2
Caution: Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information.
9 Salaries and wages (other than to partners) (less employment credits) 9 29,350
10 Guaranteed payments to partners 10 25,000
11 Repairs and maintenance 11 1,125
12 Bad debts 12 250
13 Rent 13 20,000
14 Taxes and licenses 14 3,295
15 Interest 15 1,451
16a Depreciation (if required, attach Form 4562) 16a 1,174
b Less depreciation reported on Schedule A and elsewhere on return 16b –0– 16c 1,174
17 Depletion (Do not deduct oil and gas depletion.) 17
18 Retirement plans, etc. 18
19 Employee benefit programs 19
21 Total deductions. Add the amounts shown in the far right column for lines 9 through 20 21 89,648
22 Ordinary income (loss) from trade or business activities. Subtract line 21 from line 8 22 49,370
Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge
and belief, it is true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member) is based on all
information of which preparer has any knowledge.
Please
Sign Frank W. Able
Here © Signature of general partner or limited liability company member © Date
3-12-99
©
Preparer’s Date Preparer’s social security no.
Check if
Paid signature self-employed ©
Preparer’s
©
Firm’s name (or EIN ©
Use Only yours if self-employed)
and address ZIP code ©
For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z Form 1065 (1998)
Page 20
Form 1065 (1998) Page 2
Schedule A Cost of Goods Sold (see page 14 of the instructions)
c Check this box if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) ©
d Do the rules of section 263A (for property produced or acquired for resale) apply to the partnership? Yes u No
e Was there any change in determining quantities, cost, or valuations between opening and closing inventory? Yes u No
If “Yes,” attach explanation.
1 What type of entity is filing this return? Check the applicable box: Yes No
a u General partnership b Limited partnership c Limited liability company
d Limited liability partnership e Other ©
u
2 Are any partners in this partnership also partnerships?
3 Is this partnership a partner in another partnership?
u
4 Is this partnership subject to the consolidated audit procedures of sections 6221 through 6233? If “Yes,” see
u
Designation of Tax Matters Partner below
5 Does this partnership meet ALL THREE of the following requirements?
a The partnership’s total receipts for the tax year were less than $250,000;
b The partnership’s total assets at the end of the tax year were less than $600,000; AND
c Schedules K-1 are filed with the return and furnished to the partners on or before the due date (including
extensions) for the partnership return.
If “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065;
or Item J on Schedule K-1 u
6 Does this partnership have any foreign partners? u
7 Is this partnership a publicly traded partnership as defined in section 469(k)(2)? u
8 Has this partnership filed, or is it required to file, Form 8264, Application for Registration of a Tax Shelter? u
9 At any time during calendar year 1998, did the partnership have an interest in or a signature or other authority
over a financial account in a foreign country (such as a bank account, securities account, or other financial
account)? See page 14 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,”
enter the name of the foreign country. © u
10 During the tax year, did the partnership receive a distribution from, or was it the grantor of, or transferor to, a
foreign trust? If “Yes,” the partnership may have to file Form 3520. See page 15 of the instructions u
11 Was there a distribution of property or a transfer (e.g., by sale or death) of a partnership interest during the tax
year? If “Yes,” you may elect to adjust the basis of the partnership’s assets under section 754 by attaching the
statement described under Elections Made By the Partnership on page 6 of the instructions u
Designation of Tax Matters Partner (see page 15 of the instructions)
Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return:
Name of
designated TMP © Identifying
number of TMP ©
Address of
designated TMP ©
Page 21
Form 1065 (1998) Page 3
Schedule K Partners’ Shares of Income, Credits, Deductions, etc.
(a) Distributive share items (b) Total amount
1 Ordinary income (loss) from trade or business activities (page 1, line 22) 1 49,370
2 Net income (loss) from rental real estate activities (attach Form 8825) 2
3a Gross income from other rental activities 3a
b Expenses from other rental activities (attach schedule) 3b
cNet income (loss) from other rental activities. Subtract line 3b from line 3a 3c
4 Portfolio income (loss):
Income (Loss)
a Interest income 4a
b Ordinary dividends 4b 150
cRoyalty income 4c
d Net short-term capital gain (loss) (attach Schedule D (Form 1065)) 4d
eNet long-term capital gain (loss) (attach Schedule D (Form 1065)):
(1) 28% rate gain (loss) © (2) Total for year © 4e(2)
f Other portfolio income (loss) (attach schedule) 4f
5 Guaranteed payments to partners 5 25,000
6 Net section 1231 gain (loss) (other than due to casualty or theft) (attach Form 4797) 6
7 Other income (loss) (attach schedule) 7
8 Charitable contributions (attach schedule) 8 650
Deduc-
(3) From partnerships to which section 42(j)(5) applies for property placed in service after 1989 12a(3)
(4) Other than on line 12a(3) for property placed in service after 1989 12a(4)
b Qualified rehabilitation expenditures related to rental real estate activities (attach Form 3468) 12b
c Credits (other than credits shown on lines 12a and 12b) related to rental real estate activities 12c
d Credits related to other rental activities 12d
13 Other credits 13
Interest
b (1) Investment income included on lines 4a, 4b, 4c, and 4f above 14b(1) 150
(2) Investment expenses included on line 10 above 14b(2)
15a Net earnings (loss) from self-employment 15a 74,370
ment
Adjustments and Self-
Page 22
Form 1065 (1998) Page 4
Analysis of Net Income (Loss)
1 Net income (loss). Combine Schedule K, lines 1 through 7 in column (b). From the result, subtract the
sum of Schedule K, lines 8 through 11, 14a, 17e, and 18b 1 73,870
2 Analysis by (i) Corporate (ii) Individual (iii) Individual (iv) Partnership (v) Exempt (vi) Nominee/Other
partner type: (active) (passive) organization
a General partners 73,870
b Limited partners
Schedule L Balance Sheets per Books (Not required if Question 5 on Schedule B is answered “Yes.”)
Beginning of tax year End of tax year
Assets (a) (b) (c) (d)
1 Cash 3,455 3,350
2a Trade notes and accounts receivable 7,150 10,990
b Less allowance for bad debts 7,150 10,990
3 Inventories 18,125 19,225
4 U.S. government obligations
5 Tax-exempt securities 1,000 1,000
6 Other current assets (attach schedule)
7 Mortgage and real estate loans
8 Other investments (attach schedule) 1,000 1,000
9a Buildings and other depreciable assets 15,000 15,000
b Less accumulated depreciation 4,000 11,000 5,174 9,826
10a Depletable assets
b Less accumulated depletion
11 Land (net of any amortization)
12a Intangible assets (amortizable only)
b Less accumulated amortization
13 Other assets (attach schedule)
14 Total assets 41,730 45,391
Liabilities and Capital
15 Accounts payable 10,180 10,462
16 Mortgages, notes, bonds payable in less than 1 year 4,000 3,600
17 Other current liabilities (attach schedule)
18 All nonrecourse loans
19 Mortgages, notes, bonds payable in 1 year or more 7,739
20 Other liabilities (attach schedule)
21 Partners’ capital accounts 27,550 23,590
22 Total liabilities and capital 41,730 45,391
Reconciliation of Income (Loss) per Books With Income (Loss) per Return
Schedule M-1
(Not required if Question 5 on Schedule B is answered “Yes.” See page 23 of the instructions.)
1 Net income (loss) per books 48,920 6 Income recorded on books this year not included
2 Income included on Schedule K, lines 1 on Schedule K, lines 1 through 7 (itemize):
through 4, 6, and 7, not recorded on books a Tax-exempt interest $ 50
this year (itemize): 50
3 Guaranteed payments (other than health 7 Deductions included on Schedule K, lines 1
insurance) 25,000 through 11, 14a, 17e, and 18b, not charged
4 Expenses recorded on books this year not against book income this year (itemize):
included on Schedule K, lines 1 through a Depreciation $
11, 14a, 17e, and 18b (itemize):
a Depreciation $
b Travel and entertainment $ Add lines 6 and 7 8 50
9
Income (loss) (Analysis of Net Income (Loss),
5 Add lines 1 through 4 73,920 line 1). Subtract line 8 from line 5 73,870
Schedule M-2 Analysis of Partners’ Capital Accounts (Not required if Question 5 on Schedule B is answered “Yes.”)
1 Balance at beginning of year 27,550 6 Distributions: a Cash 52,880
2 Capital contributed during year b Property
3 Net income (loss) per books 48,920 7 Other decreases (itemize):
4 Other increases (itemize):
8 Add lines 6 and 7 52,880
5 Add lines 1 through 4 76,470 9 Balance at end of year. Subtract line 8 from line 5 23,590
Page 23
SCHEDULE K-1 OMB No. 1545-0099
Partner’s Share of Income, Credits, Deductions, etc.
(Form 1065)
Department of the Treasury
Internal Revenue Service
©
A This partner is a u general partner limited partner F Partner’s share of liabilities (see instructions):
limited liability company member Nonrecourse $
B What type of entity is this partner? © Individual Qualified nonrecourse financing $
C Is this partner a u domestic or a foreign partner? Other $ 10,900
(i) Before change (ii) End of
D Enter partner’s percentage of: G Tax shelter registration number © N/A
or termination year
Profit sharing % 50 % H Check here if this partnership is a publicly traded
Loss sharing % 50 % partnership as defined in section 469(k)(2)
Ownership of capital % 50 %
E IRS Center where partnership filed return: Philadelphia I Check applicable boxes: (1) Final K-1 (2) Amended K-1
J Analysis of partner’s capital account:
(c) Partner’s share of lines (e) Capital account at end of
(a) Capital account at (b) Capital contributed (d) Withdrawals and year (combine columns (a)
3, 4, and 7, Form 1065,
beginning of year during year distributions through (d))
Schedule M-2
14,050 24,460 ( 26,440 ) 12,070
(c) 1040 filers enter the
(a) Distributive share item (b) Amount
amount in column (b) on:
%
1 Ordinary income (loss) from trade or business activities 1 24,685 See page 6 of Partner’s
2 Net income (loss) from rental real estate activities 2 Instructions for Schedule K-1
(Form 1065).
3 Net income (loss) from other rental activities 3
4 Portfolio income (loss):
a Interest 4a Sch. B, Part I, line 1
b Ordinary dividends 4b 75 Sch. B, Part II, line 5
Income (Loss)
5
6
Guaranteed payments to partner
Net section 1231 gain (loss) (other than due to casualty or theft)
5
6
20,000
% See page 6 of Partner’s
Instructions for Schedule K-1
(Form 1065).
7 Other income (loss) (attach schedule) 7 Enter on applicable line of your return.
%
8 Charitable contributions (see instructions) (attach schedule)
Deduc-
tions
%
12a Low-income housing credit:
(1) From section 42(j)(5) partnerships for property placed in
service before 1990 a(1)
(2) Other than on line 12a(1) for property placed in service before 1990 a(2)
Form 8586, line 5
(3) From section 42(j)(5) partnerships for property placed in
service after 1989 a(3)
Credits
(4) Other than on line 12a(3) for property placed in service after 1989 a(4)
%
b Qualified rehabilitation expenditures related to rental real estate
activities 12b
c Credits (other than credits shown on lines 12a and 12b) related See page 8 of Partner’s
to rental real estate activities 12c Instructions for Schedule K-1
(Form 1065).
d Credits related to other rental activities 12d
13 Other credits 13
For Paperwork Reduction Act Notice, see Instructions for Form 1065. Cat. No. 11394R Schedule K-1 (Form 1065) 1998
Page 24
Schedule K-1 (Form 1065) 1998 Page 2
(c) 1040 filers enter the
(a) Distributive share item (b) Amount
amount in column (b) on:
Investment
Interest
15a Net earnings (loss) from self-employment 15a 44,685 Sch. SE, Section A or B
b Gross farming or fishing income 15b
% See page 9 of Partner’s
Instructions for Schedule K-1
%
c Gross nonfarm income 15c (Form 1065).
%
Foreign Taxes
%
See page 9 of Partner’s
18 Section 59(e)(2) expenditures: a Type © Instructions for Schedule K-1
b Amount 18b (Form 1065).
19 Tax-exempt interest income 19 25
%
Form 1040, line 8b
20 Other tax-exempt income 20
Other
b
a From section 42(j)(5) partnerships
Other than on line 24a
24a
24b % Form 8611, line 8
25 Supplemental information required to be reported separately to each partner (attach additional schedules if more space is
needed):
Supplemental Information
Page 25
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Page 26
Index
Page 27