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IRS Has $760 Million for People Who Have Not Filed a 2010 Income Tax Return

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IR-2014-30, March 19, 2014

WASHINGTON — Refunds totaling almost $760 million may be waiting for an estimated 918,600 taxpayers who did not file a federal income tax return for 2010, the Internal Revenue Service announced today. However, to collect the money, a return for 2010 must be filed with the IRS no later than Tuesday, April 15, 2014.

"The window is quickly closing for people who are owed refunds from 2010 who haven't filed a tax return," said IRS Commissioner John Koskinen. "We encourage students, part-time workers and others who haven't filed for 2010 to look into this before time runs out on April 15."

The IRS estimates that half the potential refunds for 2010 are more than $571.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.

For 2010 returns, the window closes on April 15, 2014. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2010 refund that their checks may be held if they have not filed tax returns for 2011 and 2012. In addition, the refund will be applied to any amounts still owed to the IRS or their state tax agency, and may be used to offset unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than just their refund of taxes withheld or paid during 2010. In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). For 2010, the credit is worth as much as $5,666. The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2010 were:

  • $43,352 ($48,362 if married filing jointly) for those with three or more qualifying children,
  • $40,363 ($45,373 if married filing jointly) for people with two qualifying children,
  • $35,535 ($40,545 if married filing jointly) for those with one qualifying child, and
  • $13,460 ($18,470 if married filing jointly) for people without qualifying children.

Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 800-TAX-FORM (800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2010, 2011 or 2012 should request copies from their employer, bank or other payer.

If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by going to IRS.gov. Taxpayers can also file Form 4506-T to request a transcript of their tax return.

Individuals who did not file a 2010 return with a potential refund:
 

State or District

Estimated

Number of

Individuals

Median

Potential

Refund

Total

Potential

Refunds*

 

Alabama

15,700

$574

$12,473,000

Alaska

4,700

$649

$4,810,000

Arizona

23,800

$508

$17,517,000

Arkansas

8,400

$562

$6,667,000

California

86,500

$519

$69,752,000

Colorado

17,100

$567

$14,061,000

Connecticut

11,700

$620

$10,304,000

Delaware

3,800

$573

$3,126,000

District of Columbia

3,500

$604

$3,080,000

Florida

56,800

$593

$48,407,000

Georgia

28,400

$539

$22,504,000

Hawaii

6,200

$586

$5,413,000

Idaho

3,500

$490

$2,604,000

Illinois

37,900

$626

$32,696,000

Indiana

19,600

$570

$15,478,000

Iowa

9,200

$576

$7,050,000

Kansas

9,300

$522

$6,986,000

Kentucky

11,500

$576

$8,975,000

Louisiana

17,500

$603

$15,579,000

Maine

3,500

$502

$2,373,000

Maryland

20,700

$575

$18,002,000

Massachusetts

21,000

$560

$17,856,000

Michigan

29,200

$597

$24,259,000

Minnesota

12,700

$516

$9,582,000

Mississippi

8,500

$556

$6,769,000

Missouri

17,900

$514

$13,153,000

Montana

2,900

$534

$2,338,000

Nebraska

4,500

$528

$3,368,000

Nevada

11,400

$570

$9,156,000

New Hampshire

3,800

$602

$3,245,000

New Jersey

29,500

$639

$26,712,000

New Mexico

7,200

$572

$5,915,000

New York

57,400

$623

$50,543,000

North Carolina

24,300

$494

$17,538,000

North Dakota

1,900

$600

$1,551,000

Ohio

32,100

$560

$24,508,000

Oklahoma

15,100

$585

$12,246,000

Oregon

14,300

$519

$10,359,000

Pennsylvania

37,400

$614

$31,009,000

Rhode Island

3,000

$598

$2,472,000

South Carolina

10,200

$532

$7,756,000

South Dakota

2,100

$558

$1,605,000

Tennessee

16,300

$559

$12,839,000

Texas

80,600

$588

$71,998,000

Utah

6,100

$518

$4,705,000

Vermont

1,600

$519

$1,136,000

Virginia

26,300

$568

$22,376,000

Washington

24,800

$640

$23,033,000

West Virginia

4,100

$626

$3,534,000

Wisconsin

10,900

$516

$8,423,000

Wyoming

2,200

$648

$2,045,000

Totals

918,600

$571

$759,889,000

                      * Excluding the Earned Income Tax Credit and other credits.

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Tax extension online Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. Tax extension online Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. Tax extension online Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. Tax extension online Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. Tax extension online However, a joint undertaking merely to share expenses is not a partnership. Tax extension online For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Tax extension online The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Tax extension online Organizations formed after 1996. Tax extension online   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. Tax extension online An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Tax extension online An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Tax extension online An insurance company. Tax extension online Certain banks. Tax extension online An organization wholly owned by a state, local, or foreign government. Tax extension online An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Tax extension online Certain foreign organizations identified in section 301. Tax extension online 7701-2(b)(8) of the regulations. Tax extension online A tax-exempt organization. Tax extension online A real estate investment trust. Tax extension online An organization classified as a trust under section 301. Tax extension online 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Tax extension online Any other organization that elects to be classified as a corporation by filing Form 8832. Tax extension online For more information, see the instructions for Form 8832. Tax extension online Limited liability company. Tax extension online   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Tax extension online Unlike a partnership, none of the members of an LLC are personally liable for its debts. Tax extension online An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. Tax extension online 7701-3. Tax extension online See Form 8832 and section 301. Tax extension online 7701-3 of the regulations for more details. Tax extension online A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Tax extension online Organizations formed before 1997. Tax extension online   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. Tax extension online Community property. Tax extension online    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. Tax extension online They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. Tax extension online A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Tax extension online   A qualified entity is a business entity that meets all the following requirements. Tax extension online The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. Tax extension online No person other than one or both spouses would be considered an owner for federal tax purposes. Tax extension online The business entity is not treated as a corporation. Tax extension online   For more information about community property, see Publication 555, Community Property. Tax extension online Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Tax extension online Family Partnership Members of a family can be partners. Tax extension online However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Tax extension online If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. Tax extension online If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Tax extension online They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. Tax extension online Capital is material. Tax extension online   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Tax extension online Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Tax extension online Capital is not material. Tax extension online   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. Tax extension online Capital interest. Tax extension online   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. Tax extension online The owner withdraws from the partnership. Tax extension online The partnership liquidates. Tax extension online   The mere right to share in earnings and profits is not a capital interest in the partnership. Tax extension online Gift of capital interest. Tax extension online   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. Tax extension online It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Tax extension online The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. Tax extension online Purchase. Tax extension online   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. Tax extension online The fair market value of the purchased interest is considered donated capital. Tax extension online For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Tax extension online Example. Tax extension online A father sold 50% of his business to his son. Tax extension online The resulting partnership had a profit of $60,000. Tax extension online Capital is a material income-producing factor. Tax extension online The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Tax extension online The $24,000 must be allocated to the father as compensation. Tax extension online Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. Tax extension online The son's share of partnership profit cannot be more than $18,000. Tax extension online Business owned and operated by spouses. Tax extension online   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. Tax extension online If so, they should report income or loss from the business on Form 1065. Tax extension online They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Tax extension online However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Tax extension online Qualified Joint Venture Election. Tax extension online   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. Tax extension online A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. Tax extension online   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. Tax extension online All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Tax extension online Each spouse takes into account his or her respective share of these items as a sole proprietor. Tax extension online Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Tax extension online For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. Tax extension online e. Tax extension online , based on their respective interests in the venture). Tax extension online   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Tax extension online Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Tax extension online   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Tax extension online However, this may not be true if either spouse exceeds the social security tax limitation. Tax extension online   For more information on qualified joint ventures, go to IRS. Tax extension online gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Tax extension online ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Tax extension online The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Tax extension online The agreement or modifications can be oral or written. Tax extension online Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. Tax extension online This filing date does not include any extension of time. Tax extension online If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Tax extension online Terminating a Partnership A partnership terminates when one of the following events takes place. Tax extension online All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. Tax extension online At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. Tax extension online Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. Tax extension online See section 1. Tax extension online 708-1(b) of the regulations for more information on the termination of a partnership. Tax extension online For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Tax extension online 708-1(c) and 1. Tax extension online 708-1(d) of the regulations. Tax extension online Date of termination. Tax extension online   The partnership's tax year ends on the date of termination. Tax extension online For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Tax extension online For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. Tax extension online Short period return. Tax extension online   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Tax extension online The return is due the 15th day of the fourth month following the date of termination. Tax extension online See Partnership Return (Form 1065), later, for information about filing Form 1065. Tax extension online Conversion of partnership into limited liability company (LLC). Tax extension online   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Tax extension online The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. Tax extension online   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Tax extension online Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Tax extension online If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Tax extension online For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Tax extension online   The same rules apply if an LLC classified as a partnership is converted into a partnership. Tax extension online IRS e-file (Electronic Filing) Please click here for the text description of the image. Tax extension online e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). Tax extension online Other partnerships generally have the option to file electronically. Tax extension online For details about IRS e-file, see the Form 1065 instructions. Tax extension online Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. Tax extension online All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. Tax extension online However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Tax extension online Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. Tax extension online Investing partnership. Tax extension online   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. Tax extension online They own the property as co-owners. Tax extension online They reserve the right separately to take or dispose of their shares of any property acquired or retained. Tax extension online They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Tax extension online Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. Tax extension online Operating agreement partnership. Tax extension online   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. Tax extension online They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Tax extension online They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Tax extension online They do not jointly sell services or the property produced or extracted. Tax extension online Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. Tax extension online However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. Tax extension online Electing the exclusion. Tax extension online   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. Tax extension online This filing date includes any extension of time. Tax extension online See Regulations section 1. Tax extension online 761-2(b) for the procedures to follow. Tax extension online Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. Tax extension online The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Tax extension online The return must be signed by a general partner. Tax extension online If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Tax extension online A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. Tax extension online See the Instructions for Form 1065 for more information about who must file Form 1065. Tax extension online Partnership Distributions Partnership distributions include the following. Tax extension online A withdrawal by a partner in anticipation of the current year's earnings. Tax extension online A distribution of the current year's or prior years' earnings not needed for working capital. Tax extension online A complete or partial liquidation of a partner's interest. Tax extension online A distribution to all partners in a complete liquidation of the partnership. Tax extension online A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Tax extension online If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Tax extension online Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. Tax extension online Effect on partner's basis. Tax extension online   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. Tax extension online See Adjusted Basis under Basis of Partner's Interest, later. Tax extension online Effect on partnership. Tax extension online   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Tax extension online The partnership may be able to elect to adjust the basis of its undistributed property. Tax extension online Certain distributions treated as a sale or exchange. Tax extension online   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Tax extension online Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Tax extension online Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Tax extension online   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Tax extension online   This treatment does not apply to the following distributions. Tax extension online A distribution of property to the partner who contributed the property to the partnership. Tax extension online Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. Tax extension online Substantially appreciated inventory items. Tax extension online   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. Tax extension online However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. Tax extension online Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Tax extension online Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Tax extension online If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. Tax extension online For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Tax extension online Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Tax extension online Example. Tax extension online The adjusted basis of Jo's partnership interest is $14,000. Tax extension online She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. Tax extension online Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Tax extension online Any gain on the land will be recognized when she sells or otherwise disposes of it. Tax extension online The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Tax extension online Marketable securities treated as money. Tax extension online   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Tax extension online This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Tax extension online   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). Tax extension online   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Tax extension online Loss on distribution. Tax extension online   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Tax extension online The adjusted basis of the partner's interest in the partnership exceeds the distribution. Tax extension online The partner's entire interest in the partnership is liquidated. Tax extension online The distribution is in money, unrealized receivables, or inventory items. Tax extension online   There are exceptions to these general rules. Tax extension online See the following discussions. Tax extension online Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Tax extension online Distribution of partner's debt. Tax extension online   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). Tax extension online   The partner is treated as having satisfied the debt for its fair market value. Tax extension online If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. Tax extension online   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. Tax extension online Net precontribution gain. Tax extension online   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. Tax extension online   The gain recognized is the lesser of the following amounts. Tax extension online The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. Tax extension online The “net precontribution gain” of the partner. Tax extension online This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. Tax extension online For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Tax extension online   The character of the gain is determined by reference to the character of the net precontribution gain. Tax extension online This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. Tax extension online For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Tax extension online Effect on basis. Tax extension online   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Tax extension online Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Tax extension online See Basis of Partner's Interest , later. Tax extension online   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. Tax extension online Exceptions. Tax extension online   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. Tax extension online For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. Tax extension online   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. Tax extension online Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. Tax extension online However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Tax extension online Example 1. Tax extension online The adjusted basis of Emily's partnership interest is $30,000. Tax extension online She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Tax extension online Her basis for the property is $20,000. Tax extension online Example 2. Tax extension online The adjusted basis of Steve's partnership interest is $10,000. Tax extension online He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Tax extension online His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Tax extension online Complete liquidation of partner's interest. Tax extension online   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. Tax extension online Partner's holding period. Tax extension online   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Tax extension online If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Tax extension online Basis divided among properties. Tax extension online   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. Tax extension online For property distributed after August 5, 1997, allocate the basis using the following rules. Tax extension online Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. Tax extension online If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Tax extension online Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. Tax extension online If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Tax extension online If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Tax extension online Allocating a basis increase. Tax extension online   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Tax extension online If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Tax extension online Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Tax extension online Example. Tax extension online Eun's basis in her partnership interest is $55,000. Tax extension online In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Tax extension online Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Tax extension online Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Tax extension online To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). Tax extension online This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Tax extension online She first allocates $35,000 to property A (its unrealized appreciation). Tax extension online The remaining $5,000 is allocated between the properties based on their fair market values. Tax extension online $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Tax extension online Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). Tax extension online Allocating a basis decrease. Tax extension online   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Tax extension online Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Tax extension online If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. Tax extension online Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Tax extension online Example. Tax extension online Armando's basis in his partnership interest is $20,000. Tax extension online In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Tax extension online Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Tax extension online Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Tax extension online To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). Tax extension online This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Tax extension online He allocates the entire $10,000 to property D (its unrealized depreciation). Tax extension online Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Tax extension online Distributions before August 6, 1997. Tax extension online   For property distributed before August 6, 1997, allocate the basis using the following rules. Tax extension online Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. Tax extension online If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. Tax extension online Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Tax extension online Partner's interest more than partnership basis. Tax extension online   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. Tax extension online Special adjustment to basis. Tax extension online   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. Tax extension online To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Tax extension online Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Tax extension online   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. Tax extension online However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. Tax extension online   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. Tax extension online If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. Tax extension online   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. Tax extension online The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. Tax extension online Example. Tax extension online Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Tax extension online At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. Tax extension online Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. Tax extension online Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. Tax extension online The value of the inventory received was 25% of the value of all partnership inventory. Tax extension online (It is immaterial whether the inventory he received was on hand when he acquired his interest. Tax extension online ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. Tax extension online His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). Tax extension online The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. Tax extension online The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). Tax extension online His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Tax extension online The remaining $11,500 is allocated to his new basis for the other property he received. Tax extension online Mandatory adjustment. Tax extension online   A partner does not always have a choice of making this special adjustment to basis. Tax extension online The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. Tax extension online The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Tax extension online If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. Tax extension online The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Tax extension online Required statement. Tax extension online   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. Tax extension online The statement must provide information necessary for the partner to compute the special basis adjustment. Tax extension online Marketable securities. Tax extension online   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. Tax extension online See Marketable securities treated as money under Partner's Gain or Loss, earlier. Tax extension online The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Tax extension online Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. Tax extension online These transactions include the following. Tax extension online Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. Tax extension online Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. Tax extension online Payments by accrual basis partnership to cash basis partner. Tax extension online   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. Tax extension online However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Tax extension online Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Tax extension online A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. Tax extension online This treatment is for purposes of determining gross income and deductible business expenses only. Tax extension online For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Tax extension online Guaranteed payments are not subject to income tax withholding. Tax extension online The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Tax extension online They are also listed on Schedules K and K-1 of the partnership return. Tax extension online The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. Tax extension online Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Tax extension online Generally, organizational and syndication expenses are not deductible by the partnership. Tax extension online However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). Tax extension online Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. Tax extension online Minimum payment. Tax extension online   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Tax extension online Example. Tax extension online Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Tax extension online The partnership has net income of $20,000. Tax extension online Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Tax extension online The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Tax extension online Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. Tax extension online If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. Tax extension online Self-employed health insurance premiums. Tax extension online   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Tax extension online The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Tax extension online However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Tax extension online   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. Tax extension online The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. Tax extension online For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Tax extension online Including payments in partner's income. Tax extension online   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Tax extension online Example 1. Tax extension online Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Tax extension online Her distributive share of the partnership income is 10%. Tax extension online The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Tax extension online She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Tax extension online Example 2. Tax extension online Lamont is a calendar year taxpayer who is a partner in a partnership. Tax extension online The partnership uses a fiscal year that ended January 31, 2013. Tax extension online Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Tax extension online He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Tax extension online Payments resulting in loss. Tax extension online   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. Tax extension online The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Tax extension online Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Tax extension online Losses. Tax extension online   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Tax extension online   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Tax extension online   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. Tax extension online   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Tax extension online If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. Tax extension online Gains. Tax extension online   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. Tax extension online More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Tax extension online The property in the hands of the transferee immediately after the transfer is not a capital asset. Tax extension online Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. Tax extension online More than 50% ownership. Tax extension online   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Tax extension online An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. Tax extension online An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Tax extension online For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Tax extension online If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. Tax extension online However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. Tax extension online Example. Tax extension online Individuals A and B and Trust T are equal partners in Partnership ABT. Tax extension online A's husband, AH, is the sole beneficiary of Trust T. Tax extension online Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Tax extension online As a result, A is a more-than-50% partner. Tax extension online This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. Tax extension online More information. Tax extension online   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Tax extension online Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. Tax extension online This applies whether a partnership is being formed or is already operating. Tax extension online The partnership's holding period for the property includes the partner's holding period. Tax extension online The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. Tax extension online The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Tax extension online Disguised sales. Tax extension online   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Tax extension online The distribution would not have been made but for the contribution. Tax extension online The partner's right to the distribution does not depend on the success of partnership operations. Tax extension online   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Tax extension online However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. Tax extension online If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. Tax extension online Form 8275 required. Tax extension online   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. Tax extension online For exceptions to this requirement, see section 1. Tax extension online 707-3(c)(2) of the regulations. Tax extension online   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. Tax extension online   Form 8275 must include the following information. Tax extension online A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Tax extension online A description of the transferred property or money, including its value. Tax extension online A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Tax extension online See section 1. Tax extension online 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. Tax extension online Contribution to partnership treated as investment company. Tax extension online   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. Tax extension online   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. Tax extension online These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Tax extension online For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Tax extension online Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Tax extension online   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Tax extension online Contribution to foreign partnership. Tax extension online   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. Tax extension online Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Tax extension online The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. Tax extension online   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. Tax extension online See the form instructions for more information. Tax extension online Basis of contributed property. Tax extension online   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. Tax extension online Allocations to account for built-in gain or loss. Tax extension online   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Tax extension online The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. Tax extension online This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Tax extension online   The partnership can use different allocation methods for different items of contributed property. Tax extension online A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Tax extension online See section 1. Tax extension online 704-3 of the regulations for allocation methods generally considered reasonable. Tax extension online   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Tax extension online If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. Tax extension online However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. Tax extension online Example. Tax extension online Areta and Sofia formed an equal partnership. Tax extension online Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. Tax extension online The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Tax extension online In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Tax extension online Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. Tax extension online To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Tax extension online However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. Tax extension online The entire $400 must be allocated to Areta. Tax extension online Distribution of contributed property to another partner. Tax extension online   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. Tax extension online   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. Tax extension online This amount is the difference between the property's basis and its fair market value at the time of contribution. Tax extension online The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Tax extension online Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. Tax extension online Disposition of certain contributed property. Tax extension online   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Tax extension online Unrealized receivables. Tax extension online If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Tax extension online Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Tax extension online When reading the definition, substitute “partner” for “partnership. Tax extension online ” Inventory items. Tax extension online If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Tax extension online Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Tax extension online Capital loss property. Tax extension online If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. Tax extension online The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. Tax extension online Substituted basis property. Tax extension online If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. Tax extension online Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Tax extension online Capital interest. Tax extension online   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Tax extension online This determination generally is made at the time of receipt of the partnership interest. Tax extension online The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. Tax extension online The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Tax extension online   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Tax extension online Profits interest. Tax extension online   A profits interest is a partnership interest other than a capital interest. Tax extension online If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. Tax extension online However, this does not apply in the following situations. Tax extension online The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. Tax extension online Within 2 years of receipt, the partner disposes of the profits interest. Tax extension online The profits interest is a limited partnership interest in a publicly traded partnership. Tax extension online   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Tax extension online Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Tax extension online If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Tax extension online Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Tax extension online Interest acquired by gift, etc. Tax extension online   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. Tax extension online Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). Tax extension online The basis of an interest in a partnership is increased or decreased by certain items. Tax extension online Increases. Tax extension online   A partner's basis is increased by the following items. Tax extension online The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Tax extension online The partner's distributive share of taxable and nontaxable partnership income. Tax extension online The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Tax extension online Decreases. Tax extension online   The partner's basis is decreased (but never below zero) by the following items. Tax extension online The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. Tax extension online The partner's distributive share of the partnership losses (including capital losses). Tax extension online The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Tax extension online This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. Tax extension online The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. Tax extension online Partner's liabilities assumed by partnership. Tax extension online   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. Tax extension online This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Tax extension online The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Tax extension online See Effect of Partnership Liabilities , later. Tax extension online Example 1. Tax extension online Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. Tax extension online The partnership assumed payment of the mortgage. Tax extension online The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. Tax extension online If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Tax extension online The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. Tax extension online However, this gain would not increase the basis of his partnership interest. Tax extension online Book value of partner's interest. Tax extension online   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. Tax extension online Example. Tax extension online Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Tax extension online His partner contributes $1,000 cash. Tax extension online While each partner has increased his capital account by $1,000, which will be re