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Partnership Tax
University of Montana School of Law
Browde, Pippa

Partnership Tax Outline–Spring 2014
·          Chapter 1–The Tax Character of Partnerships–
·         REMEMBER partnerships are NOT separate taxable entities, HOWEVER, they are separate legal entities.
o    Pass through entitles.
o    Form 1065, informational partnership tax returns.
§  Form K-1s are distributed to the partners (at least two Forms K-1)
o    K-1 is used by each partner in preparing his own personal return.
·         State Law Characteristics–
o    A partnership is a contractually based relationship among owners of an enterprise organized for profit. 
o   Two broad categories:
·         General Partnerships–
§  Can arise orally and may be informal.
§  Each partner bears unlimited personal liability to 3rd parties for the partnership's obligations.
·         Limited Partnerships–
§  Creatures of state law that must satisfy filing requirements.
§  Limited partners (Like shareholders in a corporation) are liable to third parties ONLY to the extent of their actual contributions to the limited partnership, plus any promised additional contributions.
· NOTE, limited partners are generally precluded from managing the partnership.
·         Tax Background–
o    IRC Sections 701-777, known as Subchapter K.
·         POLICY–Need of administrative convenience, do NOT want to hinder business.
·         “Aggregate Theory”–
o    A partnership is both an aggregate of individual partners who pay taxes directly on their share of partnership's profits.
o   Under a pure aggregate conception, partners would be viewed as co-owners, each with an undivided interest in the partnership's assets, and each partner would account separately for her share of all partnership transactions.
·         “Entity Theory”–
o    A partnership is a separate entity for a variety of other purposes (such as filing the tax return, having a distinct taxable year, and adopting an accounting method to compute its profits/losses).
o   Under a pure entity conception, the partnership would be treated as a separate and distinct taxpayer, adopting a method of accounting and a taxable year and annually reported its taxable income.
·         The partners would each an undivided interest in the partnership entity, and would be viewed very much like shareholders in a corporation.
·         NOTE, generally there is tension between the aggregate and entity theories.
·         Partnership Status–
o    ISSUE–Whether an entity organized as a partnership under local law stands up as such, or whether it has to be reclassified as another form of organization for federal income tax purposes.
·         Reg. Section 301.7701-2 through 301.7701-4–
o    For federal income tax purposes of all business or investment entities that are NOT sole proprietorships fall into one of the following basic classifications:
·         Corporation (or S corporation),
·         Trust or estate, or
·         Partnership.
o    NOTE, many relationships that appear to involve no entity at all, such as landlord and tenant or debtor and creditor, have the potential for inadvertently producing a partnership for federal income tax purposes.
o    REMEMBER there does not need to be a partnership agreement.

f it has “associates”), it becomes a “business entity”, and it can elect whether to be taxed as a partnership or a corporation. 
·         Reg. Section 301.7701-2(b)–
o    Eight specific business organizations that each will be deemed a “per se corporation” for federal tax purposes”:
·         All statutory corporations,
·         Joint-stock companies,
·         Associations;
·         Insurance companies subject to Subchapter L;
·         State-chartered banks that have deposits insured by the Federal Deposit Insurance Acts;
·         State-owned entities;
·         Non-Section 7701(a)(3) entities; and
·         Specified foreign business entities.
·         Reg. Section 301.7701-3(b)(1)–
o    If it is a US business entity, then the “default” outcome is that it is a sole proprietorship if there is only one owner and a partnership if there are several owners. 
o    If it is foreign business entity, and no one has personal liability, then the default result is that it is a corporation for federal income tax purposes.
o    If it is foreign business entity, and if at least one person has personal liability, then the enterprise is a sole proprietorship if there is only one owner and a partnership if there are several owners.
o   NOTE, an election MUST be made by all the owners, and may NOT be changed again for five years.