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2008 Changes to Form 1065 - Frequently Asked Questions

What's New:

2014 M3 M1 Changes: The IRS will be making changes to the Schedule M-3 filing requirement for taxpayers with assets between $10M-$50M for Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065-B. These taxpayers will be permitted to file Schedule M-1 in place of the Schedule M-3 Parts II and III.  These changes will be effective for tax years ending on December 31, 2014, and later. No changes are currently planned to the Schedule M-3 requirements for Forms 1120-L, or 1120-PC, nor for Form 1120 taxpayers filing as a mixed group.


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Comments:

Schedule M-3 Update for 2012 and 2013
Subject always to a possible need to reflect changes in law, there are no other planned changes to Schedule M-3 forms for tax year 2012. In addition, while no changes have yet been identified for the tax year 2013 Schedule M-3 forms, an IRS M-3 Study Group was formed following the enactment of the Form 1120 Schedule UTP requirements (see Announcement 2010-75) and charged with seeking to reduce any duplicate reporting between Schedule UTP and Schedule M-3. The M-3 Working Group has obtained input from external and internal stakeholders and is currently reviewing and considering that information in conjunction with findings from the first year of Schedule UTP implementation.

Application of Posted 1065 FAQ Answers to Similar Form 1120 Questions
Posted 1065 FAQ answers regarding ownership reporting for Form 1065 Schedule B questions 3 and 4 may be applied to similar issues in reporting ownership for Form 1120 Schedule K questions 4 and 5. Both sets of questions require a limited application of section 267(c) attribution rules to determine total ownership percentages, direct or indirect.

Q1. How may the  Partners’ Shares of Profit, Loss, and Capital be Reported in Cases Where the Partnership Agreement Does Not Express Such Items as Percentages?

A1. The following is provided as an example of a reasonable method of calculating partners’ percentage shares of profit, loss, and capital for purposes of completing Form 1065 Schedule B questions 3 and 4, and for purposes of completing Schedule K-1 item J, for tax years ending on or after December 31, 2008.

As provided in the instructions to Form 1065, if the partnership agreement does not express the partners’ shares of profit, loss, and capital as fixed percentages, the partnership may use a reasonable method in arriving at such percentages as long as such method is consistent with the partnership agreement and is applied consistently from year to year.

This example is provided solely for purposes of assisting the partnership return preparer in calculating the partners’ percentage shares of profit, loss, and capital as required by Schedule K-1 item J and Schedule B, questions 3 and 4. 

Partners A and B are partners in Partnership AB.  At the beginning of 2008, Partner A and Partner B had capital account balances of $2,000 and $667, respectively.  The AB Partnership Agreement requires capital accounts to be maintained in accordance with section 704(b).

 The partnership agreement does not express the partners’ shares of profit, loss, and capital as fixed percentages. In 2008, Partnership AB adopts the following method for determining the percentages of capital, profit, and loss to be used in completing Schedule K-1, item J and Schedule B, questions 3 and 4. 

Partnership AB computes the partners’ end of tax year percentages of capital by dividing each partner’s positive capital account balance on the last day of the partnership’s tax year by the total positive capital account balances on the last day of the partnership’s tax year and expressing the result as a percentage. Partnership AB reports a negative capital account balance as a zero percentage. Partnership AB reports the prior end of tax year percentages of capital as the beginning of tax year percentages of capital.

Partnership AB computes the partners’ percentages of profit for the tax year as each partner’s share of items which increased partnership capital during the tax year, other than contributions to capital. Partnership AB computes the partners’ percentages of loss for the tax year as each partner’s share of items which decreased partnership capital during the tax year, other than distributions.

The Partnership Agreement allocates section 704(b) profits and losses for the tax year as follows: 1) first to Partner A as a preferred return on capital equal to 5% of Partner A’s beginning capital balance, 2) then 80% to Partner A and 20% to Partner B until Partner A is allocated profits equal to an aggregate10% preferred return on Partner A’s beginning capital balance. Any residual profits or losses are allocated 60% to Partner A and 40% to Partner B.  Allocations of taxable income or loss follow the section 704(b) allocations, and Partnership AB uses the section 704(c) traditional method to account for any differences between section 704(b) profits and losses and tax profits and losses.  

For the tax year ended December 31, 2008, Partnership AB generated $1,000 of section 704(b) profits and $900 in taxable income.  In accordance with the AB partnership agreement, Partner A is allocated $665 of section 704(b) profits as follows: 1) $100 of the first $100 of profits to equal a 5% preferred return on Partner A’s beginning capital, 2) an additional $100 of the next $125 of profits equal an aggregate 10% preferred return on Partner A’s beginning capital, and 3) $465 of the remaining $775 in profits, which is equal to 60% of Partnership AB’s residual profits. Partnership AB allocates all tax items to follow the section 704(b) allocations, with the exception of a $100 capital loss which was solely allocated to Partner A under section 704(c).  

 

Partnership AB

 

 A

 Total

 Beginning Capital

  $2,000   $   667   $2,667

 Preferred Return

       200          200

 Residual Profit

       465          465

Amount Allocated to B

         335        335

 End of Year Capital

  $2,665   $1,002   $3,667
       

 Percentage of Capital

  72.68%   27.32%  

Profit Percentages

Partner A’s percentage share of partnership profits for the tax year is 66.5% [$665 divided by $1,000]. Partner B’s percentage share of profits for the tax year is 33.5% [$335 divided by $1,000].

Loss Percentages

Partner A’s percentage share of partnership losses for the year is 0.0%.  Even though a $100 loss was allocated to Partner A under section 704(c), this loss did not impact his section 704(b) capital account.  Thus, because he was allocated no losses that would impact capital accounts, his percentage share is zero.  Likewise, Partner B was allocated no losses that would impact his section 704(b) capital account and Partner B’s percentage share of partnership losses for the year is 0.0%.

If Partnership AB had a net loss for the year for the section 704(b) capital accounts, Partner A’s percentage share of the net loss would be 60% and Partner B’s percentage share of the net loss would be 40% under the agreement and the reasonable method adopted for Item J. In such case, Partner A’s percentage share of profit would be 0.0% and Partner B’s percentage share of profit would also be 0.0%. [Added 03-11-2009]

Capital Percentages

Partner A’s share of total section 704(b) capital at the end of the tax year is $2,665 [$2,000 plus $665]. Partner A’s share of capital computed as a percentage of total partnership section 704(b) capital is 72.68% [$2,665 divided by $3,667].  Partner B’s share of total section 704(b) capital at the end of the tax year is $1,002 [$667 plus $335]. Partner B’s share of capital computed as a percentage of total partnership section 704(b) capital is 27.32 % [$1,002 divided by $3,667].
 

 


Q2. In each of the following cases, what is the percentage interest in the partnership that should be reported on Form 1065 Schedule B question 3b?

Case 1: Husband and Wife each owns a 50 percent interest in the partnership profit, loss, and capital.

Case 2: Parent owns a 50 percent interest in the partnership profit, loss, and capital, and Child owns a 50 percent interest in the partnership profit, loss, and capital.

Case 3: Brother 1, Brother 2, Sister 1, and Sister 2 each owns a 25 percent interest in the partnership profit, loss, and capital.
 
A2. Case 1: Report Husband and Wife each as owning, directly or indirectly, 100 percent. Each owns 50 percent directly and 50 percent by family attribution.

Case 2: Report Parent and Child as each owning, directly or indirectly, 100 percent. Each owns 50 percent directly and 50 percent by family attribution.

Case 3: Report Brother 1, Brother 2, Sister 1, and Sister 2 each as owning, directly or indirectly, 100 percent. Each owns 25 percent directly and 75 percent by family attribution.

 

 


Q3. Question: What is the maximum percentage interest in the partnership that Partnership P should report on its 2008 Form 1065, Schedule B question 3b for individual partners A, B, and C under the following facts?
 
Partnership P determines at the end of tax year 2008 that for 2008:
Partner A owns a 60 percent interest in profits, a 20 percent interest in loss, and a 50 percent interest in capital.
Partner B owns a 20 percent interest in profits, a 60 percent interest in loss, and a 30 percent interest in capital.
Partner C owns a 20 percent interest in profits, a 20 percent interest in loss, and a 20 percent interest in capital.
Partner C is the sister of partner A.

A3: For 2008, the maximum percentage directly owned by partner A is 60 percent (the maximum of 60, 20, and 50), the maximum percentage directly owned by partner B is 60 percent (the maximum of 20, 60, and 30), and the maximum percentage owned direct by partner C is 20 percent (the maximum of 20, 20, and 20).

In answering question 3b, partnership P reports for 2008 that partners A and C each own, directly or indirectly, 80 percent of the partnership’s profit, loss, or capital.
Partner A owns, directly, 60 percent and owns, indirectly, by family attribution, 20 percent of the profit, loss, or capital of the partnership.
Partner C owns, directly, 20 percent and owns, indirectly, by family attribution, 60 percent of the profit, loss, or capital of the partnership.

Partnership P reports for 2008 that partner B own, directly or indirectly, 60 percent of the partnership in response to question 3a.
Partner B owns, directly, 60% of the profit, loss, or capital of partnership P.

 

 

 

 


Q4: For purposes of reporting a partner’s percentage ownership of capital on Form 1065 Schedule K-1, Item J, is the following a reasonable method for reporting the partners’ ownership percentages as of the end of the partnerships’ 2008 tax year?

Facts: Partners A, B, and C are partners in partnership P. The P partnership agreement does not specify the partners’ percentage shares of profit, loss, or capital. Instead, the partnership agreement provides for allocations of profits and losses based on a complex formula which takes into consideration activity thresholds and targets which causes profit allocations to vary. P’s partnership agreement requires that capital accounts be maintained in accordance with section 704(b) and specifically provides for a deficit restoration obligation (DRO). 

For the partnership’s tax year ending in 2008, the partners’ respective capital account balances are as follows:

Partner A, $75
Partner B, $50
Partner C ($25) (deficit)

Partnership P considers the following to be a reasonable method of computing the partner’s ending capital percentage amounts for purposes of Schedule K-1, item J.

Partnership P reports total end of year partners’ capital of $100, consisting of positive capital account balances totaling $125 (A’s $75 capital plus B’s $50 capital) less C’s $25 capital deficit. Partnership P reports that partners A, B, and C own 60 percent, 40 percent, and zero percent, respectively, of partnership capital at the end of the partnership’s tax year, determined as follows:

  • Partner A’s 60 percent is determined by dividing his $75 positive ending capital account balance by total positive ending capital of $125.
  • Partner B’s 40 percent, is determined by dividing his $50 positive ending capital account balance by total positive ending capital of $125.
  • Partner C would receive no net distribution of capital if the partnership were to liquidate at the end of its 2008 tax year. Instead partner C would have to contribute capital to the partnership because of his deficit restoration obligation (DRO). Therefore, solely for purposes of computing the percentage amounts shown of Schedule K-1, item J, C’s ending positive capital account percentage is treated as equal to zero.

A4: Solely for purposes of completing Schedule K-1, item J, partnership P’s method of computing the ending partners’ capital account percentages is reasonable if the method is followed consistently from year to year.

See also posted FAQs Q16 and Q17

 


Q5: What percentage interests in partnership X are individual partners A and B and entities W, Y, Z, and T considered to own for purposes of answering questions 3a and 3b of Form 1065, Schedule B for tax year 2008?

Partnership Y and trust T each own 50 percent of the profit, loss, and capital of partnership X.
A owns 100 percent of disregarded entity W which owns 50 percent of partnership Y.
B owns 100 percent of the beneficial interest of trust T. B is A’s wife.
A also owns 100 percent of Corporation Z.
 
A5: Partnership X reports in response to question 3a that partnership Y and trust T each own, directly or indirectly, 50 percent of the profit, loss, or capital of partnership X.

Partnership X does not report with respect to W because W is a disregarded entity.
Partnership X does not report with respect to Corporation Z because Z is not a direct or indirect partner of X.

Partnership X reports in response to question 3b that A owns, directly or indirectly, 75 percent of the profit, loss, or capital of partnership X. A owns 25 percent indirectly through entities W and Y and owns 50 percent indirectly through family attribution from B.

Partnership X reports in response to question 3b that B owns, directly or indirectly, 75 percent of the profit, loss, or capital of partnership X. B owns 50 percent indirectly through entity T and 25 percent indirectly through family attribution from A.

 

 


NOTE: Posted FAQ Q6 applies only to tax year 2008. For tax year 2009 the Form 1065 Schedule K-1 Item J instructions page 24 have changed. For tax years 2009 and later, partnerships are not required to attach to a partner's Schedule K-1 any listing of multiple changes in the partner's profit and loss sharing percentages during the year. The partnership will report on Schedule K-1 Item J the partner’s percentage as of the beginning of the partnership tax year (or, if later, immediately after the partner was admitted) and as of the end of the partnership tax year (or, if earlier, immediately before the partner’s partnership interest terminated). [Added 12-16-2009.]

Q6: For purposes of the requirement in the Form 1065 Schedule K-1, Item J, instruction at page 24, first paragraph, last sentence referring to "multiple changes in the profit and loss sharing percentage during the year" should the phrase “change” be interpreted as applying only to changes in ownership resulting from sale, purchase, transfer, contribution, or distribution as distinguished from changes which occur because of fluctuations in profit allocations during the year due to formula methods specified in the partnership agreement?

Facts: Without the requested clarification my client partnership will have to prepare an enormous attachment to each of its Schedules K-1, as such, allocations may fluctuate many times during the year as the variables on which they are based (profit targets of a certain activity, etc.) change. The partnership agreement does not provide for fixed percentages in the partnership profit, loss, and capital. One partner sold part of his interest on two different dates during the year.

A6: Yes. For purposes of the requirement in the Form 1065 Schedule K-1, Item J, instruction at page 24, first paragraph, last sentence referring to "multiple changes in the profit and loss sharing percentage during the year," the phrase “change” for this purpose does not apply to changes which occur because of fluctuations in profit allocations during the year due to formula methods specified in the partnership agreement.

The partnership must report on Schedules Item J the percentage interest at the beginning and end of year in profit, loss, and capital for each partner. In cases where the partner has multiple changes in ownership, the multiple change attachment to the K-1 is necessary but only listing dates and percentages for actual changes in ownership.

 

 

 


Q7: Partnership A wishes to report ownership percentages on tax year 2009 Form 1065 Schedules K-1, Item J, using a different reasonable method from the reasonable method used for tax year 2008. Must Partnership A disclose the change on the 2009 Form 1065? The partnership agreement does not express the partners' percentage interests as fixed percentages.

A7: Yes. The instructions for Form 1065 Schedule K-1, Item J, provide that if the partnership agreement does not express the partners' percentage interests as fixed percentages, the partnership may use a reasonable method in arriving at each percentage for the purpose of completing Item J as long as such method is consistent with the partnership agreement and is applied consistently from year to year. If Partnership A changes the reasonable method used for tax year 2009 from that used for tax year 2008, Partnership A must attach a statement to its tax year 2009 Form 1065 explaining why the change was necessary and a schedule comparing each partner’s end of year percentage interests in the partnership’s profit, loss, and capital as reported for 2009 on Item J under the new method and as would have been reported under the method used in 2008.

 

 


Note: Posted 1065 FAQs Q8, Q14, and Q29 deal with transition issues in 2008 for partnerships that did not report Schedule K-1 Item J percentages in 2007. [Added 12-16-2009.]

Q8: Partnership A has over 100 partners. The partnership agreement does not express the partners' percentage interests as fixed percentages. The partnership wishes to send tax year 2008 Form 1065 Schedules K-1 to partners in March 2009 with a blank Item J. The partnership proposes that it will adopt a reasonable method for reporting ownership percentages on Item J before the extended due date of the return and include percentages on Item J of the Schedules K-1 included with the Form 1065 that will be filed with IRS prior to the extended due date. Is it permissible for Partnership A to send 2008 Schedules K-1 to partners with a blank Item J?

A8: No. The tax year 2008 Form 1065 Schedules K-1 sent to partners in 2009 must include a completed Item J and must be consistent with those filed with the Form 1065. The instructions for Form 1065 Schedule K-1, Item J, provide that if the partnership agreement does not express the partners' percentage interests as fixed percentages, the partnership may use a reasonable method in arriving at each percentage for the purpose of completing Item J as long as such method is consistent with the partnership agreement and is applied consistently from year to year.

 

 


Q9: For purposes of answering Schedule B questions 3a and 3b what percentage interest does the Partnership report as being owned by individual partners A and B and revocable grantor trusts T1 and T2 under the following facts?
 
T1 and T2 each own 50 percent of the profit, loss, and capital of partnership X.
A owns 100 percent of revocable grantor trust T1.
B owns 100 percent of revocable grantor trust T2. B is A’s wife.
 
A9: Assuming that T1 and T2 are required to file returns for federal income tax purposes, partnership X reports revocable grantor trusts T1 and T2 on question 3a and shows each as owning, directly or indirectly, 50 percent of the profit, loss, or capital of partnership X.

Partnership X reports in repose to question 3b that A owns, directly or indirectly, 100 percent of the profit, loss, or capital of partnership X. For these purposes, A is considered to own 50 percent indirectly through revocable grantor trust T1 and also to own 50 percent through family attribution from his wife, B.

Partnership X also reports in response to question 3b that B owns, directly or indirectly, 100 percent of the profit, loss, or capital of partnership X. B owns 50 percent indirectly through revocable grantor trust T2 and 50 percent through family attribution from her husband, A.

 


Q10. What is the percentage interest in the partnership that should be reported on Form 1065 Schedule B question 3a and 3b under the following facts?

Corporation X owns 1 percent of the profit, loss, and capital of partnership A. The remaining 99 percent is owned by trust T. Jane owns 50 percent of the beneficial interest in trust T. Bill, her brother owns the other 50% of trust T.

A10: Report Trust T as owning, directly or indirectly, 99 percent of the partnership in response to question 3a.

Report Jane and Bill as each owning, directly or indirectly, 99 percent of the partnership in response to question 3b. Jane and Bill each own, indirectly through attribution from Trust T, 49.5 percent of Partnership A’s profit, loss, and capital. This is computed by multiplying Trust T’s 99 percent direct ownership in P by the 50 percent in Trust T owned by Jane and owned by Bill. In addition, Jane and Bill, as brother and sister, each own an additional 49.5 percent indirectly by family attribution from the other.

 

 

 


Q11: What percentage interest in Partnership A’s profit, loss or capital is to be reported on Form 1065 Schedule B question 3a and 3b, under the following facts?

S corporations X and Y each own 50 percent of the profit, loss, and capital of partnership A. Jane owns 50% of X’s stock, and her brother Bill owns 50% of Y’s stock. Bill also owns 100 percent of a third S corporation, Z.
 
A11: In response to question 3a, Partnership A reports that corporations X and Y each own directly or indirectly, 50 percent of Partnership A’s profit, loss, or capital.

In response to question 3b, Partnership A reports that Jane and Bill each own, directly or indirectly, 50 percent of the partnership’s profit, loss, or capital. Both Jane and Bill, respectively, are considered to own 25% through their respective corporations. In addition, each is considered to own an additional 25% by family attribution, for a total of 50% each. 

Partnership A does not report with respect to Corporation Z because Z is not a direct or indirect partner of A.

 

 


Q12: For purposes of completing its 2008 Form 1065 Schedule B, questions 3 and 4, what percentage interest in profit, loss, or capital should Partnership P report for individual partners A and B, and corporation Y, given the following facts?
 
A and B each directly owns 50% of P’s profit, loss, and capital.
A and B also each owns directly 50% of the stock in corporation Y.
 
Do the attribution rules of section 267(c) and A and B’s common control of both partnership P and corporation Y result in P being deemed to indirectly own corporation Y? What must partnership P report as its percentage ownership of corporation Y on Schedule B question 4a?
 
A12: For purposes of Schedule B, questions 3 and 4, partnership P reports that A and B each own, directly or indirectly, 50 percent of the profit, loss, or capital of partnership P in answering Schedule B, question 3b.
 
Because corporation Y is not a partner in partnership P, P does not report an ownership interest in Y in response to question 3a. Y is neither a direct nor an indirect partner in P.

Partnership P does not report an interest in corporation Y in answering question 4a. P is not considered to indirectly own an interest in Y under section 267(c), even though A and B control both P and Y.

 

 


Q13: What ownership percentages does Partnership B report with respect to Form 1065 Schedule B questions 3a and 4b under the following facts?
 
Facts
Corporation P is an affiliated group filing a consolidated return for the taxable year ending December 31, 2008. P is the parent of three wholly owned subsidiaries, S1, S2, and S3.

  • Subsidiary S1 owns 100 percent of a U.S. disregarded entity, DE.
  • Subsidiaries S2 and S3 each own 50% of the profit, loss, or capital of Partnership A.
  • Partnership A and disregarded entity DE each own 25 percent of the profit, loss, or capital of Partnership B.
  • Partnership B owns 70 percent of the profit, loss, or capital of Partnership C.
  • Partnership C owns 80 percent of the profit, loss, or capital of Partnership D.

A13: Schedule B, Question 3(a)
Partnership B reports that Corporation P owns, directly or indirectly, 50 percent of the profit, loss, or capital of Partnership B, computed as follows:

  • Corporation P owns 25 percent of Partnership B, indirectly by entity attribution, through subsidiary’s S1’s ownership of disregarded entity DE.  
  • Corporation P owns an additional 12.5 percent of Partnership B, indirectly by entity attribution, through subsidiary S2’s 50% ownership in Partnership A and Partnership A’s 25 percent ownership in Partnership B. 
  • Similarly, Corporation P owns another 12.5 percent of Partnership B, through subsidiary S3’s 50% ownership in Partnership A and Partnership A’s 25 percent ownership in Partnership B. 
  • Partnership A’s 25 percent interest in Partnership B is not reported by Partnership B, as A’s interest is below the 50 percent reporting threshold. 
  • DE’s 25 percent interest in B is considered directly owned by subsidiary S1.
  • Subsidiaries S1, S2, and S3 are not reported, as they do not file their own returns for federal income tax purposes. Rather, they join with parent Corporation P in filing a consolidated return.


Schedule B, Question 4(b)

  • Partnership B must report on Schedule B question 4b that it owns, directly or indirectly, 70 percent of the profit, loss, or capital of Partnership C. Partnership B also must report that its owns, directly or indirectly, 56 percent of the profit, loss, or capital of Partnership D, because Partnership B is considered to own by entity attribution through Partnership C 70 percent of the 80 percent interest in Partnership D owned by Partnership C.

 

 

 


Note: Posted 1065 FAQs Q8, Q14, and Q29 deal with transition issues in 2008 for partnerships that did not report Schedule K-1 Item J percentages in 2007. [Added 12-16-2009.]

Q14: The partnership agreement for Partnership A does not express the partners’ shares of profit, loss, or capital as fixed percentages. For tax year 2008, Partnership A adopted a reasonable method for determining the partners’ end of year percentage shares of profit, loss, and capital for purposes of completing Schedule K-1, Item J. Under its method, the ending percentages shown on Schedule K-1 item J for 2008 will be reported as the beginning of year percentages for 2009.
 
For tax year 2007, Partnership A did not report the partners’ percentage shares of profit, loss, or capital on Schedule K-1 at the end of the year. Rather, Partnership A reported "per agreement" instead of providing percentages for each partner. May Partnership A report "per agreement" as the beginning of year percentage share of profit, loss, and capital for the 2008 Form 1065 Schedules K-1 Item J for each partner?
 
A14: No. Partnership A may not report "per agreement" as the beginning of year percentage share of profit, loss, and capital for the 2008 Form 1065 Schedules K-1 Item J for each partner. Specific percentage shares must be determined in a manner consistent with the partnership agreement.
 
The instructions for Form 1065 Schedule K-1 Item J provide that if the partnership agreement does not express the partners' percentage interests as fixed percentages, the partnership may use a reasonable method in arriving at each percentage for the purpose of completing Item J as long as such method is consistent with the partnership agreement and is applied consistently from year to year.

For the current year, it is generally acceptable to show the ending partner percentages from the prior year as the beginning of year percentage shares for the current tax year. However, if the end of year partners’ shares of profit, loss, and capital were not stated as percentages, then the reasonable method adopted for tax year 2008 may be applied as of the end of tax year 2007 to determine percentage shares at the beginning of 2008 tax year.

 

 

 


Q15: What percentages of profit, loss, and capital are reported on the partners’ 2008 Schedules K-1 Item J for Partnership P under the stated facts?

Facts: Partnership P is a calendar year partnership with 4 individual partners, Partner A, Partner B, Partner, C, and Partner D. Each partner owns 25% of the profits losses and capital as of December 31, 2007.

On June 30, 2008, the partnership made distributions to C and D in complete liquidation of their partnership interests. A and B remained in the partnership and own 50% each in the capital, loss, and profits of the partnership.

In answering, assuming in the alternative:

a. The partnership terminated under section 708
b. The partnership did not terminate.

How should income from the distributions on June 30, 2008, be reported to each partner?

A15: Assuming that the transaction is a liquidating distribution with respect to Partners C and D as opposed to a taxable purchase of C and D’s interests by the other partners, there will be no termination of the partnership. In order to have a termination of a partnership, there must be a sale or exchange of 50% or more of the partnership's capital and profits interests within a 12-month period. See IRC section 708(b)(1)(B). The liquidation of a partnership interest is ordinarily not considered a sale or exchange for these purposes. See Treas. Reg. section1.708-1(b)(1)(ii).

If there is no partnership termination, the Partnership reports Partners A, B, C and D as having beginning of year percentage shares of profit, loss, and capital of 25% each. The partnership reports Partners A, B, C, and D as having end of year shares of profit, loss and capital of 50%, 50%, 0%, and 0%, respectively. 

If the transaction is actually a sale by C and D of their partnership interests giving rise to a termination of the partnership, then the partnership reports Partners A, B, C and D as having percentage shares of profit, loss, and capital of 25% each for short period beginning 1/1/2008. The partnership reports the partners’ percentage shares as 25% each for the short period ending 6/30/2008. On the short period return beginning 7/1/2008 and ending 12/31/2008, the partnership reports A and B each as having a 50% interest in the partnership’s profit, loss, and capital at 7/1/2008 and at 12/31/2008.

Questions regarding the calculation of liquidating distributions are beyond the scope of this FAQ page.

 

 


Q16: Must the end of tax year capital accounts percentage reported on Form 1065 Schedule K-1 Item J be computed from capital accounts determined on the same basis as the end of tax year capital account balances reported in Item L? The partnership agreement does not provide for fixed capital percentage shares.
 
A16: Yes. If the partnership agreement does not provide for fixed capital percentage shares, the end of tax year capital account percentage reported on Item J must be determined on the same basis as the end of tax year capital account balance reported on Item L, and the amounts reported on both Item J and Item L must be consistent with the partnership agreement. If the Item L end of year capital account balance for one or more partners is negative under the selected reporting method, the Item J end of tax year capital account percentage for such partners may be reported as zero and the end of year capital account percentage for all other partners with positive end of year capital account balances may be reported as a percentage of the total capital account balances for those partners.
 
See also posted 1065 FAQs Q4 and Q17.

 

 

 


Q17: May negative percentages be reported on Form 1065 Schedules K Item J as end of year percentage shares of profit, loss, or capital?
 
A17: No. Each percentage should be positive and between zero percent and 100 percent. The totals for profit, loss and capital should add to 100 percent across all partners unless zero for all partners.

See also posted 1065 FAQs Q4 and Q16.

 

 

 


Q18: In each of the following cases, what is the percentage interest in the partnership that should be reported on Form 1065 Schedule B question 3b?
 
Case 1: Four grandchildren (i.e., first cousins) each own a 25 percent interest in the partnership profit, loss, and capital.

Case 2: Grandfather owns a 20 percent interest and each of four grandchildren own a 20 percent interest in the partnership profit, loss, and capital.

A18: Case 1. No reporting is required on question 3b since each of the grandchildren (first cousins) owns only 25 percent. Family attribution for these purposes is determined in accordance with section 267(c). Under that section, the family of an individual includes only that individual’s spouse, brothers, sisters, ancestors, and lineal descendants, but not cousins. Therefore, the 25% ownership of the cousins in not combined. 
 
Case 2. Report the grandfather as owning, directly or indirectly, 100 percent. The grandfather owns 20 percent directly and 80 percent indirectly by attribution from his grandchildren. The grandchildren each own 40 percent, directly or indirectly, which is below the 50 percent reporting threshold.

Each grandchild owns 20 percent directly and 20 percent by attribution from grandfather.

 

 

 


Q19: What must partnership X report in response to Form 1065 Schedule B question 3b under the following facts?

Facts: A, B, and C are brother, brother, and sister. Each owns 15% of Partnership X’s profits, loss or capital. 
Mom and Pop LLC owns 6% percent of Partnership X’s profits, loss, or capital.
Mom & Pop LLC is owned 90% by Mom and10% by Dad. Mom and Dad are the parents of A, B, and C.   
 The remaining 49% of Partnership X is owned by UNRELATED individuals.
 
A19: Partnership X must report on Schedule B question 3(b) that each of A, B, C, Mom, and Dad own, directly or indirectly, 51 percent of Partnership X. 

Under the family attribution rules, each family member is considered to own what the other family members own. For these purposes, the family of an individual includes that individual’s spouse, brothers, sisters, ancestors, and lineal descendants (such as parents).

Thus the ownership percentages of profit, loss, or capital to be listed on 3(b) for the family collectively equals 15% + 15% +15% + 6% (through the family LLC) or 51%.

Computing Mom’s 51 percent as an example, Mom owns indirectly 5.4 percent (90 percent of 6 percent) through Mom and Pop LLC and owns indirectly by family attribution 0.6 percent from Pop (10 percent of 6 percent), 15 percent from A, 15 percent from B, and 15 percent from C.

Computing A’s 51 percent as a further example, A owns directly 15 percent and owns indirectly by family attribution 5.4 percent from Mom, 0.6 percent from Pop, 15 percent from B, and 15 percent from C.

 

 


Q20: Part a. An investor owns 99% of 10 limited partnerships. Does each partnership have to report him on Schedule B, question 3(b)?

Part b. If two partnerships are owned by the same 99% partner, are they considered to indirectly own each other for purposes of Questions 4a and 4b?

A20: Part a. Yes.

Part b. No. For purposes of question 4, report only the ownership the partnership owns directly or through another entity.

 

 


Q21: With respect to Trust 1 that owns 50% of Partnership X, what information should be completed in response to Schedule B questions 3a and 3b? What information, if any, is required with respect to Trusts 2 through 10 and the beneficiaries of those trusts? Assume alternatively that the beneficiary of Trust 1 is or is not related to any of the other beneficiaries under section 267(c).

Facts: Partnership X is directly owned by 10 trusts. Trust 1 owns 50% of the profits, loss, and capital of X.  Nine other trusts, Trusts 2 through Trust 10, each own 5.55% of Partnership X, totaling 50%. Each trust (Trusts 1 through 10) has an individual as sole beneficiary. The beneficiary of Trust 1 is not a beneficiary of any of Trusts 2 through 10. Each beneficiary of Trusts 2 through 10 (the nine trusts each owning 5.55%) is a sibling of the other beneficiaries of Trusts 2 through 10. Each trust files a tax return.

A21: Trust 1 is listed in response to question 3a as owning 50% of the profit, loss, or capital of Partnership X together with all of the identifying information required. None of the other Trusts 2 through 10 are listed in response to question 3a. The relationship between the beneficiaries of trusts does not affect the ownerships attributed to the trusts under section 267(c) and therefore does not affect the response to question 3a.

All of the individual beneficiaries are listed in response to question 3b, as owning directly or indirectly, 50% or more of the partnership, assuming that the beneficiaries of Trusts 2 through 10 are not related to the beneficiary of Trust 1 within the meaning of section 267(c). If they are related within the meaning of section 267(c) (for example if the siblings are the children, grandchildren, or other lineal descendants of the beneficiary of Trust 1), then all of the individuals listed in response to question 3b, including the beneficiary of Trust 1, would be listed as owning directly or indirectly 100% of the capital, profit, or loss in Partnership X.

 

 

 


Q22: Five unrelated individuals each own 20% of the profit, loss, and capital of Partnership X. The same five unrelated individuals each own 20% of the voting stock in a “C” corporation. What is reported for purposes of questions 3a, 3b, and 4a?
 
A22: Because these individuals are unrelated, their ownership in Partnership X is not attributed to each other. Thus, there is no reporting requirement with respect to question 3b as none owns 50% or more directly or indirectly of the profits, loss, or capital of the partnership. The fact that these five unrelated individuals also own all the interests in a C corporation having no ownership in the Partnership will not cause their interests in the partnership to be attributed to each other and will not cause the C corporation to be listed in response to questions 3a or 4a.

 

 


Q23: Is a partnership required to ask its partners for sufficient information to enable the completion of Form 1065 Schedule B question 3a and 3b, pertaining to whether the partnership is owned directly or indirectly 50 percent or more at the end of its tax year by any individual or entity?

A23: Yes. The partnership must request and obtain any necessary information from its partners sufficient for the partnership to reach a proper conclusion regarding whether or not any individuals or entities meet the 50% threshold under the instructions for question 3a and 3b. If any partner is an entity, the entity partner must request and obtain the same information from its owners and provide this information to the partnership for purposes of answering questions 3a and 3b.

See also FAQ 26 on disclosures required if partners refuse or fail to provide information for the completion of Schedule B questions 3a and 3b.

 

 

 


Q24: For purposes of completing question 3b, Form 1065, Schedule B for 2008, what is the percentage interest in the partnership’s profits, loss, or capital that must be reported for individual partners A, B, and C under the following facts?
 
Facts: Partners A and B each own directly 50 percent of the profits, loss, and capital of partnership P.

C is A’s wife and is also B’s sister. B is unmarried. A, B, and C live in a community property state, S. Under the community property laws applicable in state S, a spouse is considered to own one-half of the property owned by the other spouse (including partnership interests) unless the property is otherwise considered separate property.   For purposes of this FAQ, A’s interest in partnership P will be treated as community property in state S.

A24: Under these facts, A and C are each treated as directly owning 25 percent of the profits, loss, and capital of partnership P.
  
Partner A owns directly 25 percent and indirectly by family attribution from C, an additional 25 percent of P’s profits, loss, or capital. Accordingly, for purposes of answering question 3b, P reports that A owns, directly or indirectly, 50 percent of P’s profits, loss, or capital.

Partner B owns directly 50 percent and indirectly by family attribution from C, an additional 25 percent of P’s profit, loss, or capital. Accordingly, for purposes of answering question 3b, P reports that B owns, directly or indirectly, 75 percent of P’s profits, loss, or capital. 
 
Partner C owns directly 25 percent of P’s profits, loss, or capital. In addition, C owns another 25 percent indirectly by family attribution from her husband, A, plus an additional 50 percent by family attribution from her brother B. Therefore, for 2008, partnership P reports that that partner C owns, directly or indirectly, 100 percent of the partnership for purposes of answering Schedule B question 3b.
 


Q25: If a partner of Partnership A requests a copy of the Form 1065 from the IRS under section 6103(e)(1)(C), will the copy of the return furnished by the IRS to the partner include partners' taxpayer identity information disclosed on the return by Partnership A in response to Form 1065 Schedule B questions 3a and 3b?
 
A25: No. When making disclosures of partnership returns under section 6103(e), the IRS must redact supporting schedules so that they do not include taxpayer identity information of a person other than the entity making the return, the person conducting the inspection, or the person to whom the disclosure is made. Taxpayer identity information is defined in section 6103(b)(6) to be the taxpayer’s name, address, taxpayer identification number or a combination of these. Therefore, all taxpayer identity information for any partner other than the partner requesting disclosure or conducting the inspection contained on schedule B will be redacted prior to disclosure under section 6103(e)(1)(C).

See also FAQ Q23 on requesting and obtain information from partners and FAQ Q26 on disclosures required if partners refuse or fail to provide information for the completion of Schedule B questions 3a and 3b.


Q26: What disclosures are required in filing a Form 1065 return if one or more partners refuse or otherwise fail to provide information for the completion of Form 1065 Schedule B questions 3a and 3b, but the partnership concludes it nonetheless has sufficient information from other partners and sources to reach a proper conclusion regarding whether or not any individuals or entities meet the 50% threshold under the instructions for question 3a and 3b?

What disclosures are required in filing a Form 1065 return if one or more partners refuse or otherwise fail to provide information for the completion of Form 1065 Schedule B questions 3a and 3b, and the partnership concludes it does not have sufficient information for the partnership to reach a proper conclusion regarding whether or not any individuals or entities meet the 50% threshold under the instructions for question 3a and 3b?
 
A26: If one or more partners refuse or otherwise fail to provide information for the completion of Form 1065 Schedule B questions 3a and 3b, but the partnership concludes it nonetheless has sufficient information from other partners and sources to reach a proper conclusion regarding whether or not any individuals or entities meet the 50% threshold under the instructions for question 3a and 3b, the partnership should complete questions 3a and 3b. No disclosure is required at the time of filing the return that one or more partners refused or failed to provide such information.
 
If one or more partners fail to provide information sufficient for the partnership to reach a proper conclusion regarding whether or not any individuals or entities meet the 50% threshold under the instructions for question 3a and 3b, the partnership must disclosure the refusal by indicating on the first line of question 3a or 3b or both, as appropriate, the statement, "Requested Ownership Information Refused or Not Provided." 
 
The partnership should retain in its records communications between it and its partners concerning questions 3a and 3b.

See also FAQ Q23 on requesting and obtain information from partners and FAQ Q25 on confidentiality of the information.

 

 


Q27: What total assets and liabilities must Partnership A report on its 2008 Form 1065 Schedule M-3 Part I line 12a and line 12c under the following facts?
 
Facts: Partnership A owns 75% of U.S. Partnership B. Partnership A prepares 2008 GAAP financial statements which include Partnership B on a consolidated basis. Partnership A reports on Schedule M-3 Part I line 4a the worldwide consolidated net income from its consolidated financial statements. On line 4b it checks the checkbox for GAAP. On line 6 it removes 100% of the income of Partnership B [not its 75%] as required by instructions.
 
A27: Partnership A reports on its Form 1065 Schedule M-3 Part I line 12a the worldwide consolidated total assets and total liabilities from the same financial statements that provide the worldwide consolidated income for Part I line 4a. On Line 12c Partnership A reports the total assets and total liabilities of Partnership B [not 75%].

 


Q28: Under the following facts, may Partnership A use its Form 1065 Schedule L capital accounts in completing its 2008 Form 1065 Schedule M-2 rather than the totals for all partners for its Form 1065 Schedules K-1 capital accounts?
 
Facts: Partnership A filed Form 1065 Schedule M-3 for its 2007 tax year, will do so again for its 2008 tax year, and expects to do so for its 2009 tax year. For tax year 2007, Partnership A used a different method for calculating its partners’ capital account balances for purposes of preparing its Schedule L balance sheet than it used in preparing the partners’ Schedules K-1. It expects to use these differing methods again for tax years 2008 and 2009 tax year.

As required by the 2007 instructions to Form 1065, Partnership A attached a schedule reconciling its capital account balances as shown on Schedule L with the sum of the capital accounts for all partners as shown on their Schedules K-1. It plans to follow this reconciliation procedure for the 2008 and 2009 tax years.

Partnership A used the same method for completing its 2007 Schedule M-2 as used in calculating its Form 1065 Schedule L capital account balances, as required by the 2007 instructions.
 
Partnership A proposes to use the method used for tax year 2007 in completing its Form 1065 Schedule M-2 (that is, with respect to Schedule L capital account balances) as it did in 2007. For tax year 2009, Partnership A will convert to using the totals for all partners for its Schedules K-1 capital accounts.
 
A28: Yes. If Partnership A used its Form 1065 Schedule L capital accounts in completing its 2007 Form 1065 Schedule M-2, it may do so again for its 2008 tax year, but must convert not later than its 2009 tax year to using the totals for all partners for its Form 1065 Schedules K-1 capital accounts in completing its Form 1065 Schedule M-2. For both its 2008 and 2009 tax years it must attach to its Form 1065 a reconciliation of its capital accounts for Form 1065b Schedule L with the total for all partners of those used for its Form 1065 Schedules K-1.

 

 

 


Note: Posted 1065 FAQs Q8, Q14, and Q29 deal with transition issues in 2008 for partnerships that did not report Schedule K-1 Item J percentages in 2007. [Added 12-16-2009.]

Q29: What should Partnership A report as the beginning of year percentage share of profit and loss for each partner on the 2008 Form 1065 Schedules K-1 Item J under the following facts?

Facts: The partnership agreement for Partnership A does not express the partners’ shares of profit, loss, or capital as fixed percentages. For tax year 2008, Partnership A adopted a reasonable method for determining the partners’ end of year percentage shares of profit, loss, and capital for purposes of completing Schedule K-1, Item J. Under its method, the ending percentages shown on Schedule K-1 item J for 2008 will be reported as the beginning of year percentages for 2009.

For tax year 2007, Partnership A did not report the partners’ percentage shares of profit, loss, or capital on Schedule K-1 at the end of the year. Rather, Partnership A reported "per agreement" instead of providing percentages for each partner. 

Posted 1065 FAQ Q14 directs that if the end of tax year 2007 partners’ shares of profit, loss, and capital were not stated as percentages, then the reasonable method adopted for tax year 2008 may be applied as of the end of tax year 2007 to determine percentage shares at the beginning of the 2008 tax year.

The partnership has made its best efforts to apply the reasonable method adopted for tax year 2008 as of the end of tax year 2007 to determine percentage shares at the beginning of the 2008 tax year, but has determined that it is unable to compute percentage shares for profit and for loss as of the end of tax year 2007 under the 2008 reasonable method and is therefore unable to compute the percentage shares for profits and loss at the beginning of tax year 2008. Partnership A is able to determine the end of tax year 2007 percentage shares for capital and therefore is able to determine the beginning of tax year 2008 percentage shares for capital.

A29: If Partnership A is unable to determine the beginning of year percentage shares of profit and loss for the 2008 Form 1065 Schedules K-1 Item J for each partner, it should indicate “Unknown” as the beginning of tax year 2008 percentage shares, and report the end of tax year 2008 percentage shares determined under the reasonable method adopted for 2008.

With respect to partner capital, the beginning of tax year 2008 percentage shares are readily determinable, and must be reported as must the end of tax year percentage shares.

 

 


Q30: Partner A owns an interest in Partnership X. Partnership X does not own interests in any other entities. For purposes of Form 1065 Schedule B question 3a, if Partner A owns a direct or indirect interest in Partnership Y and Corporation Z, is Partnership X considered to own interests in those entities through attribution from Partner A?

A30: No. The instructions to Form 1065 Schedule B question 3a apply the indirect ownership rules of section 267(c) in a manner which treats the owner of an entity (e.g., a partner, shareholder, or beneficiary) as owning his proportionate share of what the entity owns. However, entity ownership interests are not then reattributed to other entities owned by the partner, shareholder, or beneficiary. 

 

 


Q31: How should Partnership AB report end of year profit and loss percentages for Form 1065 Schedules K-1 Item J under the following facts?

Facts: Partnership AB has two partners, A and B, who make equal contributions of capital to the partnership. The partners agree to divide all partnership items, including profit, loss, and capital equally. Partnership AB has adopted a method of calculating profit and loss ownership percentages for purposes of completing Schedule K-1 Item J based upon an analysis of its IRC section 704(b) capital accounts. Partnership AB has net section 704(b) ordinary income of $1,000 and a capital loss of $500. 

Under these facts, should the partnership combine the $1,000 ordinary income and the $500 capital loss and report a 50% profit sharing ratio and a 0% loss sharing ratio for A and for B since partnership income exceeds partnership losses or should the partnership report profit and loss percentages of 50%, each, respectively, for A and for B since the partners agree to share profit, loss and capital equally?

A31: Under the facts as presented, Partnership AB reports end of year profit, loss, and capital percentages of 50% for both partner A and partner B for purposes of completing item J of Schedule K-1.

 

 


Q32: How should Partnership AB report end of year profit, loss, and capital percentages for Form 1065 Schedules K-1 Item J under the following facts?

Facts: Partnership AB has two partners, A and B, who each make equal initial contributions of $1,000 to partnership capital. The partners agree to divide all partnership income 60% to A and 40% to B and all partnership losses 40% to A and 60% to B. Partnership AB calculates end of year profit and loss ownership percentages for Schedule K-1 Item J with respect to changes in its section 704(b) capital accounts. In addition, Partnership AB uses its closing section 704(b) capital accounts to calculate its end of year capital account percentages for Item J. Partnership AB has section 704(b) ordinary income of $1,500, ordinary loss of $500, capital gain of $1,000, and capital loss of $1,500. 

A32: Under the facts as presented and assuming the allocations have substantial economic effect, Partnership AB reports end of year profit percentages on Schedule K-1 Item J of 60% and 40% for A and B, respectively. In addition, Partnership AB reports end of year loss percentages on Schedule K-1, item J of 40% and 60% for A and B, respectively.

The end of year section 704(b) capital account total for Partnership AB is $2,500, representing initial contributions of $2,000 ($1,000 each from A and B), ordinary income of $1,500, ordinary loss of $500, capital gain of $1,000, and capital loss of $1,500. These amounts are allocated as follows: $1,700 to A ($1,000 plus $900 ordinary profit plus $600 capital gain less $200 ordinary loss and $600 capital loss) and $800 to B ($1,000 plus $600 ordinary income plus $400 capital gain less $300 ordinary loss and $900 capital loss), or 68% for A and 32% for B.
 

 


Q33: What total assets and liabilities must Partnership A report on its 2008 Form 1065 Schedule M-3 Part I line 12a under the following facts?
 
Facts: For tax year 2008, Partnership A prepares tax-basis financial statements only.  These tax-basis statements are prepared from its books and records. These tax basis financial statements are used by Partnership A in calculating the amount it reports as its worldwide consolidated net income on Schedule M-3 Part I line 4a, and on line 4b the partnership completes the checkbox for tax-basis financial statements. Partnership A reports no adjustments on Schedule M-3 Part I lines 5 through 10. The partnership reports the same amount as book income on line 11 as it reports on line 4a. 
 
A33: Partnership A reports its tax-basis financial statement income amount on Schedule M-3 Part I line 4a as its world wide consolidated income and again on line 11 as its financial income statement amount. The amount on line 4a is the same as the amount on line 11, because Partnership A has no adjustments on Schedule M-3 Part I lines 5 through 10. 

Accordingly, Partnership A reports on Schedule M-3 Part I line 12a the same total assets and total liabilities as it does for Schedule L. It reports zero for lines 12b, 12c, and 12d.

 

 


Q34: What should Partnership A report as type of entity for Entity B in response to Form 1065 Schedule B question 3a under the following facts?

Facts: Entity B is a tax exempt entity that owns, directly or indirectly, 50% of the profit, loss, or capital of Partnership A.

A34: Partnership A should report in response to Form 1065 Schedule B question 3a that Entity B owns, directly or indirectly, 50% of the profit, loss, or capital of  Partnership A and report as type of entity either “corporation” or “trust” as appropriate for Entity B.

 

 


Q35: What does Partnership A report on its Form 1065 Schedule M-3 Part I line 12a and line 12c under the following facts?

Facts: U.S. Partnership A prepares its unconsolidated financial accounting statements under generally accepted accounting principles (GAAP). Partnership A does not prepare consolidated financial statements. Partnership A reports its investment in U.S. Partnerships B, C, and D for financial accounting purposes using the equity method of accounting. In accordance with the instructions to Schedule M-3 Part I, Partnership A does not remove its equity share of Partnerships B, C, and D financial statement net income on line 6, and does not adjust its equity method share of income on Part I line 8. Partnership A has no entries on Part I lines 5 through 10.  Accordingly, Partnership A includes its equity method share of Partnerships B, C, and D income on Part I line 11 and on Part II, line 7, column (a) of its Schedule M-3.

A35: Partnership A reports on Part I line 12a the total assets and total liabilities from the GAAP financial statements used as the source for the income (loss) reported on Part I line 4a.

If Partnership A has no entries on Part I lines 5 through 10, Partnership A reports on Part I line 12a the same total assets and total liabilities as it reports on its Schedule L.

If Partnership A has no entries on Part I lines 5 through 10, no amounts are reported for assets and liabilities on line 12b, 12c, or 12d.

 

 


Q36: What must be reported by Partnership X in response to Form 1065 Schedule B questions 3a and 3b under the following facts?

Facts:
Partnership A owns a 45% interest in Partnership X.
Partnership B owns a 45% interest in Partnership X.
C and E are brothers. 
C and his wife D own 90% and 10% interests, respectively, of Partnership A.
E and his wife F own 90% and 10% interests, respectively, of Partnership B.
The remaining partners in Partnership X are not family members of any of C, D, E, or F and are not owned, directly or indirectly, by A or B.

A36: Partnerships A and B each own, directly or indirectly, less than 50% of Partnership X and are not listed by Partnership X in response to question 3a.

C owns, directly or indirectly, 85.5% of Partnership X and Partnership X must list C in response to question 3b.
C owns indirectly 40.5% (90% of 45%) of Partnership X by attribution through Partnership A, 4.5% indirectly by family attribution from his wife D, and 40.5% indirectly by family attribution from his brother E.

E also owns, directly or indirectly, 85.5% of Partnership X and Partnership X must list E in response to question 3b.

D and F each own directly or indirectly, 45% of Partnership X and are not listed by Partnership X in response to question 3b.
For example, D owns indirectly 4.5% (10% of 45%) of Partnership X by attribution through Partnership A and 40.5% indirectly by family attribution from her husband C.

 

 


Q37: What must be reported by Partnership Z in response to Form 1065 Schedule B questions 3a and 3b under the following facts?

Facts: Partnership A is a 50% partner in Partnership Z. Individual J is a 99% partner in Partnership A and Corporation M is a 1% partner in Partnership A. Corporation M has 4 shareholders: Individual J owns 49% and each of his three children (T, U, and V) own 17%.

A37: Partnership A owns, directly, 50% of Partnership Z and is listed by Partnership Z in response to question 3a.

Corporation M owns indirectly 0.5% (1% of 50%) of Partnership Z and is not listed by Partnership Z in response to question 3a.

Individual J owns, directly or indirectly, 50% of Partnership Z and Partnership Z must list J in response to question 3b. J owns indirectly 49.5% of Partnership Z by attribution through Partnership A, and 0.245% (49% of 1% of 50%) by attribution through Partnership A and Corporation M and 0.085% (17% of 1% of 50%) by family attribution from each of children T, U, and V.

Each of T, U, and V owns, directly or indirectly, 50% of Partnership Z and Partnership Z must list T, U, and V in response to question 3b.
For example, T owns 0.085% indirectly by attribution through Partnership A and Corporation M, 0.085% indirectly by family attribution from each of siblings U and V, and 49.745% (49.5% plus 0.245%) by family attribution from parent J.

 


Q38: In completing Form 1065 Schedule B, questions 4a and 4b, is it necessary to list disregarded entities? How must a single member LLC that elects to file as a corporation be listed? 

A38: If an entity treated as a corporation or partnership for federal income tax purposes is owned by the partnership through a disregarded entity, list the information required by questions 4a and 4b for the corporation or partnership, not the disregarded entity. If a single member LLC owned by the partnership files as a corporation, list the information for the LLC as a corporation under question 4a.

 


Q39: Does Form 1065 Schedule B question 3a require that Partnership A report each foreign or domestic corporation, partnership, or trust which directly or indirectly owns 50% or more of the profit, loss, or capital of Partnership A even if one of these entities owns all of the other entities, directly or indirectly, 50% or more in a long chain of ownership? If so, how would Partnership A report ownership in Partnership A under the following facts?
 
Facts: Partnership A is owned 90% by Partnership B which files a US federal tax return.
Partnership B is owned 90% by US Corporation C which files a US federal tax return.
US Corporation C is owned 100% by Foreign Corporation D.
Foreign Corporation D is owned 100% by Foreign Corporation E.
Foreign Corporation E is owned 100% by Foreign Corporation F.
Foreign Corporation F is owned 100% by US Corporation G.
Foreign corporations D and E file a consolidated tax return with Foreign Corporation F. 
US Corporation G files a US federal tax return, is publicly traded, and no one entity or individual owns 50% or more of US Corporation G.
 
For the example above, "owned" is defined in terms of the percentage of profit, loss, or capital for partnerships and percentage of voting stock for corporations owned, directly or indirectly, 50% or more.

A39: The entire ownership chain must be reported with the exception of subsidiary corporations in tax consolidated groups and disregarded entities. Under the facts presented, Partnership A must report in response to Form 1065 Schedule B question 3a that it is owned, directly or indirectly, 90% by Partnership B, 81% by US Corporation C, 81% by Foreign Corporation F, and 81% by US Corporation G. It is not necessary to list the ownership of subsidiary corporations in a tax consolidated group, here Foreign Corporation D and Foreign Corporation E.

Foreign subsidiary owners, direct or indirect, are not listed as owners unless the foreign subsidiary owner also files or is required to file U.S. Form 1120-F. [Added 09-15-2009]

See also FAQ Q23 on requesting information from partners, FAQ Q25 on confidentiality of the information, and FAQ Q26 on disclosures required if partners refuse or fail to provide information  for completion of Schedule B questions 3a and 3b.
 


Q40.  What is the purpose of Schedule M-3 Part I lines 12a-12d (new in 2008) listing certain financial accounting total asset and total liability amounts ?

A40. The purpose of Schedule M-3 Part I lines 12a through 12d listing certain financial accounting total asset and total liability amounts is to provide two measures (in addition to financial accounting income) of the relative size of the entities with income removed or added on lines 5 through 7.

 


Q41.  Are Schedule M-3 Part I lines 12a-12d a reconciliation of assets and liabilities between the financial statement and Schedule L?

A41. Schedule M-3 Part I lines 12a-12d are not a reconciliation of assets and liabilities between the financial statement and Schedule L because there is no elimination line. Granted, if Schedule L is properly prepared, the difference between line 12a minus line 12b minus line 12c plus line 12d and Schedule L will be the elimination line.

Page Last Reviewed or Updated: 11-Feb-2014