PDF document

- 1 -

                Userid: CPM                 Schema: tipx         Leadpct: 100% Pt. size: 8          Draft               Ok to Print
AH XSL/XML      Fileid: … ons/p541/202203/a/xml/cycle04/source                                   (Init. & Date) _______

Page 1 of 23                                                                                   11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

            Publication 541
            (Rev. March 2022)                                                  Contents
            Cat. No. 15071D                                                    What’s New        . . . . . . . . . . . . . . . . . . 1
Department 
of the                                                                         Reminder . . . . . . . . . . . . . . . . . . . . 1
Treasury
Internal    Partnerships                                                       Introduction . . . . . . . . . . . . . . . . . . 2
Revenue 
Service                                                                        Forming a Partnership         . . . . . . . . . . . . 2
                                                                               Terminating a Partnership           . . . . . . . . . 4
                                                                               Exclusion From Partnership Rules              . . . . 4
                                                                               Partnership Return (Form 1065)            . . . . . . 4
                                                                               Partnership Distributions . . . . . . . . . . 5
                                                                               Transactions Between Partnership 
                                                                               and Partners . . . . . . . . . . . . . . . 7
                                                                               Basis of Partner's Interest         . . . . . . . . . 9
                                                                               Disposition of Partner's Interest         . . . . .   11
                                                                               Section 1061 Reporting 
                                                                               Instructions            . . . . . . . . . . . . . .   13
                                                                               Tax Equity and Fiscal 
                                                                               Responsibility Act of 1982 
                                                                               (TEFRA)             . . . . . . . . . . . . . . . .   15
                                                                               Bipartisan Budget Act of 2015 
                                                                               (BBA)           . . . . . . . . . . . . . . . . . .   15
                                                                               Index       . . . . . . . . . . . . . . . . . . . . . 23

                                                                               What’s New
                                                                               Section 1061 reporting.           Section 1061 rechar-
                                                                               acterizes  certain  long-term  capital  gains  of  a 
                                                                               partner that holds one or more applicable part-
                                                                               nership interests as short-term capital gains. An 
                                                                               applicable partnership interest is an interest in a 
                                                                               partnership  that  is  transferred  to  or  held  by  a 
                                                                               taxpayer,  directly  or  indirectly,  in  connection 
                                                                               with the performance of substantial services by 
                                                                               the taxpayer or any other related person, in an 
                                                                               applicable trade or business. See         Section 1061 
                                                                               Reporting Instructions for more information.
                                                                               Schedules  K-2  and  K-3  (Form  1065).             New 
                                                                               Schedules K-2 and K-3 replace the reporting of 
                                                                               certain international transactions on Schedules 
                                                                               K and K-1. The new schedules are designed to 
                                                                               provide  greater  clarity  for  partners  on  how  to 
                                                                               compute  their  U.S.  income  tax  liability  with  re-
                                                                               spect to items of international tax relevance, in-
                                                                               cluding  claiming  deductions  and  credits.  See 
                                                                               the Instructions for Schedules K-2 and K-3 for 
                                                                               more information.

                                                                               Reminder
                                                                               Photographs of missing children.              The Inter-
                                                                               nal Revenue Service is a proud partner with the 
              Get forms and other information faster and easier at:            National  Center  for  Missing  &  Exploited 
              • IRS.gov (English)         • IRS.gov/Korean (한국어)               Children®  (NCMEC).  Photographs  of  missing 
              • IRS.gov/Spanish (Español) • IRS.gov/Russian (Pусский)          children selected by the Center may appear in 
              • IRS.gov/Chinese (中文)      • IRS.gov/Vietnamese (Tiếng Việt)    this publication on pages that would otherwise 
                                                                               be  blank.  You  can  help  bring  these  children 

Mar 24, 2022

- 2 -

Page 2 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

home by looking at the photographs and calling amount realized by a foreign partner on the sale 544 544 Sales and Other Dispositions of
1-800-THE-LOST (1-800-843-5678) if you rec- for that partnership interest if the partnership is Assets
ognize a child. engaged in a trade or business in the United 551 551 Basis of Assets
States. See section 1446(f) for more informa-
tion. 925 925 Passive Activity and At-Risk Rules
Introduction 946 946 How To Depreciate Property
Withholding under the Foreign Account
This publication provides supplemental federal Tax Compliance Act (FATCA). A partnership See How To Get Tax Help at the end of this
income tax information for partnerships and may have to withhold tax on distributions to a publication for information about getting publi-
partners. It supplements the information provi- foreign partner of a foreign partner’s distributive cations and forms.
ded in the Instructions for Form 1065, U. S. Re- share when it earns withholdable payments. A
turn of Partnership Income; the Partner's In- partnership may also have to withhold on with-
structions for Schedule K-1 (Form 1065); and holdable payments that it makes to a foreign
Instructions for Schedule K-2 and Schedule K-3 entity. See sections 1471 through 1474 for Forming a Partnership
(Form 1065). Generally, a partnership doesn't more information. A partnership that has a duty The following sections contain general informa-
pay tax on its income but “passes through” any to withhold but fails to withhold may be held lia- tion about partnerships.
profits or losses to its partners. Partners must ble for the tax, applicable penalties, and inter-
include partnership items on their tax returns. est. See section 1461 for more information.
For a discussion of business expenses a For more information on withholding on non- Organizations Classified as
partnership can deduct, see Pub. 535, Busi- resident aliens and foreign entities, see Pub. Partnerships
ness Expenses. Members of oil and gas part- 515.
nerships should read about the deduction for
An unincorporated organization with two or
depletion in chapter 9 of that publication. Comments and suggestions. We welcome more members is generally classified as a part-
For tax years beginning before 2018, certain your comments about this publication and sug- nership for federal tax purposes if its members
partnerships must have a tax matters partner gestions for future editions. carry on a trade, business, financial operation,
(TMP) who is also a general partner. You can send us comments through or venture and divide its profits. However, a
The TMP has been replaced with partner- IRS.gov/FormComments. Or, you can write to joint undertaking merely to share expenses is
ship representative for partnership tax years be- the Internal Revenue Service, Tax Forms and not a partnership. For example, co-ownership of
ginning after 2017. Each partnership must des- Publications, 1111 Constitution Ave. NW, property maintained and rented or leased is not
ignate a partnership representative unless the IR-6526, Washington, DC 20224. a partnership unless the co-owners provide
partnership has made a valid election out of the
centralized partnership audit regime. See Des- Although we can’t respond individually to services to the tenants.
ignated partnership representative in the Form each comment received, we do appreciate your
1065 instructions and Regulations section feedback and will consider your comments and The rules you must use to determine
301.6223-1. suggestions as we revise our tax forms, instruc- whether an organization is classified as a part-
tions, and publications. Don’t send tax ques- nership changed for organizations formed after
Withholding on foreign partner or firm. A tions, tax returns, or payments to the above ad- 1996.
partnership that has foreign partners or en- dress.
Organizations formed after 1996. An organi-
gages in certain transactions with foreign per- Getting answers to your tax questions. zation formed after 1996 is classified as a part-
sons may have one (or more) of the following If you have a tax question not answered by this nership for federal tax purposes if it has two or
obligations. publication or the How To Get Tax Help section more members and it is none of the following.
Fixed or determinable annual or periodi at the end of this publication, go to the IRS In- • An organization formed under a federal or
cal (FDAP) income. A partnership may have teractive Tax Assistant page at IRS.gov/ state law that refers to it as incorporated or
to withhold tax on distributions to a foreign part- Help/ITA where you can find topics by using the as a corporation, body corporate, or body
ner or a foreign partner’s distributive share search feature or viewing the categories listed. politic.
• An organization formed under a state law
when it earns income not effectively connected Getting tax forms, instructions, and pub that refers to it as a joint-stock company or
with a U.S. trade or business. A partnership lications. Go to IRS.gov/Forms to download joint-stock association.
may also have to withhold on payments to a for- current and prior-year forms, instructions, and • An insurance company.
eign person of FDAP income not effectively publications. • Certain banks.
connected with a U.S. trade or business. See
section 1441 or 1442 for more information. Ordering tax forms, instructions, and • An organization wholly owned by a state,
publications. Go to IRS.gov/OrderForms to local, or foreign government.
Withholding under the Foreign Invest order current forms, instructions, and publica- • An organization specifically required to be
ment in Real Property Tax Act (FIRPTA). If a tions; call 800-829-3676 to order prior-year taxed as a corporation by the Internal Rev-
partnership acquires a U.S. real property inter- forms and instructions. The IRS will process enue Code (for example, certain publicly
est from a foreign person or firm, the partner- your order for forms and publications as soon traded partnerships).
ship may have to withhold tax on the amount it as possible. Don’t resubmit requests you’ve al- • Certain foreign organizations identified in
pays for the property (including cash, the fair ready sent us. You can get forms and publica- Regulations section 301.7701-2(b)(8).
market value (FMV) of other property, and any tions faster online. • A tax-exempt organization.
assumed liability). See section 1445 for more • A real estate investment trust (REIT).
information. • An organization classified as a trust under
Useful Items Regulations section 301.7701-4 or other-
Withholding on foreign partner’s effec You may want to see: wise subject to special treatment under the
tively connected taxable income (ECTI). If a Internal Revenue Code.
partnership has income effectively connected Publication • Any other organization that elects to be
with a trade or business in the United States (in- 334 334 Tax Guide for Small Business classified as a corporation by filing Form
cluding gain on the disposition of a U.S. real 8832.
property interest), it must withhold on the ECTI 505 505 Tax Withholding and Estimated Tax For more information, see the instructions for
allocable to its foreign partners. See section
1446(a) for more information. 515 515 Withholding of Tax on Nonresident Form 8832.
Aliens and Foreign Entities
Limited liability company (LLC). An LLC
Withholding on foreign partner’s sale of 535 535 Business Expenses is an entity formed under state law by filing arti-
a partnership interest. A purchaser of a part-
nership interest, which may include the partner- 537 537 Installment Sales cles of organization as an LLC. Unlike a part-
nership, none of the members of an LLC are
ship itself, may have to withhold tax on the 538 538 Accounting Periods and Methods personally liable for its debts. However, if the
Page 2 Publication 541 (March 2022)

- 3 -

Page 3 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

LLC is an employer, an LLC member may be li- Purchase considered gift. For purposes of Specified assets. Specified assets are:
able for employer-related penalties. See Pub. determining a partner's distributive share, an in- • Securities (as defined in section 475(c)(2),
15, Employer’s Tax Guide (Circular E), and terest purchased by one family member from under rules for mark-to-market accounting
Pub. 3402, Taxation of Limited Liability Compa- another family member is considered a gift from for securities dealers);
nies. An LLC may be classified for federal in- the seller. The FMV of the purchased interest is • Commodities (as defined under rules for
come tax purposes as either a partnership, a considered donated capital. For this purpose, mark-to-market accounting for commodi-
corporation, or an entity disregarded as an en- members of a family include only spouses, an- ties dealers in section 475(e)(2));
tity separate from its owner by applying the cestors, and lineal descendants (or a trust for • Real estate held for rental or investment;
rules in Regulations section 301.7701-3. See the primary benefit of those persons). • Options or derivative contracts with re-
Form 8832 and Regulations section 301.7701-3 spect to such securities;
for more details. Partnership Interests Held in • Cash or cash equivalents; or
A domestic LLC with at least two mem- Connection With Performance of • An interest in a partnership to the extent of
TIP bers that doesn't file Form 8832 is clas- Services the partnership’s proportionate interest in
the foregoing.
sified as a partnership for federal in-
come tax purposes. Section 1061 recharacterizes certain net
long-term capital gains of a partner that holds Security. A security for this purpose means
one or more applicable partnership interests as any of the following.
Organizations formed before 1997. An or- short-term capital gains. The provision gener- • Share of corporate stock.
ganization formed before 1997 and classified ally requires that a capital asset be held for • Partnership interest or beneficial owner-
as a partnership under the old rules will gener- more than 3 years for capital gain and loss allo- ship interest in a widely held or publicly tra-
ally continue to be classified as a partnership as cated with respect to any applicable partnership ded partnership or trust.
long as the organization has at least two mem- interest (API) to be treated as long-term capital • Note, bond, debenture, or other evidence
bers and doesn't elect to be classified as a cor- gain or loss. Proposed Regulations of indebtedness.
poration by filing Form 8832. (REG-107213-18) were published in the Fed- • Interest rate, currency, or equity notional
Community property. Spouses who own a eral Register on August 14, 2020. Final regula- principal contract.
qualified entity (defined below) can choose to tions (Treasury Decision (T.D.) 9945) were pub- • Interest in, or derivative financial instru-
classify the entity as a partnership for federal lished in the Federal Register on January 19, ment in, any such security or any currency
tax purposes by filing the appropriate partner- 2021. T.D. 9945, 2021-5 I.R.B. 627, is available (regardless of whether section 1256 ap-
ship tax returns. They can choose to classify at IRS.gov/irb/2021-5_IRB#TD-9945. Owner plies to the contract).
the entity as a sole proprietorship by filing a taxpayers and pass-through entities may rely • Position that is not such a security and is a
Schedule C (Form 1040) listing one spouse as on the proposed regulations for tax years begin- hedge with respect to such a security and
the sole proprietor. A change in reporting posi- ning before January 19, 2021, (the date final is clearly identified.
tion will be treated for federal tax purposes as a regulations were published in the Federal Reg-
conversion of the entity. ister) provided they follow the proposed regula- Business Owned and Operated by
tions in their entirety and in a consistent man- Spouses
A qualified entity is a business entity that ner. An owner taxpayer or pass-through entity
meets all the following requirements. may choose to apply the final regulations to a If spouses carry on a business together and
• The business entity is wholly owned by tax year beginning after December 31, 2017, share in the profits and losses, they may be
spouses as community property under the provided that they consistently apply the final partners whether or not they have a formal part-
laws of a state, a foreign country, or a pos- section 1061 regulations in their entirety to that nership agreement. If so, they should report in-
session of the United States. year and all subsequent years. Owner taxpay- come or loss from the business on Form 1065.
• No person other than one or both spouses ers and pass-through entities must apply the fi- They should not report the income on a Sched-
would be considered an owner for federal nal regulations to tax years beginning on or af- ule C (Form 1040) in the name of one spouse
tax purposes. ter January 19, 2021. See Section 1061 as a sole proprietor. However, the spouses can
• The business entity is not treated as a cor- Reporting Instructions, later. elect not to treat the joint venture as a partner-
poration. ship by making a qualified joint venture election.
For more information about community Applicable partnership interest (API). An
property, see Pub. 555, Community Property. API is any interest in a partnership that, directly Qualified Joint Venture Election
Pub. 555 discusses the community property or indirectly, is transferred to (or is held by) the
laws of Arizona, California, Idaho, Louisiana, taxpayer in connection with the performance of A "qualified joint venture," whose only members
Nevada, New Mexico, Texas, Washington, and substantial services by the taxpayer, or any are spouses filing a joint return, can elect not to
Wisconsin. other related person, in any “applicable trade or be treated as a partnership for federal tax pur-
business.” The special recharacterization rule poses. A qualified joint venture conducts a
Partnership Interests Created by applies to: trade or business where the only members of
Gift 1. Capital gains recognized by a partner from the joint venture are spouses filing jointly; both
the sale or exchange of an applicable part- spouses elect not to be treated as a partner-
Gift of capital interest. If a family member (or nership interest under sections 741(a) and ship; both spouses materially participate in the
any other person) receives a gift of a capital in- 731(a); and trade or business (see Passive Activity Limita-
terest in a partnership in which capital is a ma- tions in the Instructions for Form 1065 for a defi-
terial income-producing factor, the donee's dis- 2. Capital gains recognized by a partnership, nition of material participation); and the busi-
tributive share of partnership income is subject allocated to a partner with respect to an ness is co-owned by both spouses and is not
to both of the following restrictions. API. held in the name of a state law entity such as a
• It must be figured by reducing the partner- partnership or an LLC.
ship income by reasonable compensation Applicable trade or business. An applicable
for services the donor renders to the part- trade or business means any activity conducted Under this election, a qualified joint venture
nership. on a regular, continuous, and substantial basis conducted by spouses who file a joint return is
• The donee's distributive share of partner- (regardless of whether the activity is conducted not treated as a partnership for federal tax pur-
ship income attributable to donated capital through one or more entities) which consists in poses and therefore doesn't have a Form 1065
must not be proportionately greater than whole or in part of raising and returning capital, filing requirement. All items of income, gain, de-
the donor's distributive share attributable and either : duction, loss, and credit are divided between
to the donor's capital. • Investing in or disposing of “specific as- the spouses based on their respective interests
sets” (or identifying specified assets for in- in the venture. Each spouse takes into account
vesting or disposition), or their respective share of these items as a sole
• Developing specified assets.
Publication 541 (March 2022) Page 3

- 4 -

Page 4 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

proprietor. Each spouse would account for their ning of the tax year through the date of termina- • They do not actively conduct business or
respective share on the appropriate form, such tion. The return is due the 15 day of the 3th rd irrevocably authorize some person acting
as Schedule C (Form 1040). For purposes of month following the date of termination. See in a representative capacity to purchase,
determining net earnings from self-employment, Partnership Return (Form 1065), later, for infor- sell, or exchange the investment property.
each spouse's share of income or loss from a mation about filing Form 1065. Each separate participant can delegate au-
qualified joint venture is taken into account just thority to purchase, sell, or exchange their
as it is for federal income tax purposes (that is, Conversion of partnership into LLC. The share of the investment property for the
based on their respective interests in the ven- conversion of a partnership into an LLC classi- time being for their account, but not for a
ture). fied as a partnership for federal tax purposes period of more than a year.
doesn't terminate the partnership. The conver-
If the spouses do not make the election to sion is not a sale, exchange, or liquidation of Operating agreement partnership. An oper-
treat their respective interests in the joint ven- any partnership interest; the partnership's tax ating agreement partnership group can be ex-
ture as sole proprietorships, each spouse year doesn't close; and the LLC can continue to cluded if the participants in the joint production,
should carry their share of the partnership in- use the partnership's taxpayer identification extraction, or use of property meet all the fol-
come or loss from Schedule K-1 (Form 1065) to number (TIN). lowing requirements.
their joint or separate Form(s) 1040. Each However, the conversion may change some • They own the property as co-owners, ei-
spouse should include their respective share of of the partners' bases in their partnership inter- ther in fee or under lease or other form of
self-employment income on a separate Sched- ests if the partnership has recourse liabilities contract granting exclusive operating
ule SE (Form 1040), Self-Employment Tax. that become nonrecourse liabilities. Because rights.
the partners share recourse and nonrecourse li- • They reserve the right separately to take in
This generally doesn't increase the total tax abilities differently, their bases must be adjus- kind or dispose of their shares of any prop-
on the return, but it does give each spouse ted to reflect the new sharing ratios. If a de- erty produced, extracted, or used.
credit for social security earnings on which re- crease in a partner's share of liabilities exceeds • They don't jointly sell services or the prop-
tirement benefits are based. However, this may the partner's basis, they must recognize gain on erty produced or extracted. Each separate
not be true if either spouse exceeds the social the excess. For more information, see Effect of participant can delegate authority to sell
security tax limitation. Partnership Liabilities under Basis of Partner's their share of the property produced or ex-
Interest, later. tracted for the time being for their account,
For more information on qualified joint ven- The same rules apply if an LLC classified as but not for a period of time in excess of the
tures, go to IRS.gov/QJV. a partnership is converted into a partnership. minimum needs of the industry, and in no
event for more than 1 year.
Partnership Agreement Electronic Filing However, this exclusion doesn't apply to an un-
incorporated organization one of whose princi-
The partnership agreement includes the original Certain partnerships with more than 100 part- pal purposes is cycling, manufacturing, or pro-
agreement and any modifications. The modifi- ners are required to file Form 1065; Sched- cessing for persons who are not members of
cations must be agreed to by all partners or ule K-1; and related forms and schedules elec- the organization.
adopted in any other manner provided by the tronically. For tax years beginning after July 1,
partnership agreement. The agreement or mod- 2019, a religious or apostolic organization ex- Electing the exclusion. An eligible organiza-
ifications can be oral or written. empt from income tax under section 501(d) tion that wishes to be excluded from the part-
Partners can modify the partnership agree- must file Form 1065 electronically. Other part- nership rules must make the election not later
ment for a particular tax year after the close of nerships generally have the option to file elec- than the time for filing the partnership return for
the year but not later than the date for filing the tronically. For details about electronic filing, see the first tax year for which exclusion is desired.
partnership return for that year. This filing date the Instructions for Form 1065. This filing date includes any extension of time.
See Regulations section 1.761-2(b) for the pro-
doesn't include any extension of time. cedures to follow.
If the partnership agreement or any modifi- Exclusion From
cation is silent on any matter, the provisions of
local law are treated as part of the agreement. Partnership Rules Partnership Return
Certain partnerships that do not actively con- (Form 1065)
duct a business can choose to be completely or
Terminating a partially excluded from being treated as partner- Every partnership that engages in a trade or
Partnership ships for federal income tax purposes. All the business or has gross income must file an infor-
partners must agree to make the choice, and mation return on Form 1065 showing its in-
A partnership terminates when all its operations the partners must be able to figure their own come, deductions, and other required informa-
are discontinued and no part of any business, fi- taxable income without figuring the partner- tion. The partnership return must show the
nancial operation, or venture is continued by ship's income. However, the partners are not names and addresses of each partner and each
any of its partners in a partnership. exempt from the rule that limits a partner's dis- partner's distributive share of taxable income.
tributive share of partnership loss to the adjus- The return must be signed by a partner. If an
See Regulations section 1.708-1(b)(1) for ted basis of the partner's partnership interest. LLC is treated as a partnership, it must file Form
more information on the termination of a part- Nor are they exempt from the requirement of a 1065 and one of its members must sign the re-
nership. For special rules that apply to a business purpose for adopting a tax year for the turn.
merger, consolidation, or division of a partner- partnership that differs from its required tax A partnership is not considered to engage in
ship, see Regulations sections 1.708-1(c) and year. a trade or business, and is not required to file a
1.708-1(d). Form 1065, for any tax year in which it neither
Investing partnership. An investing partner- receives income nor pays or incurs any expen-
Date of termination. The partnership's tax ship can be excluded if the participants in the ses treated as deductions or credits for federal
year ends on the date of termination. The date joint purchase, retention, sale, or exchange of income tax purposes.
of termination is the date the partnership com- investment property meet all the following re-
pletes the winding up of its affairs. quirements. See the Instructions for Form 1065 for more
• They own the property as co-owners. information about who must file Form 1065.
Short period return. If a partnership is termi- • They reserve the right separately to take or
nated before the end of what would otherwise dispose of their shares of any property ac-
be its tax year, Form 1065 must be filed for the quired or retained.
short period, which is the period from the begin-
Page 4 Publication 541 (March 2022)

- 5 -

Page 5 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

principal purpose for acquiring inventory prop- Loss on distribution. A partner doesn't recog-
erty is to avoid ordinary income treatment by re- nize loss on a partnership distribution unless all
Partnership ducing the appreciation to less than 120%, that the following requirements are met.
property is excluded.
Distributions • The adjusted basis of the partner's interest
in the partnership exceeds the distribution.
Partnership distributions include the following. Partner's Gain or Loss • The partner's entire interest in the partner-
ship is liquidated.
• A withdrawal by a partner in anticipation of The distribution is in money, unrealized re-
the current year's earnings. A partner generally recognizes gain on a part- •
• A distribution of the current year's or prior nership distribution only to the extent any ceivables, or inventory items.
years' earnings not needed for working money (and marketable securities treated as There are exceptions to these general rules.
capital. money) included in the distribution exceeds the See the following discussions. Also, see Liqui-
• A complete or partial liquidation of a part- adjusted basis of the partner's interest in the dation at Partner's Retirement or Death under
ner's interest. partnership. Any gain recognized is generally Disposition of Partner's Interest, later.
• A distribution to all partners in a complete treated as capital gain from the sale of the part-
liquidation of the partnership. nership interest on the date of the distribution. If Distribution of partner's debt. If a partner-
partnership property (other than marketable se- ship acquires a partner's debt and extinguishes
A partnership distribution is not taken into curities treated as money) is distributed to a the debt by distributing it to the partner, the
account in determining the partner's distributive partner, they generally don't recognize any gain partner will recognize capital gain or loss to the
share of partnership income or loss. If any gain until the sale or other disposition of the prop- extent the FMV of the debt differs from the ba-
or loss from the distribution is recognized by the erty. sis of the debt (determined under the rules dis-
partner, it must be reported on their return for cussed under Partner's Basis for Distributed
the tax year in which the distribution is received. For exceptions to these rules, see Distribu- Property, later).
Money or property withdrawn by a partner in an- tion of partner's debt and Net precontribution The partner is treated as having satisfied the
ticipation of the current year's earnings is trea- gain, later. Also, see Payments for Unrealized debt for its FMV. If the issue price (adjusted for
ted as a distribution received on the last day of Receivables and Inventory Items under Disposi- any premium or discount) of the debt exceeds
the partnership's tax year. tion of Partner's Interest, later. its FMV when distributed, the partner may have
to include the excess amount in income as can-
Effect on partner's basis. A partner's adjus- Example. The adjusted basis of Jo's part- celed debt.
ted basis in their partnership interest is de- nership interest is $14,000. She receives a dis-
creased (but not below zero) by the money and tribution of $8,000 cash and land that has an Similarly, a deduction may be available to a
adjusted basis of property distributed to the adjusted basis of $2,000 and an FMV of corporate partner if the FMV of the debt at the
partner. See Adjusted Basis under Basis of $3,000. Because the cash received doesn't ex- time of distribution exceeds its adjusted issue
Partner's Interest, later. ceed the basis of her partnership interest, Jo price.
doesn't recognize any gain on the distribution. Net precontribution gain. A partner generally
Effect on partnership. A partnership gener- Any gain on the land will be recognized when must recognize gain on the distribution of prop-
ally doesn't recognize any gain or loss because she sells or otherwise disposes of it. The distri- erty (other than money) if the partner contrib-
of distributions it makes to partners. The part- bution decreases the adjusted basis of Jo's uted appreciated property to the partnership
nership may be able to elect to adjust the basis partnership interest to $4,000 [$14,000 − during the 7-year period before the distribution.
of its undistributed property. ($8,000 + $2,000)].
The gain recognized is the lesser of the fol-
Qualified opportunity investment. If you lowing amounts.
Certain distributions treated as a sale or held a qualified investment in a qualified oppor- 1. The excess of:
exchange. When a partnership distributes the tunity fund (QOF) at any time during the year,
following items, the distribution may be treated you must file your return with Form 8997, Initial a. The FMV of the property received in
as a sale or exchange of property rather than a and Annual Statement of Qualified Opportunity the distribution; over
distribution. Fund (QOF) Investments, attached. See the b. The adjusted basis of the partner's in-
• Unrealized receivables or substantially ap- Form 8997 instructions. terest in the partnership immediately
preciated inventory items distributed in ex-
change for any part of the partner's interest Marketable securities treated as money. before the distribution, reduced (but
in other partnership property, including Generally, a marketable security distributed to a not below zero) by any money re-
money. partner is treated as money in determining ceived in the distribution.
• Other property (including money) distrib- whether gain is recognized on the distribution. 2. The “net precontribution gain” of the part-
uted in exchange for any part of a partner's This treatment, however, doesn't generally ap- ner. This is the net gain the partner would
interest in unrealized receivables or sub- ply if that partner contributed the security to the recognize if all the property contributed by
stantially appreciated inventory items. partnership or an investment partnership made the partner within 7 years of the distribu-
See Payments for Unrealized Receivables the distribution to an eligible partner. tion, and held by the partnership immedi-
and Inventory Items under Disposition of Part- The amount treated as money is the securi- ately before the distribution, were distrib-
ner's Interest, later. ty's FMV when distributed, reduced (but not be- uted to another partner, other than a
This treatment doesn't apply to the following low zero) by the excess (if any) of: partner who owns more than 50% of the
partnership. For information about the dis-
distributions. 1. The partner's distributive share of the gain tribution of contributed property to another
• A distribution of property to the partner that would be recognized had the partner- partner, see Contribution of Property un-
who contributed the property to the part- ship sold all its marketable securities at der Transactions Between Partnership
nership. their FMV immediately before the transac- and Partners, later.
• Payments made to a retiring partner or tion resulting in the distribution, over
successor in interest of a deceased part- The character of the gain is determined by
ner that are the partner's distributive share 2. The partner's distributive share of the gain
of partnership income or guaranteed pay- that would be recognized had the partner- reference to the character of the net precontri-
ments. ship sold all such securities it still held af- bution gain. This gain is in addition to any gain
ter the distribution at the FMV in (1). the partner must recognize if the money distrib-
Substantially appreciated inventory uted is more than their basis in the partnership.
items. Inventory items of the partnership are For more information, including the defini-
considered to have appreciated substantially in tion of marketable securities, see section For these rules, the term “money” includes
value if, at the time of the distribution, their total 731(c). marketable securities treated as money, as dis-
FMV is more than 120% of the partnership's ad- cussed earlier under Marketable securities trea-
justed basis for the property. However, if a ted as money.

Publication 541 (March 2022) Page 5

- 6 -

Page 6 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Effect on basis. The adjusted basis of the must be divided among the properties distrib- 2. Allocate any remaining basis decrease
partner's interest in the partnership is increased uted to the partner. For property distributed af- among all the items in proportion to their
by any net precontribution gain recognized by ter August 5, 1997, allocate the basis using the respective assigned basis amounts (as
the partner. Other than for purposes of deter- following rules. decreased in (1)).
mining the gain, the increase is treated as oc- 1. Allocate the basis first to unrealized re- Example. Armando's basis in his partner-
curring immediately before the distribution. See ceivables and inventory items included in ship interest is $20,000. In a distribution in liqui-
Basis of Partner's Interest, later. the distribution by assigning a basis to dation of his entire interest, he receives proper-
The partnership must adjust its basis in any each item equal to the partnership's adjus- ties C and D, neither of which is inventory or
property the partner contributed within 7 years ted basis in the item immediately before unrealized receivables. Property C has an ad-
of the distribution to reflect any gain that partner the distribution. If the total of these as- justed basis to the partnership of $15,000 and
recognizes under this rule. signed bases exceeds the allocable basis, an FMV of $15,000. Property D has an adjusted
Exceptions. Any part of a distribution that decrease the assigned bases by the basis to the partnership of $15,000 and an FMV
is property the partner previously contributed to amount of the excess. of $5,000.
the partnership is not taken into account in de- 2. Allocate any remaining basis to properties To figure his basis in each property, Ar-
termining the amount of the excess distribution other than unrealized receivables and in- mando first assigns bases of $15,000 to prop-
or the partner's net precontribution gain. For this ventory items by assigning a basis to each erty C and $15,000 to property D (their adjusted
purpose, the partner's previously contributed property equal to the partnership's adjus- bases to the partnership). This leaves a
property doesn't include a contributed interest ted basis in the property immediately be- $10,000 basis decrease (the $30,000 total of
in an entity to the extent its value is due to prop- fore the distribution. If the allocable basis the assigned bases minus the $20,000 alloca-
erty contributed to the entity after the interest exceeds the total of these assigned ble basis). He allocates the entire $10,000 to
was contributed to the partnership. bases, increase the assigned bases by the property D (its unrealized depreciation). Arman-
Recognition of gain under this rule also amount of the excess. If the total of these do's basis in property C is $15,000 and his ba-
doesn't apply to a distribution of unrealized re- assigned bases exceeds the allocable ba- sis in property D is $5,000 ($15,000 − $10,000).
ceivables or substantially appreciated inventory sis, decrease the assigned bases by the
items if the distribution is treated as a sale or amount of the excess. Distributions before August 6, 1997. For
exchange, as discussed earlier under Certain property distributed before August 6, 1997, allo-
distributions treated as a sale or exchange. Allocating a basis increase. Allocate any cate the basis using the following rules.
basis increase required in rule (2) above first to 1. Allocate the basis first to unrealized re-
properties with unrealized appreciation to the ceivables and inventory items included in
Partner's Basis for extent of the unrealized appreciation. If the ba- the distribution to the extent of the partner-
Distributed Property sis increase is less than the total unrealized ap- ship's adjusted basis in those items. If the
preciation, allocate it among those properties in partnership's adjusted basis in those items
Unless there is a complete liquidation of a part- proportion to their respective amounts of unre- exceeded the allocable basis, allocate the
ner's interest, the basis of property (other than alized appreciation. Allocate any remaining ba- basis among the items in proportion to
money) distributed to the partner by a partner- sis increase among all the properties in propor- their adjusted bases to the partnership.
ship is its adjusted basis to the partnership im- tion to their respective FMVs.
mediately before the distribution. However, the 2. Allocate any remaining basis to other dis-
basis of the property to the partner cannot be Example. Eun's basis in her partnership in- tributed properties in proportion to their
more than the adjusted basis of their interest in terest is $55,000. In a distribution in liquidation adjusted bases to the partnership.
the partnership reduced by any money received of her entire interest, she receives properties A
in the same transaction. and B, neither of which is inventory or unreal- Partner's interest more than partnership
ized receivables. Property A has an adjusted basis. If the basis of a partner's interest to be
Example 1. The adjusted basis of Emily's basis to the partnership of $5,000 and an FMV divided in a complete liquidation of the partner's
partnership interest is $30,000. She receives a of $40,000. Property B has an adjusted basis to interest is more than the partnership's adjusted
distribution of property that has an adjusted ba- the partnership of $10,000 and an FMV of basis for the unrealized receivables and inven-
sis of $20,000 to the partnership and $4,000 in $10,000. tory items distributed, and if no other property is
cash. Her basis for the property is $20,000. To figure her basis in each property, Eun distributed to which the partner can apply the
first assigns bases of $5,000 to property A and remaining basis, the partner has a capital loss
Example 2. The adjusted basis of Steve's $10,000 to property B (their adjusted bases to to the extent of the remaining basis of the part-
partnership interest is $10,000. He receives a the partnership). This leaves a $40,000 basis nership interest.
distribution of $4,000 cash and property that increase (the $55,000 allocable basis minus the
has an adjusted basis to the partnership of $15,000 total of the assigned bases). She first Special adjustment to basis. A partner who
$8,000. His basis for the distributed property is allocates $35,000 to property A (its unrealized acquired any part of their partnership interest in
limited to $6,000 ($10,000 − $4,000, the cash appreciation). The remaining $5,000 is alloca- a sale or exchange or upon the death of another
he receives). ted between the properties based on their partner may be able to choose a special basis
FMVs. $4,000 ($40,000/$50,000) is allocated to adjustment for property distributed by the part-
Complete liquidation of partner's interest. property A and $1,000 ($10,000/$50,000) is al- nership. To choose the special adjustment, the
The basis of property received in complete liqui- located to property B. Eun's basis in property A partner must have received the distribution
dation of a partner's interest is the adjusted ba- is $44,000 ($5,000 + $35,000 + $4,000) and her within 2 years after acquiring the partnership in-
sis of the partner's interest in the partnership re- basis in property B is $11,000 ($10,000 + terest. Also, the partnership must not have
duced by any money distributed to the partner $1,000). chosen the optional adjustment to basis when
in the same transaction. the partner acquired the partnership interest.
Allocating a basis decrease. Use the fol- If a partner chooses this special basis ad-
Partner's holding period. A partner's holding lowing rules to allocate any basis decrease re- justment, the partner's basis for the property
period for property distributed to the partner in- quired in rule (1) or rule (2), earlier. distributed is the same as it would have been if
cludes the period the property was held by the 1. Allocate the basis decrease first to items the partnership had chosen the optional adjust-
partnership. If the property was contributed to with unrealized depreciation to the extent ment to basis. However, this assigned basis is
the partnership by a partner, then the period it of the unrealized depreciation. If the basis not reduced by any depletion or depreciation
was held by that partner is also included. decrease is less than the total unrealized that would have been allowed or allowable if the
depreciation, allocate it among those partnership had previously chosen the optional
Basis divided among properties. If the basis items in proportion to their respective adjustment.
of property received is the adjusted basis of the amounts of unrealized depreciation. The choice must be made with the partner's
partner's interest in the partnership (reduced by tax return for the year of the distribution if the
money received in the same transaction), it distribution includes any property subject to
Page 6 Publication 541 (March 2022)

- 7 -

Page 7 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

depreciation, depletion, or amortization. If the • The optional basis adjustment, if it had were made to a person who is not a partner.
choice doesn't have to be made for the distribu- been chosen by the partnership, would This treatment is for purposes of determining
tion year, it must be made with the return for the have changed the partner's basis for the gross income and deductible business expen-
first year in which the basis of the distributed property actually distributed. ses only. For other tax purposes, guaranteed
property is pertinent in determining the partner's payments are treated as a partner's distributive
income tax. Required statement. Generally, if a partner share of ordinary income. Guaranteed pay-
A partner choosing this special basis adjust- chooses a special basis adjustment and notifies ments are not subject to income tax withhold-
ment must attach a statement to their tax return the partnership, or if the partnership makes a ing.
that the partner chooses under section 732(d) distribution for which the special basis adjust-
to adjust the basis of property received in a dis- ment is mandatory, the partnership must pro- The partnership generally deducts guaran-
tribution. The statement must show the compu- vide a statement to the partner. The statement teed payments on Form 1065, line 10, as a
tation of the special basis adjustment for the must provide information necessary for the part- business expense. They are also listed on
property distributed and list the properties to ner to figure the special basis adjustment. Schedules K and K-1 of the partnership return.
which the adjustment has been allocated. The individual partner reports guaranteed pay-
Marketable securities. A partner's basis in ments on Schedule E (Form 1040) as ordinary
Example. Chin Ho purchased a 25% inter- marketable securities received in a partnership income, along with their distributive share of the
est in X partnership for $17,000 cash. At the distribution, as determined in the preceding dis- partnership's other ordinary income.
time of the purchase, the partnership owned in- cussions, is increased by any gain recognized
ventory having a basis to the partnership of by treating the securities as money. See Mar- Guaranteed payments made to partners for
$14,000 and an FMV of $16,000. Thus, $4,000 ketable securities treated as money under Part- organizing the partnership or syndicating inter-
of the $17,000 he paid was attributable to his ner’s Gain or Loss, earlier. The basis increase ests in the partnership are capital expenses.
share of inventory with a basis to the partner- is allocated among the securities in proportion Generally, organizational and syndication ex-
ship of $3,500. to their respective amounts of unrealized appre- penses are not deductible by the partnership.
Within 2 years after acquiring his interest, ciation before the basis increase. However, a partnership can elect to deduct a
portion of its organizational expenses and am-
Chin Ho withdrew from the partnership and for ortize the remaining expenses (see Business
his entire interest received cash of $1,500, in- start-up and organizational costs in the
ventory with a basis to the partnership of Transactions Between Instructions for Form 1065). Organizational ex-
$3,500, and other property with a basis of penses (if the election is not made) and syndi-
$6,000. The value of the inventory received was Partnership and
cation expenses paid to partners must be repor-
25% of the value of all partnership inventory. (It Partners ted on the partners' Schedules K-1 as
is immaterial whether the inventory he received guaranteed payments.
was on hand when he acquired his interest.) For certain transactions between a partner and
Because the partnership from which Chin their partnership, the partner is treated as not Minimum payment. If a partner is to receive a
Ho withdrew didn't make the optional adjust- being a member of the partnership. These minimum payment from the partnership, the
ment to basis, he chose to adjust the basis of transactions include the following. guaranteed payment is the amount by which the
the inventory received. His share of the partner- minimum payment is more than the partner's
ship's basis for the inventory is increased by 1. Performing services for, or transferring distributive share of the partnership income be-
$500 (25% of the $2,000 difference between property to, a partnership if: fore taking into account the guaranteed pay-
the $16,000 FMV of the inventory and its a. There is a related allocation and distri- ment.
$14,000 basis to the partnership at the time he bution to a partner; and
acquired his interest). The adjustment applies Example. Under a partnership agreement,
only for purposes of determining his new basis b. The entire transaction, when viewed Divya is to receive 30% of the partnership in-
in the inventory, and not for purposes of part- together, is properly characterized as come, but not less than $8,000. The partnership
nership gain or loss on disposition. occurring between the partnership has net income of $20,000. Divya's share, with-
The total to be allocated among the proper- and a partner not acting in the ca- out regard to the minimum guarantee, is $6,000
ties Chin Ho received in the distribution is pacity of a partner. (30% × $20,000). The guaranteed payment that
$15,500 ($17,000 basis of his interest − $1,500 2. Transferring money or other property to a can be deducted by the partnership is $2,000
cash received). His basis in the inventory items partnership if: ($8,000 − $6,000). Divya's income from the
is $4,000 ($3,500 partnership basis + $500 spe- partnership is $8,000, and the remaining
cial adjustment). The remaining $11,500 is allo- a. There is a related transfer of money or $12,000 of partnership income will be reported
cated to his new basis for the other property he other property by the partnership to by the other partners in proportion to their
received. the contributing partner or another shares under the partnership agreement.
partner, and
Mandatory adjustment. A partner doesn't If the partnership net income had been
always have a choice of making this special ad- b. The transfers together are properly $30,000, there would have been no guaranteed
justment to basis. The special adjustment to ba- characterized as a sale or exchange payment because her share, without regard to
sis must be made for a distribution of property of property. the guarantee, would have been greater than
(whether or not within 2 years after the partner- the guarantee.
ship interest was acquired) if all the following Payments by accrual basis partnership to
conditions existed when the partner received cash basis partner. A partnership that uses Self-employed health insurance premiums.
the partnership interest. an accrual method of accounting cannot deduct Premiums for health insurance paid by a part-
• The FMV of all partnership property (other any business expense owed to a cash basis nership on behalf of a partner, for services as a
than money) was more than 110% of its partner until the amount is paid. However, this partner, are treated as guaranteed payments.
adjusted basis to the partnership. rule doesn't apply to guaranteed payments The partnership can deduct the payments as a
• If there had been a liquidation of the part- made to a partner, which are generally deducti- business expense, and the partner must include
ner's interest immediately after it was ac- ble when accrued. them in gross income. However, if the partner-
quired, an allocation of the basis of that in- ship accounts for insurance paid for a partner
as a reduction in distributions to the partner, the
terest under the general rules (discussed Guaranteed Payments partnership cannot deduct the premiums.
earlier under Basis divided among proper-
ties) would have decreased the basis of A partner who qualifies can deduct 100% of
property that couldn't be depreciated, de- Guaranteed payments are those made by a the health insurance premiums paid by the part-
pleted, or amortized and increased the ba- partnership to a partner that are determined nership on their behalf as an adjustment to in-
sis of property that could be. without regard to the partnership's income. A come. The partner cannot deduct the premiums
partnership treats guaranteed payments for for any calendar month, or part of a month, in
services, or for the use of capital, as if they which the partner is eligible to participate in any
Publication 541 (March 2022) Page 7

- 8 -

Page 8 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

subsidized health plan maintained by any em- Gains. Gains are treated as ordinary income in partnership if the transaction is made for busi-
ployer of the partner, the partner's spouse, the a sale or exchange of property directly or indi- ness purposes. The exchange is not subject to
partner's dependents, or any children under rectly between a person and a partnership, or the rules explained later under Disposition of
age 27 who are not dependents. For more infor- between two partnerships, if both of the follow- Partner's Interest.
mation on the self-employed health insurance ing tests are met.
deduction, see chapter 6 of Pub. 535. • More than 50% of the capital or profits in- Disguised sales. A contribution of money or
terest in the partnership(s) is directly or in- other property to the partnership followed by a
Including payments in partner's income. directly owned by the same person(s). distribution of different property from the part-
Guaranteed payments are included in income in • The property in the hands of the transferee nership to the partner is treated not as a contri-
the partner's tax year in which the partnership's immediately after the transfer is not a capi- bution and distribution, but as a sale of prop-
tax year ends. tal asset. Property that is not a capital as- erty, if both of the following tests are met.
set includes accounts receivable, inven- • The distribution wouldn't have been made
Example 1. Under the terms of a partner- tory, stock-in-trade, and depreciable or but for the contribution.
ship agreement, Erica is entitled to a fixed an- real property used in a trade or business. • The partner's right to the distribution
nual payment of $10,000 without regard to the doesn't depend on the success of partner-
income of the partnership. Her distributive More than 50% ownership. To determine if ship operations.
share of the partnership income is 10%. The there is more than 50% ownership in partner- All facts and circumstances are considered
partnership has $50,000 of ordinary income af- ship capital or profits, the following rules apply. in determining if the contribution and distribu-
ter deducting the guaranteed payment. She tion are more properly characterized as a sale.
must include ordinary income of $15,000 1. An interest directly or indirectly owned by,
($10,000 guaranteed payment + $5,000 or for, a corporation, partnership, estate, However, if the contribution and distribution oc-
($50,000 × 10%) distributive share) on her indi- or trust is considered to be owned propor- cur within 2 years of each other, the transfers
vidual income tax return for her tax year in tionately by, or for, its shareholders, part- are presumed to be a sale unless the facts
which the partnership's tax year ends. ners, or beneficiaries. clearly indicate that the transfers are not a sale.
If the contribution and distribution occur more
2. An individual is considered to own the in- than 2 years apart, the transfers are presumed
Example 2. Lamont is a calendar year tax- terest directly or indirectly owned by, or not to be a sale unless the facts clearly indicate
payer who is a partner in a partnership. The for, the individual's family. For this rule, that the transfers are a sale.
partnership uses a fiscal year that ended Janu- “family” includes only brothers, sisters,
ary 31, 2021. Lamont received guaranteed pay- half-brothers, half-sisters, spouses, an- Form 8275 required. A partner must at-
ments from the partnership from February 1, cestors, and lineal descendants. tach Form 8275, Disclosure Statement, (or
2020, until December 31, 2020. He must in- other statement) to their return if the partner
clude these guaranteed payments in income for 3. If a person is considered to own an inter-
2021 and report them on his 2021 income tax est using rule (1), that person (the “con- contributes property to a partnership and, within
return. structive owner”) is treated as if actually 2 years (before or after the contribution), the
owning that interest when rules (1) and (2) partnership transfers money or other considera-
Payments resulting in loss. If guaranteed are applied. However, if a person is con- tion to the partner. For exceptions to this re-
payments to a partner result in a partnership sidered to own an interest using rule (2), quirement, see Regulations section 1.707-3(c)
loss in which the partner shares, the partner that person is not treated as actually own- (2).
must report the full amount of the guaranteed ing that interest in reapplying rule (2) to A partnership must attach Form 8275 (or
payments as ordinary income. The partner sep- make another person the constructive other statement) to its return if it distributes
arately takes into account their distributive owner. property to a partner, and, within 2 years (be-
share of the partnership loss, to the extent of fore or after the distribution), the partner trans-
the adjusted basis of the partner's partnership Example. Individuals A and B and Trust T fers money or other consideration to the part-
interest. are equal partners in Partnership ABT. A's hus- nership.
band, AH, is the sole beneficiary of Trust T. Form 8275 must include the following infor-
Trust T's partnership interest will be attributed mation.
Sale or Exchange of to AH only for the purpose of further attributing • A caption identifying the statement as a
Property the interest to A. As a result, A is a disclosure under section 707.
more-than-50% partner. This means that any • A description of the transferred property or
Special rules apply to a sale or exchange of deduction for losses on transactions between money, including its value.
property between a partnership and certain per- her and ABT will not be allowed, and gain from • A description of any relevant facts in deter-
sons. property that in the hands of the transferee is mining if the transfers are properly viewed
not a capital asset is treated as ordinary, rather as a disguised sale. See Regulations sec-
Losses. Losses will not be allowed from a sale than capital, gain. tion 1.707-3(b)(2) for a description of the
or exchange of property (other than an interest facts and circumstances considered in de-
in the partnership) directly or indirectly between More information. For more information on termining if the transfers are a disguised
a partnership and a person whose direct or indi- these special rules, see Sales and Exchanges sale.
rect interest in the capital or profits of the part- Between Related Persons in chapter 2 of Pub.
nership is more than 50%. 544. Contribution to partnership treated as in-
vestment company. Gain is recognized when
If the sale or exchange is between two part- property is contributed (in exchange for an in-
nerships in which the same persons directly or Contribution of Property terest in the partnership) to a partnership that
indirectly own more than 50% of the capital or would be treated as an investment company if it
profits interests in each partnership, no deduc- were incorporated.
tion of a loss is allowed. Usually, neither the partner nor the partnership
recognizes a gain or loss when property is con- A partnership is generally treated as an in-
The basis of each partner's interest in the tributed to the partnership in exchange for a vestment company if over 80% of the value of
partnership is decreased (but not below zero) partnership interest. This applies whether a its assets is held for investment and consists of
by the partner's share of the disallowed loss. partnership is being formed or is already oper- certain readily marketable items. These items
If the purchaser later sells the property, only ating. The partnership's holding period for the include money, stocks and other equity inter-
the gain realized that is greater than the loss not property includes the partner's holding period. ests in a corporation, and interests in regulated
allowed will be taxable. If any gain from the sale investment companies (RICs) and REITs. For
of the property is not recognized because of The contribution of limited partnership inter- more information, see section 351(e)(1) and the
this rule, the basis of each partner's interest in ests in one partnership for limited partnership related regulations. Whether a partnership is
the partnership is increased by the partner's interests in another partnership qualifies as a treated as an investment company under this
share of that gain. tax-free contribution of property to the second

Page 8 Publication 541 (March 2022)

- 9 -

Page 9 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

test is ordinarily determined immediately after adjusted basis of $4,000. The partnership's ba- 4. Substituted basis property. If the dispo-
the transfer of property. sis for depreciation is limited to the adjusted ba- sition of any of the property listed in (1),
This rule applies to limited partnerships and sis of the property in Sofia's hands, $4,000. (2), or (3) is a nonrecognition transaction,
general partnerships, regardless of whether In effect, Areta purchased an undivided these rules apply when the recipient of the
they are privately formed or publicly syndicated. one-half interest in the depreciable property property disposes of any substituted basis
with her contribution of $10,000. Assuming that property (other than certain corporate
Contribution to foreign partnership. A do- the depreciation rate is 10% a year under the stock) resulting from the transaction.
mestic partnership that contributed property af- General Depreciation System (GDS), she would
ter August 5, 1997, to a foreign partnership in have been entitled to a depreciation deduction
exchange for a partnership interest may have to of $500 per year, based on her interest in the Contribution of Services
file Form 8865, Return of U.S. Persons With partnership, if the adjusted basis of the property A partner can acquire an interest in partnership
Respect to Certain Foreign Partnerships, if ei- equaled its FMV when contributed. To simplify capital or profits as compensation for services
ther of the following applies. this example, the depreciation deductions are performed or to be performed.
determined without regard to any first-year de-
1. Immediately after the contribution, the preciation conventions. Capital interest. A capital interest is an inter-
partnership owned, directly, indirectly, or However, because the partnership is al- est that would give the holder a share of the
by attribution, at least a 10% interest in the lowed only $400 per year of depreciation (10% proceeds if the partnership's assets were sold
foreign partnership. of $4,000), no more than $400 can be allocated at FMV and the proceeds were distributed in a
2. The FMV of the property contributed to the between the partners. The entire $400 must be complete liquidation of the partnership. This de-
foreign partnership, when added to other allocated to Areta. termination is generally made at the time of re-
contributions of property made to the part- ceipt of the partnership interest. The FMV of
nership during the preceding 12-month Distribution of contributed property to an- such an interest received by a partner as com-
period, is greater than $100,000. other partner. If a partner contributes property pensation for services must generally be inclu-
to a partnership and the partnership distributes ded in the partner's gross income in the first tax
The partnership may also have to file Form the property to another partner within 7 years of year in which the partner can transfer the inter-
8865, even if no contributions are made during the contribution, the contributing partner must est or the interest is not subject to a substantial
the tax year, if it owns a 10% or more interest in recognize gain or loss on the distribution. risk of forfeiture. The capital interest transferred
a foreign partnership at any time during the The recognized gain or loss is the amount as compensation for services is subject to the
year. See the form instructions for more infor- the contributing partner would have recognized rules for restricted property discussed under
mation. if the property had been sold for its FMV when it Employee Compensation in Pub. 525, Taxable
was distributed. This amount is the difference and Nontaxable Income.
Basis of contributed property. If a partner between the property's basis and its FMV at the The FMV of an interest in partnership capital
contributes property to a partnership, the part- time of contribution. The character of the gain or transferred to a partner as payment for services
nership's basis for determining depreciation, loss will be the same as the character of the to the partnership is a guaranteed payment, dis-
depletion, gain, or loss for the property is the gain or loss that would have resulted if the part- cussed earlier under Guaranteed Payments.
same as the partner's adjusted basis for the nership had sold the property to the distributee
property when it was contributed, increased by partner. Appropriate adjustments must be made Profits interest. A profits interest is a partner-
any gain recognized by the partner at the time to the adjusted basis of the contributing part- ship interest other than a capital interest. If a
of contribution. ner's partnership interest and to the adjusted person receives a profits interest for providing
basis of the property distributed to reflect the services to, or for the benefit of, a partnership in
Allocations to account for built-in gain or recognized gain or loss. a partner capacity or in anticipation of being a
loss. The FMV of property at the time it is con-
partner, the receipt of such an interest is not a
tributed may be different from the partner's ad- Disposition of certain contributed property. taxable event for the partner or the partnership.
justed basis. The partnership must allocate The following rules determine the character of However, this doesn't apply in the following sit-
among the partners any income, deduction, the partnership's gain or loss on a disposition of uations.
gain, or loss on the property in a manner that certain types of contributed property. The profits interest relates to a substan-
will account for the difference. This rule also ap- •
plies to contributions of accounts payable and 1. Unrealized receivables. If the property tially certain and predictable stream of in-
other accrued but unpaid items of a cash basis was an unrealized receivable in the hands come from partnership assets, such as in-
partner. of the contributing partner, any gain or loss come from high-quality debt securities or a
The partnership can use different allocation on its disposition by the partnership is or- high-quality net lease.
methods for different items of contributed prop- dinary income or loss. Unrealized receiva- • Within 2 years of receipt, the partner dispo-
erty. A single reasonable method must be con- bles are defined later under Payments for ses of the profits interest.
sistently applied to each item, and the overall Unrealized Receivables and Inventory • The profits interest is a limited partnership
method or combination of methods must be Items. When reading the definition, substi- interest in a publicly traded partnership.
reasonable. See Regulations section 1.704-3 tute “partner” for “partnership.” A profits interest transferred as compensa-
for allocation methods generally considered 2. Inventory items. If the property was an tion for services is not subject to the rules for re-
reasonable. inventory item in the hands of the contribu- stricted property that apply to capital interests.
If the partnership sells contributed property ting partner, any gain or loss on its dispo-
and recognizes gain or loss, built-in gain or loss sition by the partnership within 5 years af-
is allocated to the contributing partner. If con- ter the contribution is ordinary income or Basis of Partner's
tributed property is subject to depreciation or loss. Inventory items are defined later un-
other cost recovery, the allocation of deductions der Payments for Unrealized Receivables Interest
for these items takes into account built-in gain and Inventory Items.
or loss on the property. However, the total de- The basis of a partnership interest is the money
preciation, depletion, gain, or loss allocated to 3. Capital loss property. If the property was plus the adjusted basis of any property the part-
partners cannot be more than the depreciation a capital asset in the contributing partner's ner contributed. If the partner must recognize
or depletion allowable to the partnership or the hands, any loss on its disposition by the gain as a result of the contribution, this gain is
gain or loss realized by the partnership. partnership within 5 years after the contri- included in the basis of their interest. Any in-
bution is a capital loss. The capital loss is crease in a partner's individual liabilities be-
Example. Areta and Sofia formed an equal limited to the amount by which the part- cause of an assumption of partnership liabilities
partnership. Areta contributed $10,000 in cash ner's adjusted basis for the property ex- is considered a contribution of money to the
to the partnership and Sofia contributed depre- ceeded the property's FMV immediately partnership by the partner.
ciable property with an FMV of $10,000 and an before the contribution.

Publication 541 (March 2022) Page 9

- 10 -

Page 10 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Interest acquired by gift, etc. If a partner ac- of the liability is treated as a contribution by property any significant discrepancies that re-
quires an interest in a partnership by gift, inheri- them of money to the partnership. See Effect of sulted from contributed property, transfers of
tance, or under any circumstance other than by Partnership Liabilities, later. partnership interests, or distributions of property
a contribution of money or property to the part- to the partners.
nership, the partner's basis must be determined Example 1. Ivan acquired a 20% interest in
using the basis rules described in Pub. 551. a partnership by contributing property that had
an adjusted basis to him of $8,000 and a Effect of Partnership
$4,000 mortgage. The partnership assumed Liabilities
Adjusted Basis payment of the mortgage. The basis of Ivan's
There is a worksheet for adjusting the interest is: A partner's basis in a partnership interest in-
TIP basis of a partner's interest in the part- cludes the partner's share of a partnership lia-
nership in the Partner's Instructions for Adjusted basis of contributed property . . . . . . $8,000 bility only if, and to the extent that, the liability:
Schedule K-1 (Form 1065). Minus: Part of mortgage assumed by other 1. Creates or increases the partnership's ba-
partners (80% (0.80) × $4,000) . . . . . . . . . . . 3,200 sis in any of its assets;
The basis of an interest in a partnership is in- Basis of Ivan's partnership interest . . . . . . . . $4,800 2. Gives rise to a current deduction to the
creased or decreased by certain items. partnership; or
Increases. A partner's basis is increased by Example 2. If, in Example 1, the contrib- 3. Is a nondeductible, noncapital expense of
the following items. uted property had a $12,000 mortgage, the ba- the partnership.
• The partner's additional contributions to sis of Ivan's partnership interest would be zero. The term “assets” in (1) includes capitalized
the partnership, including an increased The $1,600 difference between the mortgage items allocable to future periods, such as or-
share of, or assumption of, partnership lia- assumed by the other partners, $9,600 (80% × ganization expenses.
bilities. $12,000), and his basis of $8,000 would be
• The partner's distributive share of taxable treated as capital gain from the sale or ex- A partner's share of accrued but unpaid ex-
and nontaxable partnership income. change of a partnership interest. However, this penses or accounts payable of a cash basis
• The partner's distributive share of the ex- gain wouldn't increase the basis of his partner- partnership is not included in the adjusted basis
cess of the deductions for depletion over ship interest. of the partner's interest in the partnership.
the basis of the depletable property, unless Partner's basis increased. If a partner's
the property is oil or gas wells whose basis Book value of partner's interest. The adjus-
has been allocated to partners. ted basis of a partner's interest is determined share of partnership liabilities increases, or a
without considering any amount shown in the partner's individual liabilities increase because
Decreases. The partner's basis is decreased partnership books as a capital, equity, or similar they assume partnership liabilities, this increase
(but never below zero) by the following items. account. is treated as a contribution of money by the
partner to the partnership.
• The money (including a decreased share
of partnership liabilities or an assumption Example. Enzo contributes to his partner-
of the partner's individual liabilities by the ship property that has an adjusted basis of $400 Partner's basis decreased. If a partner's
partnership) and adjusted basis of property and an FMV of $1,000. His partner contributes share of partnership liabilities decreases, or a
distributed to the partner by the partner- $1,000 cash. While each partner has increased partner's individual liabilities decrease because
ship. his capital account by $1,000, which will be re- the partnership assumes their individual liabili-
• The partner's distributive share of the part- flected in the partnership’s books, the adjusted ties, this decrease is treated as a distribution of
nership losses (including capital losses). basis of Enzo's interest is only $400 and the ad- money to the partner by the partnership.
• The partner's distributive share of nonde- justed basis of his partner's interest is $1,000.
Assumption of liability. Generally, a partner
ductible partnership expenses that are not or related person is considered to assume a
capital expenditures. This includes the When determined. The adjusted basis of a
partner's share of any section 179 expen- partner's partnership interest is ordinarily deter- partnership liability only to the extent that:
ses, even if the partner cannot deduct the mined at the end of the partnership's tax year. 1. They’re personally liable for it,
entire amount on their individual income However, if there has been a sale or exchange
tax return. of all or part of the partner's interest or a liquida- 2. The creditor knows that the liability was
• The partner's deduction for depletion for tion of their entire interest in a partnership, the assumed by the partner or related person,
any partnership oil and gas wells, up to the adjusted basis is determined on the date of 3. The creditor can demand payment from
proportionate share of the adjusted basis sale, exchange, or liquidation. the partner or related person, and
of the wells allocated to the partner. Alternative rule for figuring adjusted basis. 4. No other partner or person related to an-
• A partner’s distributive share of foreign In certain cases, the adjusted basis of a part- other partner will bear the economic risk of
taxes paid or accrued by the partnership nership interest can be figured by using the loss on that liability immediately after the
for tax years beginning after 2017. partner's share of the adjusted basis of partner- assumption.
• A partner’s distributive share of the adjus- ship property that would be distributed if the Related person. Related persons, for
ted basis of a partnership’s property dona- partnership terminated. these purposes, includes all the following.
tion to charity.
This alternative rule can be used in either of • An individual and their spouse, ancestors,
Note. If the property’s FMV exceeds its ad- the following situations. and lineal descendants.
justed basis, a special rule provides that the ba- • The circumstances are such that the part- • An individual and a corporation if the indi-
sis limitation on partner losses does not apply to ner cannot practicably apply the general vidual directly or indirectly owns 80% or
the extent of the partner’s distributive share of basis rules. more in value of the outstanding stock of
the excess for tax years beginning after 2017. • It is, in the opinion of the IRS, reasonable the corporation.
to conclude that the result produced will • Two corporations that are members of the
Partner's liabilities assumed by partner not vary substantially from the result under same controlled group.
ship. If contributed property is subject to a debt the general basis rules. • A grantor and a fiduciary of any trust.
or if a partner's liabilities are assumed by the Adjustments may be necessary in figuring • Fiduciaries of two separate trusts if the
partnership, the basis of that partner's interest is the adjusted basis of a partnership interest un- same person is a grantor of both trusts.
reduced (but not below zero) by the liability as- der the alternative rule. For example, adjust- • A fiduciary and a beneficiary of the same
sumed by the other partners. This partner must ments would be required to include in the part- trust.
reduce their basis because the assumption of ner's share of the adjusted basis of partnership • A fiduciary and a beneficiary of two sepa-
the liability is treated as a distribution of money rate trusts if the same person is a grantor
to that partner. The other partners' assumption of both trusts.
Page 10 Publication 541 (March 2022)

- 11 -

Page 11 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• A fiduciary of a trust and a corporation if creates an additional $60,000 of basis in the make an optional adjustment to basis in the
the trust or the grantor of the trust directly partnership's depreciable property. year of transfer.
or indirectly owns 80% or more in value of If neither partner has an economic risk of
the outstanding stock of the corporation. loss in the liability, it is a nonrecourse liability.
• A person and a tax-exempt educational or Each partner's basis would include their share Sale, Exchange, or Other
charitable organization controlled directly of the liability, $30,000. Transfer
or indirectly by the person or by members If Teresa is required to pay the creditor if the
of the person's family. partnership defaults, she has an economic risk The sale or exchange of a partner's interest in a
• A corporation and a partnership if the of loss in the liability. Her basis in the partner- partnership usually results in capital gain or
same persons own 80% or more in value ship would be $80,000 ($20,000 + $60,000), loss. However, see Payments for Unrealized
of the outstanding stock of the corporation while Juan's basis would be $20,000. Receivables and Inventory Items, later, for cer-
and 80% or more of the capital or profits in- tain exceptions. Gain or loss is the difference
terest in the partnership. Limited partner. A limited partner gener- between the amount realized and the adjusted
• Two S corporations or an S corporation ally has no obligation to contribute additional basis of the partner's interest in the partnership.
and a C corporation if the same persons capital to the partnership and therefore doesn't If the selling partner is relieved of any partner-
own 80% or more in value of the outstand- have an economic risk of loss in partnership re- ship liabilities, that partner must include the lia-
ing stock of each corporation. course liabilities. Thus, absent some other fac- bility relief as part of the amount realized for
• An executor and a beneficiary of an estate. tor, such as the guarantee of a partnership lia- their interest.
• A partnership and a person owning, di- bility by the limited partner or the limited partner
rectly or indirectly, 80% or more of the cap- making the loan to the partnership, a limited Example 1. Kumar became a limited part-
ital or profits interest in the partnership. partner generally doesn't have a share of part- ner in the ABC Partnership by contributing
• Two partnerships if the same persons di- nership recourse liabilities. $10,000 in cash on the formation of the partner-
rectly or indirectly own 80% or more of the ship. The adjusted basis of his partnership in-
capital or profits interests. Partner's share of nonrecourse liabilities. A terest at the end of the current year is $20,000,
partnership liability is a nonrecourse liability if which includes his $15,000 share of partnership
Property subject to a liability. If property no partner or related person has an economic liabilities. The partnership has no unrealized re-
contributed to a partnership by a partner or dis- risk of loss for that liability. A partner's share of ceivables or inventory items. Kumar sells his in-
tributed by the partnership to a partner is sub- nonrecourse liabilities is generally proportionate terest in the partnership for $10,000 in cash. He
ject to a liability, the transferee is treated as to their share of partnership profits. However, had been paid his share of the partnership in-
having assumed the liability to the extent it this rule may not apply if the partnership has come for the tax year.
doesn't exceed the FMV of the property. taken deductions attributable to nonrecourse li- Kumar realizes $25,000 from the sale of his
abilities or the partnership holds property that partnership interest ($10,000 cash payment +
Partner's share of recourse liabilities. A was contributed by a partner. $15,000 liability relief). He reports $5,000
partnership liability is a recourse liability to the ($25,000 realized − $20,000 basis) as a capital
extent that any partner or a related person, de- More information. For more information on gain.
fined earlier under Related person, has an eco- the effect of partnership liabilities, including
nomic risk of loss for that liability. A partner's rules for limited partners and examples, see Example 2. The facts are the same as in
share of a recourse liability equals their eco- Regulations sections 1.752-1 through 1.752-5. Example 1, except that Kumar withdraws from
nomic risk of loss for that liability. A partner has the partnership when the adjusted basis of his
an economic risk of loss if that partner or a rela- interest in the partnership is zero. He is consid-
ted person would be obligated (whether by Disposition of Partner's ered to have received a distribution of $15,000,
agreement or law) to make a net payment to the his relief of liability. He reports a capital gain of
creditor or a contribution to the partnership with Interest $15,000.
respect to the liability if the partnership were
constructively liquidated. A partner who is the The following discussions explain the treatment Installment reporting for sale of partnership
creditor for a liability that would otherwise be a of gain or loss from the disposition of an interest interest. A partner who sells a partnership in-
nonrecourse liability of the partnership has an in a partnership. terest at a gain may be able to report the sale
economic risk of loss in that liability. on the installment method. For requirements
Abandoned or worthless partnership inter- and other information on installment sales, see
Constructive liquidation. Generally, in a est. A loss incurred from the abandonment or Pub. 537.
constructive liquidation, the following events are worthlessness of a partnership interest is an or- Part of the gain from the installment sale
treated as occurring at the same time. dinary loss only if both of the following tests are may be allocable to unrealized receivables or
• All partnership liabilities become payable met. inventory items. See Payments for Unrealized
in full. • The transaction is not a sale or exchange. Receivables and Inventory Items next. The gain
• All of the partnership's assets have a value • The partner has not received an actual or allocable to unrealized receivables and inven-
of zero, except for property contributed to deemed distribution from the partnership. tory items must be reported in the year of sale.
secure a liability. The gain allocable to the other assets can be
• All property is disposed of by the partner- If the partner receives even a de minimis actual
ship in a fully taxable transaction for no or deemed distribution, the entire loss is gener- reported under the installment method.
consideration except relief from liabilities ally a capital loss. However, see Payments for
for which the creditor's right to reimburse- Unrealized Receivables and Inventory Items, Payments for Unrealized
ment is limited solely to one or more assets later.
of the partnership. For information on how to report an aban- Receivables and Inventory
• All items of income, gain, loss, or deduc- donment loss, see the Instructions for Form Items
tion are allocated to the partners. 4797. See Revenue Ruling 93-80 for more in-
• The partnership liquidates. formation on determining if a loss incurred on If a partner receives money or property in ex-
the abandonment or worthlessness of a part- change for any part of a partnership interest, the
Example. Juan and Teresa form a cash ba- nership interest is a capital or an ordinary loss. amount due to their share of the partnership's
sis general partnership with cash contributions unrealized receivables or inventory items re-
of $20,000 each. Under the partnership agree- Partnership election to adjust basis of part- sults in ordinary income or loss. This amount is
ment, they share all partnership profits and los- nership property. Generally, a partnership's treated as if it were received for the sale or ex-
ses equally. The partnership borrows $60,000 basis in its assets is not affected by a transfer of change of property that is not a capital asset.
and purchases depreciable business equip- an interest in the partnership, whether by sale
ment. This debt is included in the partners' ba- or exchange or because of the death of a part- This treatment applies to the unrealized re-
sis in the partnership because incurring it ner. However, the partnership can elect to ceivables part of payments to a retiring partner
or successor in interest of a deceased partner
Publication 541 (March 2022) Page 11

- 12 -

Page 12 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

only if that part is not treated as paid in ex- adjusted basis in the partnership is zero. You ventory, they must file a statement with their tax
change for partnership property. See Liquida- report as ordinary income your $5,000 share of return for the year in which the sale or ex-
tion at Partner's Retirement or Death, later. potential ordinary income from the partnership's change occurs. The statement must contain the
depreciable property. The remaining $5,000 following information.
Unrealized receivables. Unrealized receiva- gain is a capital gain. • The date of the sale or exchange.
bles include any rights to payment not already • The amount of any gain or loss attributable
included in income for the following items. Inventory items. Inventory items are not limi- to the unrealized receivables or inventory.
• Goods delivered or to be delivered to the ted to stock-in-trade of the partnership. They • The amount of any gain or loss attributable
extent the payment would be treated as re- also include the following property. to capital gain or loss on the sale of the
ceived for property other than a capital as- • Property that would properly be included in partnership interest.
set. the partnership's inventory if on hand at the
• Services rendered or to be rendered. end of the tax year or that is held primarily Partner's disposition of distributed unreal-
These rights must have arisen under a con- for sale to customers in the normal course ized receivables or inventory items. In gen-
tract or agreement that existed at the time of of business. eral, any gain or loss on a sale or exchange of
sale or distribution, even though the partnership • Property that, if sold or exchanged by the unrealized receivables or inventory items a part-
may not be able to enforce payment until a later partnership, wouldn't be a capital asset or ner received in a distribution is an ordinary gain
date. For example, unrealized receivables in- section 1231 property (real or depreciable or loss. For this purpose, inventory items do not
clude accounts receivable of a cash method business property held more than 1 year). include real or depreciable business property,
partnership and rights to payment for work or For example, accounts receivable ac- even if they are not held more than 1 year.
goods begun but incomplete at the time of the quired for services or from the sale of in-
sale or distribution of the partner's share. ventory and unrealized receivables are in- Example. Oscar, a distributee partner, re-
ventory items. ceived his share of accounts receivable when
The basis for any unrealized receivables in- Property held by the partnership that would his law firm dissolved. The partnership used the
cludes all costs or expenses for the receivables •
be considered inventory if held by the part- cash method of accounting, so the receivables
that were paid or accrued but not previously ner selling the partnership interest or re- had a basis of zero. If Oscar later collects the
taken into account under the partnership's ceiving the distribution. receivables or sells them, the amount he re-
method of accounting. ceives will be ordinary income.
Other items treated as unrealized receiv Notification required of partner. If a partner
ables. Unrealized receivables include potential exchanges a partnership interest attributable to Exception for inventory items held more
gain that would be ordinary income if the follow- unrealized receivables or inventory for money than 5 years. If a distributee partner sells in-
ing partnership property were sold at its FMV on or property, they must notify the partnership in ventory items held for more than 5 years after
the date of the payment. writing. This must be done within 30 days of the the distribution, the type of gain or loss depends
• Mining property for which exploration ex- transaction or, if earlier, by January 15 of the on how they are being used on the date sold.
penses were deducted. calendar year following the calendar year of the The gain or loss is capital gain or loss if the
• Stock in a domestic international sales cor- exchange. A partner may be subject to a $50 property is a capital asset in the partner's hands
poration (DISC). penalty for each failure to notify the partnership at the time sold.
• Certain farmland for which expenses for about such a transaction, unless the failure was
soil and water conservation or land clear- due to reasonable cause and not willful neglect. Example. Marucia receives, through disso-
lution of her partnership, inventory that has a
ing were deducted. basis of $19,000. Within 5 years, she sells the
• Franchises, trademarks, or trade names. Information return required of partnership.
• Oil, gas, or geothermal property for which When a partnership is notified of an exchange inventory for $24,000. The $5,000 gain is taxed
intangible drilling and development costs of partnership interests involving unrealized re- as ordinary income. If she had held the inven-
were deducted. ceivables or inventory items, the partnership tory for more than 5 years, her gain would have
• Stock of certain controlled foreign corpora- must file Form 8308, Report of a Sale or Ex- been capital gain, provided the inventory was a
tions. change of Certain Partnership Interests. Form capital asset in her hands at the time of sale.
• Market discount bonds and short-term obli- 8308 is filed with Form 1065 for the tax year that Substituted basis property. If a distribu-
gations. includes the last day of the calendar year in tee partner disposes of unrealized receivables
• Property subject to recapture of deprecia- which the exchange took place. If notified of an or inventory items in a nonrecognition transac-
tion under sections 1245 and 1250. Depre- exchange after filing Form 1065, the partner- tion, ordinary gain or loss treatment applies to a
ciation recapture is discussed in chapter 3 ship must file Form 8308 separately, within 30 later disposition of any substituted basis prop-
of Pub. 544. days of the notification. erty resulting from the transaction.
On Form 8308, the partnership provides its
Determining gain or loss. The income or telephone number and states the date of the ex- Foreign partner's transfer of an interest in a
loss realized by a partner upon the sale or ex- change and the names, addresses, and TINs of partnership engaged in the conduct of a
change of its interest in unrealized receivables the partnership filing the return and the trans- U.S. trade or business. Section 864(c)(8) re-
and inventory items, discussed below, is the feree and transferor in the exchange. The part- quires a foreign partner that transfers part or all
amount that would have been allocated to the nership must provide a copy of Form 8308 (or a of an interest in a partnership engaged in the
partner if the partnership had sold all of its prop- written statement with the same information) to conduct of a trade or business in the United
erty for cash at FMV, in a fully taxable transac- each transferee and transferor by the later of States (U.S. trade or business) to include in in-
tion, immediately prior to the partner's transfer January 31 following the end of the calendar come the effectively connected gain or loss
of interest in the partnership. Any gain or loss year or 30 days after it receives notice of the ex- from the transfer. A partnership distribution is
recognized that is attributable to the unrealized change. considered a transfer when it results in recogni-
receivables and inventory items will be ordinary The partnership may be subject to a penalty tion of gain or loss. See Regulations section
gain or loss. for each failure to timely file Form 8308 and a 1.731-1(a).
penalty for each failure to furnish a copy of In general, any foreign person, any domestic
Example. You are a partner in ABC Part- Form 8308 to a transferor or transferee, unless partnership that has a foreign person as a direct
nership. The adjusted basis of your partnership the failure is due to reasonable cause and not partner, and any domestic partnership that has
interest at the end of the current year is zero. willful neglect. If the failure is intentional, a actual knowledge that a foreign person indi-
Your share of potential ordinary income from higher penalty may be imposed. See sections rectly holds, through one or more partnerships,
partnership depreciable property is $5,000. The 6722, 6723, and 6724 for details. an interest in the domestic partnership that
partnership has no other unrealized receivables transfers an interest in a partnership engaged in
or inventory items. You sell your interest in the Statement required of partner. If a partner
partnership for $10,000 in cash and you report sells or exchanges any part of an interest in a
the entire amount as a gain because your partnership having unrealized receivables or in-

Page 12 Publication 541 (March 2022)

- 13 -

Page 13 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

a U.S. trade or business must notify the partner- interest in partnership property and other pay- the payments are to be made. It applies to pay-
ship of the transfer in writing within 30 days af- ments. The partnership's payments include an ments made for the partner's share of unreal-
ter the transfer. The notification must include: assumption of the partner's share of partnership ized receivables and goodwill not treated as a
• The names and addresses of the notifying liabilities treated as a distribution of money. distribution.
transferor and the transferee or transfer- If the amount is based on partnership in-
ees; For income tax purposes, a retiring partner come, the payment is taxable as a distributive
• The U.S. TIN of the notifying transferor or successor in interest of a deceased partner is share of partnership income. The payment re-
and, if known, of the transferee or transfer- treated as a partner until their interest in the tains the same character when reported by the
ees; and partnership has been completely liquidated. recipient that it would have had if reported by
the partnership.
• The date of the transfer. Liquidating payments. Payments made in liq- If the amount is not based on partnership in-
This notification requirement does not apply uidation of the interest of a retiring or deceased come, it is treated as a guaranteed payment.
to the transfer of an interest in a publicly traded partner in exchange for their interest in partner- The recipient reports guaranteed payments as
partnership if the interest is publicly traded on ship property are considered a distribution, not ordinary income. For additional information on
an established securities market or is readily a distributive share or guaranteed payment that guaranteed payments, see Transactions Be-
tradable on a secondary market (or the sub- could give rise to a deduction (or its equivalent) tween Partnership and Partners, earlier.
stantial equivalent thereof). It also does not ap- for the partnership. These payments are included in income by
ply to a notifying transferor that is treated as Unrealized receivables and goodwill. the recipient for their tax year that includes the
transferring an interest in the partnership be- Payments made for the retiring or deceased end of the partnership tax year for which the
cause it received a distribution from the partner- partner's share of the partnership's unrealized payments are a distributive share or in which
ship. This notification may be combined with or receivables or goodwill are not treated as made the partnership is entitled to deduct them as
provided at the same time as the statement re- in exchange for partnership property if both of guaranteed payments.
quired of a partner that sells or exchanges any the following tests are met. Former partners who continue to make guar-
part of an interest in a partnership having unre- • Capital is not a material income-producing anteed periodic payments to satisfy the partner-
alized receivables or inventory, provided that it factor for the partnership. Whether capital ship's liability to a retired partner after the part-
satisfies the requirements of both sections. For is a material income-producing factor is ex- nership is terminated can deduct the payments
more information, see Regulations section plained under Partnership Interests Cre- as a business expense in the year paid.
1.864(c)(8)-2. ated by Gift, earlier.
To determine the amount of gain or loss de- • The retiring or deceased partner was a
scribed in section 864(c)(8), generally, a foreign general partner in the partnership. Section 1061 Reporting
transferor must first determine its outside gain
or loss on the transfer of a partnership interest. However, this rule doesn't apply to payments Instructions
For this purpose, outside gain or loss is deter- for goodwill to the extent that the partnership
mined under all relevant provisions of the Code agreement provides for a reasonable payment The instructions for owner taxpayer filing re-
and regulations thereunder. A foreign transferor to a retiring partner for goodwill. quirements and pass-through entity filing and
may recognize outside capital gain or loss and Unrealized receivables include, to the extent reporting requirements are in accordance with
outside ordinary gain or loss on the transfer of not previously includible in income under the Regulations section 1.1061-6. For more infor-
its partnership interest and must separately ap- method of accounting used by the partnership, mation, see T.D. 9945, 2021-5, I.R.B. 627,
ply section 864(c)(8) with respect to its capital any rights (contractual or otherwise) to payment available at IRS.gov/irb/2021-5_IRB#TD-9945,
gain or loss and its ordinary gain or loss. for (1) goods delivered, or to be delivered, to for specific rules and definitions.
the extent the proceeds therefrom would be
The foreign transferor must compare the treated as amounts received from the sale or
outside gain or loss amounts with the relevant exchange of property other than a capital asset; Pass-Through Entity
aggregate deemed sale effectively connected or (2) services rendered, or to be rendered. Reporting to API Holders
gain or loss that the partnership calculates
based on the foreign transferor's distributive Partners' valuation. Generally, the part-
share of gain or loss that would have been ef- ners' valuation of a partner's interest in partner- A pass-through entity is required to attach
fectively connected if the partnership had sold ship property in an arm's-length agreement will Worksheet A to the API holder’s Schedule K-1
all of its assets at FMV. This information will be be treated as correct. If the valuation reflects for tax returns filed after December 31, 2021, in
provided to the notifying transferor on or before only the partner's net interest in the property (to- which a pass-through entity applies the final
the due date (with extensions) for issuing tal assets less liabilities), it must be adjusted so regulations under T.D. 9945. A pass-through
Schedule K-1 (Form 1065), Partner’s Share of that both the value of, and the basis for, the entity means a partnership, trust, estate, S cor-
Income, Deductions, Credits, etc. The foreign partner's interest include the partner's share of poration described in Regulations section
transferor only includes in income the lower of partnership liabilities. 1.1061-3(b)(2)(i), or a passive foreign invest-
the outside amount and the deemed sale effec- ment company (PFIC) described in Regulations
tively connected amount. This determination is Gain or loss on distribution. Upon the re- section 1.1061-3(b)(2)(ii). The pass-through en-
made separately with respect to capital gain or ceipt of the distribution, the retiring partner or tity must provide the information in Worksheet A
loss and ordinary gain or loss. For example, a successor in interest of a deceased partner will to each API holder, including owner taxpayer,
foreign transferor would compare its outside or- recognize gain only to the extent that any as an attachment to the Schedule K-1 for the
dinary gain to its aggregate deemed sale effec- money (and marketable securities treated as applicable form, noting the proper box and
tively connected ordinary gain, treating the for- money) distributed is more than the partner's code. For the 2021 Form 1065, it’s box 20,
mer as effectively connected gain only to the adjusted basis in the partnership. The partner code AH. For the 2021 Form 1120-S, U.S. In-
extent it does not exceed the latter. For more in- will recognize a loss only if the distribution is in come Tax Return for an S Corporation, it’s
formation, see Regulations section 1.864(c) money, unrealized receivables, and inventory box 17, code AD. For the 2021 Form 1041, U.S.
(8)-1. items. No loss is recognized if any other prop- Income Tax Return for Estate and Trusts, it’s
erty is received. See Partner's Gain or Loss un- box 14, code Z
der Partnership Distributions, earlier.
Liquidation at Partner's See Regulations section 1.1061-6(c) for the
Retirement or Death Other payments. Payments made by the part- section 1061 reporting rules of a RIC and a
nership to a retiring partner or successor in in- REIT. In the case of RICs and REITs, the infor-
Payments made by the partnership to a retiring terest of a deceased partner that are not made mation will be furnished in connection with the
partner or successor in interest of a deceased in exchange for an interest in partnership prop- Form 1099-DIV, Dividends and Distributions.
partner in return for the partner's entire interest erty are treated as distributive shares of part- Regulations section 1.1061-6(d) permits a
in the partnership may have to be allocated be- nership income or guaranteed payments. This PFIC with respect to which the shareholder is
tween payments in liquidation of the partner's rule applies regardless of the time over which an API holder who has a qualified electing fund
Publication 541 (March 2022) Page 13

- 14 -

Page 14 of 23             Fileid: … ons/p541/202203/a/xml/cycle04/source                                             11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

election (as described in section 1295(a)) in ef-     The Owner Taxpayer                                       short-term capital gain under section 1061 and 
fect for the tax year to provide additional infor-                                                             the  amount  of  collectibles  gain  that  is  not  re-
mation  to  the  shareholder  to  determine  the      Reporting of the                                         characterized  and  that  is  included  in  the  28% 
amount  of  the  shareholder's  inclusion  that       Recharacterization Amount                                Rate Gain Worksheet (see line 18 of the Sched-
would  be  included  in  the  Section  1061 Work-     on Schedule D (Form 1040)                                ule  D  (Form  1040),  or  line  18c  of  the  Sched-
sheet A: API 1-Year Distributive Share Amount         or Schedule D (Form 1041)                                ule  D  (Form  1041)).  Collectibles  gain  or  loss 
and  API  3-Year  Distributive  Share  Amount.  If                                                             that  is  API  gain  or  loss  and  is  included  in  the 
the PFIC furnishes this information to the share-     and on Form 8949                                         calculation  of  the  recharacterization  amount, 
holder,  the  shareholder  must  retain  a  copy  of                                                           but not recharacterized, must be included in the 
this information along with the other information     An owner taxpayer reports long- and short-term           28% Rate Gain Worksheet. Collectibles gain or 
required to be retained under Regulations sec-        API  gains  and  losses  on  Schedule  D  (Form          loss with respect to a pass-through interest that 
tion 1.1295-1(f)(2)(ii).                              1040) or Schedule D (Form 1041) and on Form              is  treated  as  capital  interest  gain  or  loss  must 
                                                      8949,  Sales  and  Other  Dispositions  of  Capital      also  be  included  in  the  28%  Rate  Gain  Work-
A pass-through entity that is not required to         Assets, as if section 1061 does not apply. In ad-        sheet.
and does not choose to apply the final regula-        dition, if the owner taxpayer has a recharacteri-
tions  to  tax  returns  filed  after  December  31,  zation amount as computed on line 7 of Work-                Similarly,  on  line  11  of Worksheet  B,  the 
2021,  for  a  tax  year  beginning  before  January  sheet B, and/or any amounts resulting from the           owner taxpayer must report the total amount of 
19,  2021,  must  attach  a  worksheet  to  the  API  application  of  section  1061(d)  (transfer  of  an     unrecaptured section 1250 gain for the tax year 
holder's  Schedule  K-1  that  contains  similar  in- API to a related person) on line 8 of Worksheet          that the owner taxpayer has with respect to any 
formation  as Worksheet  A,  and  must  disclose      B  (see  Regulations  section  1.1061-5(c)),  the        pass-through interests that it owns. It must also 
whether the information was determined under          owner  taxpayer  will  increase  the  reported           report the amount of unrecaptured section 1250 
the proposed regulations or another method.           short-term  capital  gain  by  listing  as  a  transac-  gain that is recharacterized as short-term capi-
                                                      tion identified as "Section 1061 Adjustment" on          tal gain under section 1061 and the amount of 
                                                      Form 8949, Part I, line 1, column (a), and enter-        unrecaptured  section  1250  gain  that  is  not  re-
Calculation and reporting for the                     ing  the amount from line  9 of Worksheet B as           characterized and that is included in the Unrec-
API 1-year distributive share                         proceeds  (column  (d)  of  the  Form  8949)  and        aptured  Section  1250  Gain  Worksheet  (see 
amount and 3-year distributive                        zero  as  basis  (column  (e)  of  the  Form  8949).     line  19  of  the  Schedule  D  (Form  1040),  or 
share amount by a pass-through                        The  owner  taxpayer  will  make  corresponding          line  18b  of  the  Schedule  D  (Form  1041)).  Un-
entity                                                entries on Form 8949, Part II, line 1, to reduce         recaptured section 1250 gain or loss that is API 
                                                      the reported long-term capital gain by listing as        gain or loss and is included in the calculation of 
• Section 1061 Worksheet A.                           a transaction identified as "Section 1061 Adjust-        the  recharacterization  amount,  but  not  rechar-
                                                      ment" in column (a) of the Form 8949 and enter-          acterized,  must  be  included  in  the  Unrecap-
Owner Taxpayer Calculation                            ing  zero  as  proceeds  (column  (d)  of  the  Form     tured Section 1250 Gain Worksheet. Unrecap-
                                                      8949) and the amount from line 9 of Worksheet            tured section 1250 gain or loss with respect to a 
of Amount Treated as                                  B as basis (column (e) of the Form 8949).                pass-through  interest  that  is  treated  as  capital 
Short-Term Capital Gain                                                                                        interest  gain  or  loss  must  also  be  included  in 
Under Section 1061                                    The Owner Taxpayer                                       the  Unrecaptured  Section  1250  Gain  Work-
                                                                                                               sheet.
                                                      Reporting of Collectibles 
An owner taxpayer is the person who is subject 
to federal income tax on the recharacterization       Gain and Unrecaptured                                    Reporting example for Worksheets A and B. 
amount,  and  could  be  an  individual,  estate,  or Section 1250 Gain                                        Owner Taxpayer M, an individual, holds an API 
trust. An owner taxpayer uses information provi-                                                               in  XYZ  Partnership  and  receives  a  Sched-
ded by all the pass-through entities in which it      Pending further guidance, if the owner taxpayer          ule  K-1  with Worksheet  A  attached  from  XYZ 
holds an API, directly or indirectly, to determine    sells an API and recognizes collectibles gain or         Partnership for the tax year 2021, that contains 
the amount that is recharacterized as short-term      loss or unrecaptured section 1250 gain, or if a          a long-term capital gain of $55,000 in box 9a of 
capital gain under sections 1061(a) and (d) for       pass-through entity reports that collectibles gain       the Schedule K-1. Taxpayer M did not dispose 
a tax year. For tax returns filed after December      or  loss  or  unrecaptured  section  1250  gain  is      of an API in 2021. The following is a summary 
31,  2021,  in  which  an  owner  taxpayer  applies   treated as API gain or loss, the owner taxpayer          of Worksheet A that XYZ Partnership attached 
the  final  regulations  under  T.D.  9945, Work-     must use a reasonable method to compute the              to  Taxpayer  M's  Schedule  K-1:  Line  4  has  an 
sheet B must be used to determine the amount          amount  of  the  inclusion  of  collectibles  gain       API 1-year distributive share amount of $55,000 
of  the  owner  taxpayer’s  recharacterization        and/or  unrecaptured  section  1250  gain  in  the       and line 7 has an API 3-year distributive share 
amount. Worksheet B, along with     Table 1 and       recharacterization  amount  that  is  calculated  in     amount of $20,000.
Table 2, are to be attached to the owner taxpay-      Worksheet  B.  If  the  owner  taxpayer  has  re-           Taxpayer  M  reports  a  $55,000  long-term 
er’s tax return.                                      ceived an API 1-year distributive share amount           capital  gain  from  XYZ  Partnership  on  Sched-
                                                      and  an  API  3-year  distributive  share  amount        ule D (Form 1040), line 12. Taxpayer M chose 
An  owner  taxpayer  that  is  not  required  to      that includes collectibles gain or loss and/or un-       to follow the final regulations under T.D. 9945 in 
and does not choose to apply the final regula-        recaptured section      1250    gain  from a             preparation  of  their  2021  tax  return  and  pre-
tions  to  tax  returns  filed  after  December  21,  pass-through entity, the owner taxpayer should           pares and attaches Worksheet B to their Form 
2021,  for  a  tax  year  beginning  before  January  include those amounts on lines 1 and 4, respec-          1040. Worksheet  B  has  a  1-year  gain  amount 
19,  2021,  must  attach  worksheets  to  its  return tively,  of  Worksheet  B.  If  the  owner  taxpayer     on  line  3  of  $55,000,  a  3-year  gain  amount  of 
that contain similar information as Worksheet B,      has  received  an  API  1-year  distributive  share      $20,000 on line 6, a recharacterization amount 
Table  1,  and   Table  2;  and  must  disclose       amount  and  an  API  3-year  distributive  share        on line 7 of $35,000, and a section 1061 adjust-
whether the information was determined under          amount  that  includes  collectibles  gain  or  loss     ment on line 9 of $35,000. In addition to report-
proposed regulations or another method.               and/or  unrecaptured  section  1250  gain  from  a       ing  the  long-term  capital  gain  of  $55,000  on 
                                                      pass-through entity, the owner taxpayer should           Schedule D (Form 1040), line 12, Taxpayer M 
                                                      include those amounts on lines 1 and 4, respec-          reports  on  Form  8949,  Part  I,  line  1,  a 
Calculation and reporting of                          tively, of Worksheet B.                                  short-term capital gain of $35,000, and on Part 
recharacterization amount by the                                                                               II, line 1, a long-term capital loss of ($35,000). 
owner taxpayer                                         On  line  10  of Worksheet  B,  the  owner  tax-        Both Form 8949 items are described in column 
                                                      payer  must  report  the  total  amount  of  collecti-   (a) as "Section 1061 Adjustment."
• Section 1061 Worksheet B.                           bles  gains  for  the  tax  year  that  the  owner  tax-
• Section 1061 Table 1: API 1-Year Disposi-           payer  has  with  respect  to  any  interest  in  a 
  tion Amount.                                        pass-through  entity  (pass-through  interests) 
• Section 1061 Table 2: API 3-Year Disposi-           that  it  owns.  It  must  also  report  the  amount  of 
  tion Amount.                                        collectibles  gain  that  is  recharacterized  as 
Page 14                                                                                                                       Publication 541 (March 2022)

- 15 -

Page 15 of 23          Fileid: … ons/p541/202203/a/xml/cycle04/source                                                        11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

                                                          partner is an eligible partner if it is an individual,  AARs  filed  under  the  centralized  partner-
                                                          a C corporation, a foreign entity that would be         ship audit regime. Partnerships subject to the 
Tax Equity and Fiscal                                     treated as a C corporation if it were domestic,         centralized  partnership  audit  regime  and  filing 
                                                          an  S  corporation,  or  an  estate  of  a  deceased    an  AAR  that  results  in  an  imputed  underpay-
Responsibility Act of                                     partner.  The  determination  as  to  whether  the      ment and any interest or penalties related to the 
1982 (TEFRA)                                              partnership has 100 or fewer partners is made           imputed underpayment should report the impu-
                                                          by  adding  the  number  of  Schedules  K-1  re-        ted underpayment and any related interest and 
TEFRA is the common acronym used for a set                quired  to  be  issued  by  the  partnership  to  the   penalties on Form 1065 or 1065-X (as applica-
of  consolidated  examination,  processing,  and          number of Schedules K-1 required to be issued           ble). See the Instructions for Form 1065.
judicial  procedures  which  determine  the  tax          by  any  partner  that  is  an  S  corporation  to  its    See  the  instructions  for  Form  8082  or 
treatment  of  partnership  items  at  the  partner-      shareholders for the tax year of the S corpora-         1065-X (as applicable) for the following.
ship level for partnerships and LLCs that file as         tion  ending  with  or  within  the  partnership  tax   •  Information pertaining to certain modifica-
partnerships.  TEFRA  created  the  unified  part-        year. A partnership is not an eligible partnership         tions that are allowable for the partnership 
nership audit and litigation procedures (TEFRA            if it is required to issue a Schedule K-1 to any of        to include in its calculation of an AAR im-
partnership  procedures)  of  sections  6221              the following partners.                                    puted underpayment.
through 6234 (prior to the amendments by the              •    A partnership.                                     •  Information pertaining to the ability for the 
BBA).  For  additional  information  on  TEFRA            •    A trust.                                              partnership to make an election under sec-
partnership  procedures,  see  the  January  2016         •    A foreign entity that would not be treated            tion 6227(b)(2) to have the adjustments of 
revision of Pub. 541.                                          as a C corporation were it a domestic en-             the AAR taken into account by the re-
                                                               tity.                                                 viewed year partners, rather than the part-
        The  TEFRA  partnership  audit  proce-            •    A disregarded entity described in Regula-             nership making an imputed underpayment.
!       dures were repealed and do not apply                   tions section 301.7701-2(c)(2)(i).
CAUTION to tax years beginning after 2017. The                 An estate of an individual other than a de-        Partner  amended  return  filed  as  part  of 
                                                          •
Bipartisan Budget Act of 2015 (BBA) is effective               ceased partner.                                    modification of the imputed underpayment 
for partnership tax years beginning after 2017.           •    Any person that holds an interest in the           during  a  BBA  examination.     Section  6225(c) 
                                                               partnership on behalf of another person.           allows a BBA partnership under examination to 
                                                               See the Instructions for Form 1065 if elect-       request  specific  types  of  modifications  of  any 
Bipartisan Budget Act of                                       ing out of the centralized partnership audit       imputed  underpayment  proposed  by  the  IRS. 
                                                               regime.                                            One type of modification (under section 6225(c)
2015 (BBA)                                                                                                        (2)) that may be requested is when one or more 
                                                           An  annual  election  out  of  the  centralized        (reviewed  year)  partners  file  amended  returns 
The BBA created a new centralized partnership             partnership audit regime must be made on the            for the tax years of the partners which includes 
audit regime effective for partnership tax years          eligible partnership’s timely filed return, includ-     the end of the reviewed year of the BBA part-
beginning after 2017. The new regime replaces             ing  extensions,  for  the  tax  year  to  which  the   nership under examination and for any tax year 
the  consolidated  audit  proceedings  under  TE-         election  applies.  The  election  is  made  by  in-    with respect to which tax attributes are affected. 
FRA  and  the  electing  large  partnership  provi-       cluding  the  following  information  on  Sched-        See the Instructions for Form 8980.
sions. The new audit regime applies to all part-          ule B-2 (Form 1065) and filing with the tax re-
nerships  unless  the  partnership  is  an  eligible      turn.
partnership  and  elects  out  by  making  a  valid       •    The name of each partner.                          How To Sign Documents on 
election.  See  the  Instructions  for  Form  1065        •    The TIN of each partner.                           Behalf of the Partnership
and BBA Centralized Partnership Audit Regime.             •    The federal tax classification for each part-
                                                               ner.
                                                          •    If an S corporation is a partner, provide the         How To Sign Documents on Behalf of the 
Role of Partnership                                            names, TINs, and federal tax classification                       Partnership
                                                                                                                     The following are examples of how a partnership 
Representative                                                 of any shareholder of the S corporation for        representative (PR) should sign documents on behalf of 
                                                               the tax year of the S corporation ending              the partnership. The manner in which the PR signs 
Under the centralized partnership audit regime,                with or within the partnership’s tax year.         depends on whether the PR is an entity or an individual. 
                                                                                                                  If the PR is an entity, the designated individual (DI) signs 
partnerships  are  required  to  designate  a  part-       This annual election once made may not be                 in their capacity to act on behalf of that entity PR.
nership  representative.  The  partnership  repre-        revoked without the consent of the IRS. A part-         Designated     Signature as      Example
sentative  will  have  the  sole  authority  to  act  on  nership  that  elects  out  of  the  centralized  part- Partnership    Partnership 
behalf of the partnership under the centralized           nership  audit  regime  must  notify  each  of  its     Representative Representative 
partnership audit regime. The designated part-            partners of the election within 30 days of mak-         (PR)           (PR)
nership representative is a partner or other per-         ing the election. By making the election out of         Individual     Individual's      John Smith, PR
son  with  substantial  presence  in  the  United         the  centralized  partnership  audit  regime,  you                     signature
States. If the designated partnership represen-           are affirming that all of the partners in the part-     Entity         Designated        Entity Name, PR, 
tative is an entity, the partnership must also ap-        nership  meet  the  eligibility  requirements  under                   individual’s (DI) by John Smith, DI
point a designated individual to act on behalf of         section 6221(b)(1)(C) and you have provided all                        signature
the entity partnership representative. The part-          of the required information with the Form 1065.
nership must include information regarding the 
partnership representative and designated indi-
vidual  (if  applicable)  on  Form  1065,  Sched-         Administrative Adjustment                               How To Get Tax Help
ule  B.  For  more  information,  see  the  Instruc-      Request
tions for Form 1065.                                                                                              If  you  have  questions  about  a  tax  issue;  need 
                                                          Rather than filing an amended return, a partner-        help preparing your tax return; or want to down-
Electing Out of the                                       ship  that  is  subject  to  the  centralized  partner- load free publications, forms, or instructions, go 
                                                          ship  audit  regime  must  file  an  Administrative     to IRS.gov to find resources that can help you 
Centralized Partnership                                   Adjustment  Request  (AAR)  to  change  the             right away.
Audit Regime                                              amount  or  treatment  of  one  or  more  partner-
                                                          ship-related  items.  If  filing  electronically,  file Preparing  and  filing  your  tax  return.   After 
A  partnership  can  elect  out  of  the  centralized     Form 8082, Notice of Inconsistent Treatment or          receiving  all  your  wage  and  earnings  state-
partnership  audit  regime  for  a  tax  year  if  the    Administrative Adjustment Request (AAR), with           ments (Forms W-2, W-2G, 1099-R, 1099-MISC, 
partnership is an eligible partnership that year.         a  Form  1065,  or  Form  1065-X,  Amended  Re-         1099-NEC, etc.); unemployment compensation 
A partnership is an eligible partnership for a tax        turn  or  Administrative  Adjustment  Request           statements  (by  mail  or  in  a  digital  format)  or 
year  if  it  has  100  or  fewer  eligible  partners.  A (AAR).
Publication 541 (March 2022)                                                                                                                           Page 15

- 16 -

Page 16 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

other government payment statements (Form retirees and self-employed individuals. The more information about these payments and
1099-G); and interest, dividend, and retirement features include the following. how they can affect your taxes.
statements from banks and investment firms ▶ Easy to understand language.
(Forms 1099), you have several options to ▶ The ability to switch between Coronavirus. Go to IRS.gov/Coronavirus for
choose from to prepare and file your tax return. screens, correct previous entries, and skip links to information on the impact of the corona-
You can prepare the tax return yourself, see if screens that don’t apply. virus, as well as tax relief available for individu-
you qualify for free tax preparation, or hire a tax ▶ Tips and links to help you determine als and families, small and large businesses,
professional to prepare your return. if you qualify for tax credits and deduc- and tax-exempt organizations.
tions.
For 2021, if you received an Economic ▶ A progress tracker. Employers can register to use Business
! Impact Payment (EIP), refer to your ▶ A self-employment tax feature. Services Online. The Social Security Adminis-
CAUTION Notice 1444-C, Your 2021 Economic
▶ Automatic calculation of taxable so- tration (SSA) offers online service at SSA.gov/
Impact Payment. If you received Advance Child cial security benefits. employer for fast, free, and secure online W-2
Tax Credit payments, refer to your Letter 6419. filing options to CPAs, accountants, enrolled
• The First-Time Homebuyer Credit Account agents, and individuals who process Form W-2,
Free options for tax preparation. Go to Look-up IRS.gov/HomeBuyer ( ) tool pro- Wage and Tax Statement, and Form W-2c,
IRS.gov to see your options for preparing and vides information on your repayments and Corrected Wage and Tax Statement.
filing your return online or in your local commun- account balance.
ity, if you qualify, which include the following. • The Sales Tax Deduction Calculator IRS social media. Go to IRS.gov/SocialMedia
(IRS.gov/SalesTax) figures the amount you to see the various social media tools the IRS
• Free File. This program lets you prepare can claim if you itemize deductions on uses to share the latest information on tax
and file your federal individual income tax Schedule A (Form 1040). changes, scam alerts, initiatives, products, and
return for free using brand-name tax-prep-
aration-and-filing software or Free File filla- Getting answers to your tax ques- services. At the IRS, privacy and security are
ble forms. However, state tax preparation tions. On IRS.gov, you can get our highest priority. We use these tools to share
may not be available through Free File. Go up-to-date information on current public information with you. Don’t post your so-
to IRS.gov/FreeFile to see if you qualify for events and changes in tax law. cial security number (SSN) or other confidential
information on social media sites. Always pro-
and direct deposit or payment options. •
free online federal tax preparation, e-filing, IRS.gov/Help: A variety of tools to help you tect your identity when using any social net-
get answers to some of the most common working site.
• VITA. The Volunteer Income Tax Assis- tax questions. The following IRS YouTube channels pro-
to people with low-to-moderate incomes, •
tance (VITA) program offers free tax help IRS.gov/ITA: The Interactive Tax Assistant, vide short, informative videos on various tax-re-
a tool that will ask you questions and, lated topics in English, Spanish, and ASL.
persons with disabilities, and limited-Eng- based on your input, provide answers on a Youtube.com/irsvideos.
lish-speaking taxpayers who need help number of tax law topics. •
preparing their own tax returns. Go to IRS.gov/Forms: Find forms, instructions, • Youtube.com/irsvideosmultilingua.
IRS.gov/VITA, download the free IRS2Go • • Youtube.com/irsvideosASL.
and publications. You will find details on
app, or call 800-906-9887 for information 2021 tax changes and hundreds of interac- Watching IRS videos. The IRS Video portal
on free tax return preparation. tive links to help you find answers to your (IRSVideos.gov) contains video and audio pre-
• TCE. The Tax Counseling for the Elderly questions. sentations for individuals, small businesses,
taxpayers, particularly those who are 60 •
(TCE) program offers free tax help for all You may also be able to access tax law in- and tax professionals.
formation in your electronic filing software.
years of age and older. TCE volunteers
specialize in answering questions about Online tax information in other languages.
pensions and retirement-related issues Need someone to prepare your tax return? You can find information on IRS.gov/
unique to seniors. Go to IRS.gov/TCE, There are various types of tax return preparers, MyLanguage if English isn’t your native lan-
download the free IRS2Go app, or call including tax preparers, enrolled agents, certi- guage.
888-227-7669 for information on free tax fied public accountants (CPAs), attorneys, and
return preparation. many others who don’t have professional cre- Free Over-the-Phone Interpreter (OPI) Serv-
• MilTax. Members of the U.S. Armed dentials. If you choose to have someone pre- ice. The IRS is committed to serving our multi-
Forces and qualified veterans may use Mil- pare your tax return, choose that preparer lingual customers by offering OPI services. The
Tax, a free tax service offered by the De- wisely. A paid tax preparer is: OPI Service is a federally funded program and
partment of Defense through Military One- • Primarily responsible for the overall sub- is available at Taxpayer Assistance Centers
Source. For more information, go to stantive accuracy of your return, (TACs), other IRS offices, and every VITA/TCE
MilitaryOneSource MilitaryOneSource.mil/ ( • Required to sign the return, and return site. The OPI Service is accessible in
MilTax). • Required to include their preparer tax iden- more than 350 languages.
Also, the IRS offers Free Fillable tification number (PTIN). Accessibility Helpline available for taxpay-
Forms, which can be completed online and
then filed electronically regardless of in- Although the tax preparer always signs the ers with disabilities. Taxpayers who need in-
come. return, you're ultimately responsible for provid- formation about accessibility services can call
ing all the information required for the preparer 833-690-0598. The Accessibility Helpline can
Using online tools to help prepare your re- to accurately prepare your return. Anyone paid answer questions related to current and future
turn. Go to IRS.gov/Tools for the following. to prepare tax returns for others should have a accessibility products and services available in
• The Earned Income Tax Credit Assistant thorough understanding of tax matters. For alternative media formats (for example, braille,
(IRS.gov/EITCAssistant) determines if more information on how to choose a tax pre- large print, audio, etc.).
you’re eligible for the earned income credit parer, go to Tips for Choosing a Tax Preparer Getting tax forms and publications. Go to
(EIC). on IRS.gov. IRS.gov/Forms to view, download, or print all of
• The Online EIN Application IRS.gov/EIN ( )
helps you get an employer identification Advance child tax credit payments. From the forms, instructions, and publications you
number (EIN) at no cost. July through December 2021, advance pay- may need. Or, you can go to IRS.gov/
• The Tax Withholding Estimator IRS.gov/ ( ments were sent automatically to taxpayers with OrderForms to place an order.
W4app) makes it easier for everyone to qualifying children who met certain criteria. The Getting tax publications and instructions in
pay the correct amount of tax during the advance child tax credit payments were early eBook format. You can also download and
year. The tool is a convenient, online way payments of up to 50% of the estimated child view popular tax publications and instructions
to check and tailor your withholding. It’s tax credit that taxpayers may properly claim on
more user-friendly for taxpayers, including their 2021 returns. Go to IRS.gov/AdvCTC for

Page 16 Publication 541 (March 2022)

- 17 -

Page 17 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

(including the Instructions for Form 1040) on on identity theft and data security protec- • Use the Offer in Compromise Pre-Qualifier
mobile devices as eBooks at IRS.gov/eBooks. tion for taxpayers, tax professionals, and to see if you can settle your tax debt for
businesses. If your SSN has been lost or less than the full amount you owe. For
Note. IRS eBooks have been tested using stolen or you suspect you’re a victim of more information on the Offer in Compro-
Apple's iBooks for iPad. Our eBooks haven’t tax-related identity theft, you can learn mise program, go to IRS.gov/OIC.
been tested on other dedicated eBook readers, what steps you should take.
and eBook functionality may not operate as in- • Get an Identity Protection PIN (IP PIN). IP Filing an amended return. You can now file
tended. PINs are six-digit numbers assigned to tax- Form 1040-X electronically with tax filing soft-
payers to help prevent the misuse of their ware to amend 2019 or 2020 Forms 1040 and
Access your online account (individual tax- SSNs on fraudulent federal income tax re- 1040-SR. To do so, you must have e-filed your
payers only). Go to IRS.gov/Account to se- turns. When you have an IP PIN, it pre- original 2019 or 2020 return. Amended returns
curely access information about your federal tax vents someone else from filing a tax return for all prior years must be mailed. Go to
account. with your SSN. To learn more, go to IRS.gov/Form1040X for information and up-
• View the amount you owe and a break- IRS.gov/IPPIN. dates.
down by tax year.
• See payment plan details or apply for a Ways to check on the status of your refund. Checking the status of your amended re-
new payment plan. • Go to IRS.gov/Refunds. turn. Go to IRS.gov/WMAR to track the status
• Make a payment or view 5 years of pay- • Download the official IRS2Go app to your of Form 1040-X amended returns.
ment history and any pending or sched- mobile device to check your refund status.
uled payments. • Call the automated refund hotline at Note. It can take up to 3 weeks from the
• Access your tax records, including key 800-829-1954. date you filed your amended return for it to
data from your most recent tax return, your show up in our system, and processing it can
EIP amounts, and transcripts. Note. The IRS can’t issue refunds before take up to 16 weeks.
• View digital copies of select notices from mid-February 2022 for returns that claimed the
the IRS. EIC or the additional child tax credit (ACTC). Understanding an IRS notice or letter
• Approve or reject authorization requests This applies to the entire refund, not just the you’ve received. Go to IRS.gov/Notices to
from tax professionals. portion associated with these credits. find additional information about responding to
• View your address on file or manage your an IRS notice or letter.
communication preferences. Making a tax payment. Go to IRS.gov/ You can use Schedule LEP, Request for
Payments for information on how to make a Change in Language Preference, to state a
Tax Pro Account. This tool lets your tax pro- payment using any of the following options. preference to receive notices, letters, or other
fessional submit an authorization request to ac- • IRS Direct Pay: Pay your individual tax bill written communications from the IRS in an al-
cess your individual taxpayer IRS online or estimated tax payment directly from ternative language, when these are available.
account. For more information, go to IRS.gov/ your checking or savings account at no Once your Schedule LEP is processed, the IRS
TaxProAccount. cost to you. will determine your translation needs and pro-
• Debit or Credit Card: Choose an approved vide you translations when available. If you
Using direct deposit. The fastest way to re- payment processor to pay online or by have a disability requiring notices in an accessi-
ceive a tax refund is to file electronically and phone. ble format, see Form 9000.
choose direct deposit, which securely and elec- • Electronic Funds Withdrawal: Schedule a
tronically transfers your refund directly into your payment when filing your federal taxes us- Contacting your local IRS office. Keep in
financial account. Direct deposit also avoids the ing tax return preparation software or mind, many questions can be answered on
possibility that your check could be lost, stolen, through a tax professional. IRS.gov without visiting an IRS TAC. Go to
or returned undeliverable to the IRS. Eight in 10 • Electronic Federal Tax Payment System: IRS.gov/LetUsHelp for the topics people ask
taxpayers use direct deposit to receive their re- Best option for businesses. Enrollment is about most. If you still need help, IRS TACs
funds. If you don’t have a bank account, go to required. provide tax help when a tax issue can’t be han-
IRS.gov/DirectDeposit for more information on • Check or Money Order: Mail your payment dled online or by phone. All TACs now provide
where to find a bank or credit union that can to the address listed on the notice or in- service by appointment, so you’ll know in ad-
open an account online. structions. vance that you can get the service you need
• Cash: You may be able to pay your taxes without long wait times. Before you visit, go to
Getting a transcript of your return. The with cash at a participating retail store. IRS.gov/TACLocator to find the nearest TAC
quickest way to get a copy of your tax transcript • Same-Day Wire: You may be able to do and to check hours, available services, and ap-
is to go to IRS.gov/Transcripts. Click on either same-day wire from your financial institu- pointment options. Or, on the IRS2Go app, un-
“Get Transcript Online” or “Get Transcript by tion. Contact your financial institution for der the Stay Connected tab, choose the Con-
Mail” to order a free copy of your transcript. If availability, cost, and time frames. tact Us option and click on “Local Offices.”
you prefer, you can order your transcript by call-
ing 800-908-9946. Note. The IRS uses the latest encryption
technology to ensure that the electronic pay- The Taxpayer Advocate
Reporting and resolving your tax-related ments you make online, by phone, or from a Service (TAS) Is Here To
identity theft issues. mobile device using the IRS2Go app are safe Help You
• Tax-related identity theft happens when and secure. Paying electronically is quick, easy,
someone steals your personal information and faster than mailing in a check or money or- What Is TAS?
to commit tax fraud. Your taxes can be af- der.
fected if your SSN is used to file a fraudu- TAS is an independent organization within the
lent return or to claim a refund or credit. What if I can’t pay now? Go to IRS.gov/ IRS that helps taxpayers and protects taxpayer
• The IRS doesn’t initiate contact with tax- Payments for more information about your op- rights. Their job is to ensure that every taxpayer
payers by email, text messages, telephone tions. is treated fairly and that you know and under-
calls, or social media channels to request • Apply for an online payment agreement stand your rights under the Taxpayer Bill of
personal or financial information. This in- (IRS.gov/OPA) to meet your tax obligation Rights.
cludes requests for personal identification in monthly installments if you can’t pay
numbers (PINs), passwords, or similar in- your taxes in full today. Once you complete How Can You Learn About Your
formation for credit cards, banks, or other the online process, you will receive imme- Taxpayer Rights?
financial accounts. diate notification of whether your agree-
• Go to IRS.gov/IdentityTheft, the IRS Iden- ment has been approved. The Taxpayer Bill of Rights describes 10 basic
tity Theft Central webpage, for information rights that all taxpayers have when dealing with

Publication 541 (March 2022) Page 17

- 18 -

Page 18 of 23 Fileid: … ons/p541/202203/a/xml/cycle04/source 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

the IRS. Go to TaxpayerAdvocate.IRS.gov to TaxpayerAdvocate.IRS.gov/Contact-Us. You collection disputes. In addition, LITCs can pro-
help you understand what these rights mean to can also call them at 877-777-4778. vide information about taxpayer rights and re-
you and how they apply. These are your rights. sponsibilities in different languages for individu-
Know them. Use them. How Else Does TAS Help als who speak English as a second language.
Taxpayers? Services are offered for free or a small fee for
What Can TAS Do for You? eligible taxpayers. To find an LITC near you, go
TAS works to resolve large-scale problems that to TaxpayerAdvocate.IRS.gov/about-us/Low-
TAS can help you resolve problems that you affect many taxpayers. If you know of one of Income-Taxpayer-Clinics-LITC or see IRS Pub.
can’t resolve with the IRS. And their service is these broad issues, report it to them at IRS.gov/ 4134, Low Income Taxpayer Clinic List.
free. If you qualify for their assistance, you will SAMS.
be assigned to one advocate who will work with
you throughout the process and will do every- TAS for Tax Professionals Section 1061
thing possible to resolve your issue. TAS can
Worksheets and Tables
help you if: TAS can provide a variety of information for tax
• Your problem is causing financial difficulty professionals, including tax law updates and
for you, your family, or your business; guidance, TAS programs, and ways to let TAS
• You face (or your business is facing) an know about systemic problems you’ve seen in
immediate threat of adverse action; or your practice.
• You’ve tried repeatedly to contact the IRS
but no one has responded, or the IRS
hasn’t responded by the date promised. Low Income Taxpayer
Clinics (LITCs)
How Can You Reach TAS?
LITCs are independent from the IRS. LITCs
TAS has offices in every state, the District of represent individuals whose income is below a
Columbia, and Puerto Rico. Your local advo- certain level and need to resolve tax problems
cate’s number is in your local directory and at with the IRS, such as audits, appeals, and tax

Page 18 Publication 541 (March 2022)

- 19 -

Page 19 of 23  Fileid: … ons/p541/202203/a/xml/cycle04/source                                 11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section 1061 Worksheet A: API 1-Year Distributive Share Amount and API 3-Year Distributive Share Amount
(Completed by a pass-through entity that has issued an API and attached to the Schedule K-1.)

Pass-Through Entity Name                                                    EIN 

   API Holder                                                               SSN or TIN

   Line       Description                                                   API Gains and (Losses)*
   1          Net long-term capital gain (loss) from Schedule K-1 (Form     $
              1065), box 9a; Schedule K-1 (Form 1120-S), box 8a; or 
              Schedule K-1 (Form 1041), box 4a(a)
   2          Capital gains or (losses) included in line 1 that are not     $
              subject to section 1061 under Regulations section 
              1.1061-4(b)(7)
   3          Capital interest gains or (losses) under Regulations section  $
              1.1061-3(c)(2) included in line 1(b)
   4          API 1-Year Distributive Share Amount                          $
              Subtract the sum of lines 2 and 3 from line 1.
   5          Amounts included in line 4 that would not be treated as       $
              long-term gain or (loss) if 3 years is substituted for 1 year 
              under paragraphs (3) and (4) of section 1222
   6          Any Lookthrough Rule adjustment applicable to the             $
              disposition of an API by the pass-through entity under 
              Regulations section 1.1061-4(b)(9)(c)
   7          API 3-Year Distributive Share Amount Gain or (Loss)           $
              Subtract the sum of lines 5 and 6 from line 4.
* Gains are entered as positive and losses are entered as negative.
(a) Calculation for collectibles gains or unrecaptured section 1250 gains. If a partnership, S corporation, estate, or trust has 
collectibles gain or loss or unrecaptured section 1250 gain that is treated as API gain or loss, the pass-through entity must provide 
the API holder with information to determine whether collectibles gain or unrecaptured section 1250 gain is recharacterized under 
section 1061. The pass-through entity must provide the API holder with information that enables the API holder to separately 
determine its API 1-Year Distributive Share Amount and its API 3-Year Distributive Share Amount for its collectibles gain or loss 
and/or its unrecaptured section 1250 gain. This information should be attached to Worksheet A.
(b) Capital interest gains and losses. See Regulations section 1.1061-3(c)(2) for computation of capital interest gains and losses.
(c) Lookthrough Rule information. See Regulations section 1.1061-4(b)(9) for computation of Lookthrough Rule amount 
adjustment.

Publication 541 (March 2022)                                                                               Page 19

- 20 -

Page 20 of 23  Fileid: … ons/p541/202203/a/xml/cycle04/source                           11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section 1061 Worksheet B: Owner Taxpayer Reporting of Recharacterization Amount
(The owner taxpayer must complete and attach to their return.)

Taxpayer Name                                                                SSN or TIN 

        Line  Description                                                    Gains and (Losses)*
        1     API 1-Year Distributive Share Amount from Worksheet A,         $
              line 4, which is attached to Schedule K-1.
              Combined net amount from all APIs and increased by the API 
              1-Year Distributive Share Amount of collectibles gain or loss 
              and/or unrecaptured section 1250 gain, if applicable.
        2     API 1-Year Disposition Amount from Table 1, line 4.            $
              Combined net amount from all APIs.
        3     1-Year Gain Amount                                             $
              Add lines 1 and 2. If the sum of line 1 plus line 2 is zero or 
              less, enter zero on line 3 and skip to line 8.
        4     API 3-Year Distributive Share Amount from Worksheet A,         $
              line 7, which is attached to the Schedule K-1.
              Combined net amount from all APIs, increased by the 
              amount of API 3-Year Distributive Share Amount of 
              collectibles gain or loss and/or recaptured section 1250 gain, 
              if applicable.
        5     API 3-Year Disposition Amount from Table 2, line 4.            $
              Combined net amount for all APIs. 
        6     3-Year Gain Amount                                             $
              Add lines 4 and 5. If the sum of line 4 plus line 5 is zero or 
              less, enter zero. 
        7     Recharacterization Amount (treat as short-term capital         $
              gain) 
              Subtract line 6 from line 3. If zero or less, enter zero.
        8     Section 1061(d) Recharacterization Amount (as                  $
              determined in Regulations section 1.1061-5(c)).
        9     Section 1061 Adjustment to Form 8949                           $
              Add lines 7 and 8. (This amount is an adjustment to increase 
              short-term capital gain and decrease long-term capital gain 
              amounts on Form 8949, Parts I and II. See The Owner 
              Taxpayer Reporting of the Recharacterization Amount on 
              Schedule D for instructions on how to report adjustments on 
              tax return.)
        10**  (a) Total collectibles gain with respect to any interest in  $
              a pass-through entity (per Schedule K-1 (Form 1065), 
              box 9b; Schedule K-1 (Form 1120-S), box 8b; Schedule K-1 
              (Form 1041), box 4b)
              (b) Amount of collectibles gain included in the                $
              recharacterization amount
              (c) Amount of collectibles gain entered in the 28% Rate  $
              Gain Worksheet (see line 18 of the Schedule D (Form 
              1040), or line 28c of the Schedule D (Form 1041))
     11***    (a) Total unrecaptured section 1250 gain with respect          $
              to any interest in a pass-through entity (per Schedule K-1 
              (Form 1065), box 9c; Schedule K-1 (Form 1120-S), box 8c; 
              Schedule K-1 (Form 1041), box 4c)
              (b) Amount of unrecaptured section 1250 gain included  $
              in the recharacterization amount
              (c) Amount of unrecaptured section 1250 gain entered  $
              in the Unrecaptured Section 1250 Gain Worksheet (see 
              line 19 of the Schedule D (Form 1040), or line 18b of the 
              Schedule D (Form 1041))
* Gains are entered as positive and losses are entered as negative.
** The sum of the amount entered on line 10(b) plus the amount entered on line 10(c) must equal the amount entered on line 10(a) 
(see The Owner Taxpayer Reporting of Collectibles Gain and Unrecaptured Section 1250 for instructions on how to report 
adjustments on tax return).
*** The sum of the amount entered on line 11(b) plus the amount entered on line 11(c) must equal the amount entered on line 11(a) 
(see The Owner Taxpayer Reporting of Collectibles Gain and Unrecaptured Section 1250 for instructions on how to report 
adjustments on tax return).

Page 20                                                                                 Publication 541 (March 2022)

- 21 -

Page 21 of 23  Fileid: … ons/p541/202203/a/xml/cycle04/source                                  11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section 1061 Table 1: API 1-Year Disposition Amount
(Separately computed for each API. Required to be attached to the owner taxpayer’s tax return.)

Name of Owner Taxpayer                                               SSN/TIN 

Name of Pass-Through Entity                                          Pass-Through EIN 

Line Description                                                     Gains and (Losses)*
1    Long-term capital gains and losses recognized on the            $
     disposition by the owner taxpayer, including long-term capital 
     gain computed under the installment method that is taken into 
     account during the tax year of all or a portion of any API held 
     for more than 1 year including a disposition to which the 
     Lookthrough Rule in Regulations section 1.1061-4(b)(9) 
     applies. 
2    Long-term capital gain and loss recognized by the owner         $
     taxpayer on a disposition with respect to an API during the tax 
     year that is treated under section 731(a) as gain or loss from 
     the sale or exchange of a partnership interest held for more 
     than 1 year. 
3    Long-term capital gains and losses recognized by the owner      $
     taxpayer on the disposition of distributed API property (taking 
     into account deemed exchanges under section 751(b)) during 
     the tax year that has a holding period of more than 1 year but 
     not more than 3 years to the distributee owner taxpayer on 
     the date of disposition, excluding items described in 
     Regulations section 1.1061-4(b)(7). 
4    API 1-Year Distributive Share Amount                            $
     Combine lines 1 through 3. Enter amount on line 2 of 
     Worksheet B.
* Gains are entered as positive and losses are entered as negative.

Publication 541 (March 2022)                                                                       Page 21

- 22 -

Page 22 of 23  Fileid: … ons/p541/202203/a/xml/cycle04/source                                  11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Section 1061 Table 2: API 3-Year Disposition Amount
(Separately computed for each API. Required to be attached to the owner taxpayer’s tax return.)

Name of Owner Taxpayer                                                     SSN/TIN 

Name of Pass-Through Entity                                                Pass-Through EIN 

Line      Description                                                      Gains and (Losses)*
        1 Long-term capital gains and losses recognized on the             $
          disposition by the owner taxpayer, including long-term capital 
          gain computed under the installment method that is taken into 
          account for the tax year of all or a portion of any API held for 
          more than 3 years and to which the Lookthrough Rule in 
          Regulations section 1.1061-4(b)(9) does not apply.
        2 Long-term capital gains and losses recognized by an owner        $
          taxpayer on the disposition during the tax year of all or a 
          portion of an API that has been held for more than 3 years in 
          a transaction to which the Lookthrough Rule in Regulations 
          section 1.1061-4(b)(9) applies, less any adjustments required 
          under the Lookthrough Rule in Regulations section 
          1.1061-4(b)(9)(ii). 
        3 Long-term capital gains and losses recognized on a               $
          distribution with respect to an API during the tax year that is 
          treated under section 731(a) as gain or loss from the sale or 
          exchange of a partnership interest held for more than 3 years.
        4 API 3-Year Distributive Share Amount                             $
          Combine lines 1 through 3. Enter amount on line 5 of 
          Worksheet B.
* Gains are entered as positive and losses are entered as negative.

Page 22                                                                                        Publication 541 (March 2022)

- 23 -

Page 23 of 23               Fileid: … ons/p541/202203/a/xml/cycle04/source                      11:52 - 24-Mar-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

                        To help us develop a more useful index, please let us know if you have ideas for index entries.
Index                   See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
 
                                                             Limited liability company  2        Agreement    4
A                             E                              Liquidation:                        Basis, contributed property 9
Allocations:                  Electronic filing 4              Constructive   11                 Defined 2
  Built-in gain or loss 9                                      Partner's interest 6              Exclusion from rules    4
  Installment sale 11                                          Partner's retirement or death 13  Forming 2
Assistance (See Tax help)     F                              Losses:                             Liabilities 10
                              Form:                            Sales or exchanges   8            Terminating   4
                                8275    8                                                        Transactions with partner 7
B                               8308    12                                                      Precontribution gain 5
Bipartisan Budget Act of 2015   8832    2                    M                                  Profits interest 9
  (BBA) 15                      8865    9                    Marketable securities  5           Publications (See Tax help)
Built-in gain or loss 9
                              G                              P                                  S
C                             Guaranteed payments  7         Partner's:                         Section 1061  3 13, 
Capital interest 9                                             Basis:                            Section 1061 Worksheets and 
Contribution:                                                  Distributed property     6        Tables       18
  Basis of property 9         H                                Partnership interest     9       Self-employed health 
  Built-in gain or loss 9     How to sign documents on         Interest:                         insurance    7
  Distribution of property 9    behalf of the partnership 15   Alternative rule, adjusted       Short period return 4
  Net precontribution gain 5                                         basis    10                Substantially appreciated 
  Property 8                                                   Basis     9                       inventory items    5
  Services  9                 I                                Basis adjustments    10
                              Insurance, self-employed         Book value     10
                                health  7                      Gift     3 10,                   T
D                             Inventory items, substantially   Liquidation of     6 13,         Tax help 15
Definition, partnership 2       appreciated   5                Mandatory basis                  Tax withholding, foreign partner 
Determining ownership     8                                          adjustment   7              of firm 2
Distributions:                                                 Performance of services    3     TEFRA 15
                                                               Sale, exchange, transfer   11    Terminating a partnership  4
  Gain or loss 5              L                                Special basis adjustment      6
  Partner's debt 5            Liability:
  Partnership  5                Assumption of   10             Transactions with partnership 7
Distributive share:             Partner's assumed by         Partnership:                       U
  Adjusted basis 10             partnership     10             Abandoned or worthless           Unrealized receivables   12
  Guaranteed payments      7    Partnership's 10               interest    11

Publication 541 (March 2022)                                                                                             Page 23

PDF file checksum: 544736533

(Plugin #1/9.12/13.0)