U.S. Return of Partnership Income

Changes To Note

• For tax years ending on or after December 31, 2001, certain partnerships with average annual gross receipts of more than $1 million but less than or equal to $10 million may be able to adopt or change to the cash method of accounting for eligible trades or businesses. This rule does not apply to partnerships prohibited from using the cash method under section 448. For more details, including change in accounting method requirements, see Notice 2001-76, 2001-52 I.R.B. 614.
• The partnership may need to mail its return to a different service center this year because the IRS has changed the filing location for several areas. If an envelope was received with the tax package, please use it. Otherwise, see Where To File on page 4.
• The partnership can now allow a paid preparer to resolve certain tax issues with the IRS. See Paid Preparer Authorization on page 4 for more information.

Photographs of Missing Children

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in instructions on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Unresolved Tax Issues

If the partnership has attempted to deal with an IRS problem unsuccessfully, it should contact the Taxpayer Advocate. The Taxpayer Advocate independently represents the partnership's interests and concerns within the IRS by protecting its rights and resolving problems that have not been fixed through normal channels.

While the Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that the partnership's case is given a complete and impartial review.

The partnership's assigned personal advocate will listen to its point of view and will work with the partnership to address its concerns. The partnership can expect the advocate to provide:

• A fresh look at a new or on-going problem.
• Timely acknowledgement.
• The name and phone number of the individual assigned to its case.
• Updates on progress.
• Timeframes for action.
• Speedy resolution.
• Courteous service.

When contacting the Taxpayer Advocate, the partnership should provide the following information:

• The partnership's name, address, and employer identification number.
• The name and telephone number of an authorized contact person and the hours he or she can be reached.
• The type of tax return and year(s) involved.
• A detailed description of the problem.
• Previous attempts to solve the problem and the office that had been contacted.
• A description of the hardship the partnership is facing (if applicable).

The partnership may contact a Taxpayer Advocate by calling a toll-free number, 1-877-777-4778. Persons who have access to TTY/TDD equipment may call 1-800-829-4059 and ask for the Taxpayer Advocate. If the partnership prefers, it may call, write, or fax the Taxpayer Advocate office in its area. See Pub. 1546, The Taxpayer Advocate Service of the IRS, for a list of addresses and fax numbers.

How To Get Forms and Publications

Personal Computer

You can access the IRS Web Site 24 hours a day, 7 days a week at www.irs.gov to:

• Download forms, instructions, and publications.
• See answers to frequently asked tax questions.
• Search publications on-line by topic or keyword.
• Send us comments or request help by e-mail.
• Sign up to receive local and national tax news by e-mail.

You can also reach us using file transfer protocol at ftp.irs.gov.

CD-ROM

Order Pub. 1796, Federal Tax Products on CD-ROM, and get:

• Current year forms, instructions, and publications.
• Prior year forms, instructions, and publications.
• Frequently requested tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
• The Internal Revenue Bulletin.

Buy the CD-ROM on the Internet at www.irs.gov/cdorders from the National Technical Information Service (NTIS) for $21 (no handling fee), or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD-ROM for $21 (plus a $5 handling fee).

By Phone and In Person

You can order forms and publications 24 hours a day, 7 days a week, by calling 1-800-TAX-FORM (1-800-829-3676). You can also get most forms and publications at your local IRS office.

Purpose of Form

Form 1065 is an information return used to report the income, deductions, gains, losses, etc., from the operation of a partnership. A partnership does not pay tax on its income but passes through any profits or losses to its partners. Partners must include partnership items on their tax returns.

Definitions

Partnership

A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made.

The term partnership includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that is not, within the meaning of the regulations under section 7701, a corporation, trust, estate, or sole proprietorship.

A joint undertaking merely to share expenses is not a partnership. Mere co-ownership of property that is maintained and leased or rented is not a partnership. However, if the co-owners provide services to the tenants, a partnership exists.

Foreign Partnership

A foreign partnership is a partnership that is not created or organized in the United States or under the law of the United States or of any state.

General Partner

A general partner is a partner who is personally liable for partnership debts.

General Partnership

A general partnership is composed only of general partners.

Limited Partner

A limited partner is a partner in a partnership formed under a state limited partnership law, whose personal liability for partnership debts is limited to the amount of money or other property that the partner contributed or is required to contribute to the partnership. Some members of other entities, such as domestic or foreign business trusts or limited liability companies that are classified as partnerships, may be treated as limited partners for certain purposes. See, for example, Temporary Regulations section 1.469-5T(e)(3), which treats all members with limited liability as limited partners for purposes of section 469(h)(2).

Limited Partnership

A limited partnership is formed under a state limited partnership law and composed of at least one general partner and one or more limited partners.

Limited Liability Partnership

A limited liability partnership (LLP) is formed under a state limited liability partnership law. Generally, a partner in an LLP is not personally liable for the debts of the LLP or any other partner, nor is a partner liable for the acts or omissions of any other partner, solely by reason of being a partner.

Limited Liability Company

A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes either as a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301.7701-3. See Form 8832, Entity Classification Election, for more details.

Note: A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for Federal income tax purposes.

Nonrecourse Loans

Nonrecourse loans are those liabilities of the partnership for which no partner bears the economic risk of loss.

Who Must File

Domestic Partnerships

Except as provided below, every domestic partnership must file Form 1065, unless it neither receives income nor incurs any expenditures treated as deductions or credits for Federal income tax purposes.

Entities formed as LLCs that are classified as partnerships for Federal income tax purposes must file Form 1065.

A religious or apostolic organization exempt from income tax under section 501(d) must file Form 1065 to report its taxable income, which must be allocated to its members as a dividend, whether distributed or not. Such an organization must figure its taxable income on an attachment to Form 1065 in the same manner as a corporation. The organization may use Form 1120, U.S. Corporation Income Tax Return, for this purpose. Enter the organization's taxable income, if any, on line 4b of Schedule K and each member's pro rata share on line 4b of Schedule K-1. Net operating losses are not deductible by the members but may be carried back or forward by the organization under the rules of section 172. The religious or apostolic organization also must make its annual information return available for public inspection. For this purpose, annual information return includes an exact copy of Form 1065 and all accompanying schedules and attachments, except Schedules K-1. For more details, see Regulations section 301.6104(d)-3.

A qualifying syndicate, pool, joint venture, or similar organization may elect under section 761(a) not to be treated as a partnership for Federal income tax purposes and will not be required to file Form 1065 except for the year of election. For details, see section 761(a) and Regulations section 1.761-2.

An electing large partnership (as defined in section 775) must file Form 1065-B, U.S. Return of Income for Electing Large Partnerships.

Real estate mortgage investment conduits (REMICs) must file Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return.

Certain publicly traded partnerships treated as corporations under section 7704 must file Form 1120.

Foreign Partnerships

Generally, a foreign partnership that has gross income effectively connected with the conduct of a trade or business within the United States or has gross income derived from sources in the United States must file Form 1065, even if its principal place of business is outside the United States or all its members are foreign persons. A foreign partnership required to file a return generally must report all of its foreign and U.S. source income.

A foreign partnership with U.S. source income is not required to file Form 1065 if it qualifies for either of the following two exceptions.

Exception for foreign partnerships with U.S. partners. A return is not required if:

• The partnership had no effectively connected income (ECI) during its tax year,
• The partnership had U.S. source income of $20,000 or less during its tax year,
• Less than 1% of any partnership item of income, gain, loss, deduction, or credit was allocable in the aggregate to direct U.S. partners at any time during its tax year, and
• The partnership is not a withholding foreign partnership as defined in Regulations section 1.1441-5(c)(2)(i).

Exception for foreign partnerships with no U.S. partners. A return is not required if:

• The partnership had no ECI during its tax year,
• The partnership had no U.S. partners at any time during its tax year,
• All required Forms 1042 and 1042-S were filed by the partnership or another withholding agent as required by Regulations section 1.1461-1(b) and (c),
• The tax liability of each partner for amounts reportable under Regulations sections 1.1461-1(b) and (c) has been fully satisfied by the withholding of tax at the source, and
• The partnership is not a withholding foreign partnership as defined in Regulations section 1.1441-5(c)(2)(i).

A foreign partnership filing Form 1065 solely to make an election (such as an election to amortize organization expenses) need only provide its name, address, and employer identification number (EIN) on page one of the form and attach a statement citing Regulations section 1.6031(a)-1(b)(5) and identifying the election being made. A foreign partnership filing Form 1065 solely to make an election must obtain an EIN if it does not already have one.

Termination of the Partnership

A partnership terminates when:

1. All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership, or
2. At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. See Regulations section 1.708-1(b)(1) for more details.

The partnership's tax year ends on the date of termination. For purposes of 1 above, the date of termination is the date the partnership winds up its affairs. For purposes of 2 above, the date of termination is the date the partnership interest is sold or exchanged that, of itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both partnership capital and profits.

Special rules apply in the case of a merger, consolidation, or division of a partnership. See Regulations sections 1.708-1(c) and (d) for details.

Electronic Filing

Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically. Other partnerships generally have the option to file electronically. This requirement or option does not apply to:

• Partnership returns with a foreign address on Form 1065.
• Fiscal year returns with a tax period ending after August 31, 2002. Other fiscal year return filers may voluntarily file electronically.
• Short period returns. Calendar year return filers with a short period ending in 2001 may voluntarily file electronically.
• Returns filed for religious or apostolic organizations under section 501(d)(3) or for organizations electing not to be treated as a partnership under section 761(a).
• Returns filed on Form 1065-B.

To file electronically, partnerships must file:

• Form 9041, Application/Registration for Electronic/Magnetic Media Filing of Business Returns.
• Form 8453-P, U.S. Partnership Declaration and Signature for Electronic Filing.

For more details on electronic filing, see:

• Pub. 1524, Procedures and Specifications for the 1065 e-file Program, U.S. Return of Partnership Income For Tax Year 2001;
• Pub. 1525, Validation Criteria and Record Layouts for the 1065 e-file Program, U.S. Return of Partnership Income for Tax Year 2001;
• Pub. 3416, 1065 e-file Program, U.S. Return of Partnership Income for Tax Year 2001 (Publication 1525 Supplement); and
• Pub. 3225, Test Package for Electronic Filers of U.S. Return of Partnership Income for Tax Year 2001.

For more information on filing electronically:

• Call the Electronic Filing Section at the Memphis Service Center at 901-546-2690 (not a toll-free call) or
• Write to Internal Revenue Service Center, Electronic Filing Section, Stop 2711, P.O. Box 30309, Memphis, TN 38130.

Electronic Filing Waiver

The IRS may waive the electronic filing rules if the partnership demonstrates that a hardship would result if it were required to file its return electronically. Partnerships seeking a waiver must request one in the manner prescribed by the IRS. Detailed information regarding how to request a waiver and the information to provide can be found at the following IRS Web site at www.irs.gov/elec_svs/1065-waivr.html

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