U.S. Return of Income for Electing Large Partnerships

Schedule B - Other Information

Question 1

Check box 1f for any other type of entity and state the type.

Question 3

The partnership must answer Yes to Question 3, if during the tax year, it owned:

• An interest in another partnership (foreign or domestic) or
• A foreign entity that was disregarded as an entity separate from the partnership under Regulations sections 301.7701-2 and 301.7701-3.

If the partnership answered Yes to this question, report the following information on an attached schedule:

1. If the partnership owned at least a 10% interest, directly or indirectly, in any other foreign or domestic partnership (other than any partnership for which a Form 8865 is attached to the tax return), show each partnership's name, EIN (if any), and the country under whose laws the partnership was organized.
2. If the partnership owned any entities that have been disregarded as separate from the partnership, show each disregarded entity's name, EIN (if any), and the country under whose laws the partnership was organized.

Note: Clearly indicate whether each entity in the attached schedule is a partnership or a disregarded entity.

Question 4 - Foreign Partners

Answer Yes to Question 4 if the partnership had any foreign partners (for purposes of section 1446) at any time during the tax year. Otherwise, answer No.

If the partnership had gross income effectively connected with a trade or business in the United States and foreign partners, it may be required to withhold tax under section 1446 on income allocable to foreign partners (without regard to distributions) and file Forms 8804, 8805, and 8813.

Question 5

Answer Yes to Question 5 if interests in the partnership are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).

Question 6

Organizers of certain tax shelters are required to register the tax shelters by filing Form 8264 no later than the day on which an interest in the shelter is first offered for sale. Organizers filing a properly completed Form 8264 will receive a tax shelter registration number that they must furnish to their investors. See the Instructions for Form 8264 for the definition of a tax shelter and the investments exempted from tax shelter registration.

Question 7 - Foreign Accounts

Answer Yes to Question 7 if either 1 or 2 below applies to the partnership. Otherwise, check the No box.

1. At any time during the 2001 calendar year, the partnership had an interest in or signature or other authority over a bank account, securities account, or other financial account in a foreign country; and
   • The combined value of the accounts was more than $10,000 at any time during the calendar year and
   • The accounts were not with a U.S. military banking facility operated by a U.S. financial institution.
2. The partnership owns more than 50% of the stock in any corporation that would answer the question Yes based on item 1 above.

Get Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, to see if the partnership is considered to have an interest in or signature or other authority over a bank account, securities account, or other financial account in a foreign country.

If you answered Yes to Question 7, file Form TD F 90-22.1 by June 30, 2002, with the Department of the Treasury at the address shown on the form. Because Form TD F 90-22.1 is not a tax return, do not file it with Form 1065-B. You may order Form TD F 90-22.1 by calling 1-800-TAX-FORM (1-800-829-3676) or you can download it from the IRS Web Site at www.irs.gov.

Question 8

The partnership may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, if:

• It directly or indirectly transferred property or money to a foreign trust. For this purpose, any U.S. person who created a foreign trust is considered a transferor.
• It is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules.
• It received a distribution from a foreign trust.

For more information, see the Instructions for Form 3520.

Note: An owner of a foreign trust must ensure that the trust files an annual information return on Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner.

Schedule D - Capital Gains and Losses

Purpose of Schedule

Use Schedule D (Form 1065-B) to report sales or exchanges of capital assets, capital gain distributions, and nonbusiness bad debts.

Do not report on Schedule D capital gains (losses) specially allocated to any partners. Enter specially allocated capital gains (losses) directly on line 3 or 4 of Schedule K, or on an attachment to line 16 of Schedule K and in box 3, 4, or 9 of Schedule K-1, whichever applies. See How Income Is Shared Among Partners on page 23.

What are Capital Assets?

Each item of property the partnership held (whether or not connected with its trade or business) is a capital asset except:

• Stock in trade or other property included in inventory or held mainly for sale to customers.
• Accounts or notes receivable acquired in the ordinary course of the trade or business for services rendered or from the sale of stock in trade or other property held mainly for sale to customers.
• Depreciable or real property used in the trade or business, even if it is fully depreciated.
• Certain copyrights; literary, musical, or artistic compositions; letters or memoranda; or similar property. See section 1221(a)(3).
• U.S. Government publications, including the Congressional Record, that the partnership received from the Government, other than by purchase at the normal sales price, or that the partnership got from another taxpayer who had received it in a similar way, if the partnership's basis is determined by reference to the previous owner.
• Certain commodities derivative financial instruments held by a dealer. See section 1221(a)(6).
• Certain hedging transactions entered into in the normal course of the trade or business. See section 1221(a)(7).
• Supplies regularly used in the trade or business.

Overview of Large Partnership Provisions

For electing large partnerships, capital gains and losses generally are netted at the partnership level. A partner in a large partnership takes into account separately his distributive share of the partnership's net capital gain or net capital loss. Such net capital gain (loss) is treated as long-term capital gain (loss). The 28% rate gain (loss) is treated in the same manner.

Any excess of net short-term capital gain over net long-term capital loss is not separately stated. Instead, it is consolidated with the partnership's other taxable income.

A partner's distributive share is divided between passive loss limitation activities and other activities. Capital gain (loss) is allocated to passive loss limitation activities to the extent that it is from sales and exchanges of property used in connection with a trade or business or rental activity. Any excess is allocated to other activities (i.e., portfolio income).

Section 1231 gains are also netted at the partnership level. The net gain is generally treated as long-term capital gain. The net loss is treated as an ordinary loss and is included in computing the partnership's taxable income.

Items for Special Treatment

• Use Form 4797, Sales of Business Property, to report (a) sales or exchanges of property used in a trade or business, (b) sales or exchanges of depreciable or amortizable property, (c) sales or other dispositions of securities or commodities held in connection with a trading business, if the partnership made a mark-to-market election (see page 4), (d) involuntary conversions (other than from casualties or thefts), and (e) the disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business).
• Use Form 4684, Casualties and Thefts, to report involuntary conversions of property due to a casualty or theft.
• Gains and losses from section 1256 contracts and straddles are reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.
• An exchange of business or investment property for property of a like kind is reported on Form 8824, Like-Kind Exchanges.
• Transactions by a securities dealer. See section 1236.
• See Pub. 550, Investment Income and Expenses, for information on bonds and other debt instruments.
• For certain real estate subdivided for sale that may be considered a capital asset, see section 1237.
• Gain on the sale of depreciable property to a more than 50%-owned entity, or to a trust in which the partnership is a beneficiary, is treated as ordinary gain.
• For liquidating distributions from a corporation, see Pub. 550.
• See section 1248 for gain on the sale or exchange of stock in certain foreign corporations.
• For gain or loss on options to buy or sell, including closing transactions, see Pub. 550.
• Gain or loss from a short sale of property. See Pub. 550 for details.
• For undistributed capital gains from a regulated investment company or a real estate investment trust, the partnership will receive information on Form 2439.
• See section 84 for the transfer of property to a political organization if the FMV of the property exceeds the partnership's adjusted basis in such property.
• Any loss on the disposition of converted wetland or highly erodible cropland that is first used for farming after March 1, 1986, is reported as a long-term capital loss on Schedule D, but any gain on such a disposition is reported as ordinary income on Form 4797. See section 1257 for details.
• See Rev. Rul. 84-111, 1984-2 C.B. 88, for the transfer of partnership assets and liabilities to a newly formed corporation in exchange for all of its stock.
• See section 897 for the disposition of foreign investment in a U.S. real property interest.
• Any loss from a sale or exchange of property between the partnership and certain related persons is not allowed, except for distributions in complete liquidation of a corporation. See sections 267 and 707(b) for details.
• Any loss from securities that are capital assets that become worthless during the year is treated as a loss from the sale or exchange of a capital asset on the last day of the tax year.
• Gain from the sale or exchange of stock in a collapsible corporation is not a capital gain. See section 341.
• Nonrecognition of gain on sale of stock to an employee stock ownership plan (ESOP) or an eligible cooperative. See section 1042 and Temporary Regulations section 1.1042-1T for rules under which the partnership may elect not to recognize gain from the sale of certain stock to an ESOP or an eligible cooperative.
• A nonbusiness bad debt must be treated as a short-term capital loss and can be deducted only in the year the debt becomes totally worthless. For each bad debt, enter the name of the debtor and Schedule Attached in column (a) of line 1 and the amount of the bad debt as a loss in column (f). Also attach a statement of facts to support each bad debt deduction.
• Any loss from a wash sale of stock or securities (including contracts or options to acquire or sell stock or securities) cannot be deducted unless the partnership is a dealer in stock or securities and the loss was sustained in a transaction made in the ordinary course of the partnership's trade or business. A wash sale occurs if the partnership acquires (by purchase or exchange), or has a contract or option to acquire, substantially identical stock or securities within 30 days before or after the date of the sale or exchange. See section 1091 for more information.
• If the partnership sold property at a gain and it will receive a payment in a tax year after the year of sale, it generally must report the sale on the installment method unless it elects not to. However, the installment method may not be used to report sales of stock or securities traded on an established securities market. Use Form 6252, Installment Sale Income, to report the sale on the installment method. Also use Form 6252 to report any payment received during the tax year from a sale made in an earlier year that was reported on the installment method.

  If the partnership wants to elect out of the installment method, it must report the full amount of the gain on a timely filed return (including extensions). If the partnership filed Form 1065-B on time, the election may be made on an amended return filed no later than 6 months after the due date (excluding extensions) of the original return. Write See attached Form 8082 for AAR per IRC section 6251; Filed pursuant to section 301.9100-2 in the top margin of the amended return, and file it at the same address the original return was filed. See Administrative Adjustment Requests on page 5 for details.

• A sale or other disposition of an interest in a partnership owning unrealized receivables or inventory items may result in ordinary gain or loss. See Pub. 541, Partnerships, for more details.
• Certain constructive ownership transactions. Gain in excess of the gain that would have been recognized if the partnership had held a financial asset directly during the term of a derivative contract must be treated as ordinary income. See section 1260 for details.

Election to recognize gain on assets held on January 1, 2001. Partnerships may elect to treat certain assets held on January 1, 2001, as having been sold and then reacquired on the same date. The purpose of the election is to make the asset eligible for an 18% (instead of 20%) capital gain tax rate upon future disposition. The 18% rate is applicable to the extent the gain would otherwise be taxed to the partner at 20% if the holding period of the asset begins after December 31, 2000, and the asset is held for more than five years.

Any readily tradable stock (that is a capital asset) not sold before January 2, 2001, for which the election is made is deemed to have been sold on January 2, 2001, at its closing market price on that date and reacquired on that date for the same amount. For this purpose, readily tradable stock includes shares issued by an open-end mutual fund. Any other capital asset held on January 1, 2001, for which the election is made is deemed to have been sold and reacquired on January 1, 2001, for its fair market value on that date. Any gain on a deemed sale must be recognized. A loss from a deemed sale is not allowed in any tax year, but the asset will be eligible for the 18% rate on future gain. The basis in the reacquired asset is its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale results in a gain or unallowed loss.

If the partnership makes the election with respect to its interest in another pass-through entity and that pass-through entity makes the election with respect to assets it holds, that pass-through entity's election will be considered to immediately precede the partnership's election for deemed sales that occur on the same day. For purposes of this election, pass-through entities include mutual funds (or other regulated investment companies), real estate investment trusts (REITs), partnerships, estates, trusts and common trust funds.

To make the election, report the deemed sale(s) on Schedule D for the tax year that includes the date of the deemed sale. If the deemed sale results in a loss, enter zero instead of the amount of the loss. Make the election on a share-by-share or asset-by-asset basis. Attach a statement to the return stating that the partnership is making an election under section 311 of the Taxpayer Relief Act of 1997 and listing the asset(s) for which it is making the election. The partnership must file the tax return no later than its due date (including extensions). However, if the partnership timely filed its tax return without making the election for any asset, it can still make the election by filing an amended return within 6 months of the original due date (excluding extensions). Write "See attached Form 8082 for AAR per IRC section 6251; Election Under Section 311 of the Taxpayer Relief Act of 1997" in the top margin of the amended return. Once made, an election for any asset is irrevocable. See Administrative Adjustment Requests on page 5 for details.

Note: This election does not apply to any asset which is disposed of (in a transaction in which gain or loss is recognized in whole or in part) before the close of the 1-year period beginning on the date that the asset would have been treated as sold under this election.

Constructive sale treatment for certain appreciated positions. Generally, the partnership must recognize gain (but not loss) on the date it enters into a constructive sale of any appreciated position in stock, a partnership interest, or certain debt instruments as if the position were disposed of at fair market value on that date.

The partnership is treated as making a constructive sale of an appreciated position when it (or a related person, in some cases) does one of the following:

• Enters into a short sale of the same or substantially identical property (that is, a short sale against the box).
• Enters into an offsetting notional principal contract relating to the same or substantially identical property.
• Enters into a futures or forward contract to deliver the same or substantially identical property.
• Acquires the same or substantially identical property (if the appreciated position is a short sale, offsetting notional principal contract, or a futures or forward contract).

Exception. Generally, constructive sale treatment does not apply if:

• The partnership closed the transaction before the end of the 30th day after the end of the year in which it was entered into,
• The partnership held the appreciated position to which the transaction relates throughout the 60-day period starting on the date the transaction was closed, and
• At no time during that 60-day period was the partnership's risk of loss reduced by holding certain other positions.

For details and other exceptions to these rules, see Pub. 550.

Special rules for traders in securities. Traders in securities are engaged in the business of buying and selling securities for their own account. To be engaged in business as a trader in securities:

• The partnership must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
• The partnership's trading activity must be substantial.
• The partnership must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if a partnership's activity is a business:

• Typical holding periods for securities bought and sold.
• The frequency and dollar amount of the partnership's trades during the year.
• The extent to which the partners pursue the activity to produce income for a livelihood.
• The amount of time devoted to the activity.

Like an investor, a trader must report each sale of securities (taking into account commissions and any other costs of acquiring or disposing of the securities) on Schedule D or on an attached statement containing all the same information for each sale in a similar format. However, if a trader made the mark-to-market election (see page 4), each transaction is reported in Part II of Form 4797 instead of Schedule D. Regardless of whether a trader reports its gains and losses on Schedule D or Form 4797, the gain or loss from the disposition of securities is not taken into account when figuring net earnings from self-employment on Schedules K and K-1. See section 1402(i) for an exception that applies to section 1256 contracts.

The limitation on investment interest expense that applies to investors does not apply to interest paid or incurred in a trading business. A trader reports interest expense and other expenses (excluding commissions and other costs of acquiring or disposing of securities) from a trading business in Part I of Form 1065-B.

A trader also may hold securities for investment. The rules for investors generally will apply to those securities. Allocate interest and other expenses between the partnership's trading business and its investment securities. Investment interest expense is reported on line 7 of Part II, Form 1065-B.

Rollover of gain from qualified stock. If the partnership sold qualified small business stock (defined below) it held for more than 6 months, it may postpone gain if it purchased other qualified small business stock during the 60-day period that began on the date of the sale. The partnership must recognize gain to the extent the sale proceeds exceed the cost of the replacement stock. Reduce the basis of the replacement stock by any postponed gain.

If the partnership chooses to postpone gain, report the entire gain realized on the sale on line 1 or 5. Directly below the line on which the partnership reported the gain, enter in column (a) Section 1045 Rollover and enter as a (loss) in column (f) the amount of the postponed gain. The partnership also must separately state the amount of the gain rolled over on qualified stock under section 1045 on an attachment to Form 1065-B, Schedule K, line 16, because each partner must determine if he or she qualifies for the rollover at the partner level. Also, the partnership must separately state on that line (and not on Schedule D) any gain that would qualify for the section 1045 rollover at the partner level instead of the partnership level (because a partner was entitled to purchase replacement stock) and any gain on qualified stock that could qualify for the 50% exclusion under section 1202.

To be qualified small business stock, the stock must meet all of the following tests:

• It must be stock in a C corporation (that is not S corporation stock).
• It must have been originally issued after August 10, 1993.
• As of the date the stock was issued, the corporation was a qualified small business. A qualified small business is a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.
• The partnership must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation. In certain cases, the partnership may meet the test if it acquired the stock from another person who met this test (such as by gift or inheritance) or through a conversion or exchange of qualified small business stock held by the partnership.
• During substantially all the time the partnership held the stock:
  1. The corporation was a C corporation,
  2. At least 80% of the value of the corporation's assets were used in the active conduct of one or more qualified businesses (defined below), and
  3. The issuing corporation was not a foreign corporation, domestic international sales corporation (DISC), former DISC, interest charge domestic international sales corporation (IC-DISC), former IC-DISC, corporation that has made (or that has a subsidiary that has made) a section 936 election, regulated investment company (RIC), real estate investment trust (REIT), real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT), or cooperative.

Note: A specialized small business investment company (SSBIC) is treated as having met test 2 above.

A qualified business is any business other than the following:

• One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.
• One whose principal asset is the reputation or skill of one or more employees.
• Any banking, insurance, financing, leasing, investing, or similar business.
• Any farming business (including raising or harvesting of trees).
• Any business involving the production of products for which percentage depletion can be claimed.
• Any business of operating a hotel, motel, restaurant, or similar business.

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