Specific Instructions

Columns (b) and (c) - Date Acquired and Date Sold

Use the trade dates for date acquired and date sold for stocks and bonds traded on an exchange or over-the-counter market. The acquisition date for an asset the partnership held on January 1, 2001, for which it made an election to recognize any gain on a deemed sale, is the date of the deemed sale.

Column (d) - Sales Price

Enter in this column either the gross sales price or the net sales price from the sale. On sales of stocks and bonds, report the gross amount as reported to the partnership by the partnership's broker on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or similar statement. However, if the broker advised the partnership that gross proceeds (gross sales price) less commissions and option premiums were reported to the IRS, enter that net amount in column (d).

Column (e) - Cost or Other Basis

In general, the cost or other basis is the cost of the property plus purchase commissions and improvements and minus depreciation, amortization, and depletion. If the partnership got the property in a tax-free exchange, involuntary conversion, or wash sale of stock, it may not be able to use the actual cash cost as the basis. If the partnership does not use cash cost, attach an explanation of the basis.

If the partnership sold stock, adjust the basis by subtracting all the stock-related nontaxable distributions received before the sale. This includes nontaxable distributions from utility company stock and mutual funds. Also adjust the basis for any stock splits or stock dividends.

If the partnership elected to recognize gain on an asset held on January 1, 2001, its basis in the asset is its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale resulted in a gain or an unallowed loss.

If a charitable contribution deduction is allowed because of a bargain sale of property to a charitable organization, the adjusted basis for purposes of determining gain from the sale is the amount which has the same ratio to the adjusted basis as the amount realized has to the fair market value.

See section 852(f) for the treatment of certain load charges incurred in acquiring stock in a mutual fund with a reinvestment right.

If the gross sales price is reported in column (d), increase the cost or other basis by any expense of sale, such as broker's fees, commissions, or option premiums, before making an entry in column (e).

For more details, see Pub. 551, Basis of Assets.

Column (f) - Gain or (Loss)

Make a separate entry in this column for each transaction reported on lines 1 and 5 and any other lines that apply to the partnership. For lines 1 and 5, subtract the amount in column (e) from the amount in column (d). Enter negative amounts in parentheses.

Column (g) - 28% Rate Gain or (Loss)

Enter in column (g) only the amount, if any, from Part II, column (f), that is from collectibles gains and losses. A collectibles gain or loss is any long-term gain or deductible long-term loss from the sale or exchange of a collectible that is a capital asset.

Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible property.

Also include gain (but not loss) from the sale or exchange of an interest in a partnership or trust held for more than 1 year and attributable to unrealized appreciation of collectibles. For details, see Regulations section 1.1(h)-1. Also attach the statement required under Regulations section 1.1(h)-1(e).

Capital Gains and Losses From Other Partnerships, Estates, and Trusts

See the Schedule K-1 or other information supplied to you by the other partnership, estate, or trust. Enter the gains (losses) on line 1 or 5, whichever applies. Do not complete columns (a) through (e). Instead, write From Schedule K-1 (Form 1065, 1065-B, or 1041) across these columns.

Schedules K and K-1 - Partners' Shares of Income, Credits, Deductions, etc.

Purpose of Schedules

The partners are liable for tax on their shares of the partnership income, whether or not distributed, and must include their shares on their tax returns.

Schedule K   (page 4 of Form 1065-B) is a summary schedule of all the partners' shares of the partnership's income, credits, deductions, etc.

Schedule K-1   (Form 1065-B) shows each partner's separate share. Attach a copy of each Schedule K-1 to the Form 1065-B filed with the IRS; keep a copy with a copy of the partnership return as a part of the partnership's records; and furnish a copy to each partner. If a partnership interest is held by a nominee on behalf of another person, the partnership may be required to furnish Schedule K-1 to the nominee. See Temporary Regulations sections 1.6031(b)-1T and 1.6031(c)-1T for more information.

Give each partner a copy of either the Partner's Instructions for Schedule K-1 (Form 1065-B) or specific instructions for each item reported on the partner's Schedule K-1 (Form 1065-B).

Substitute Forms

The partnership does not need IRS approval to use a substitute Schedule K-1 if it is an exact copy of the IRS schedule, or if it contains only those boxes the taxpayer is required to use. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The partnership must provide each partner with the Partner's Instructions for Schedule K-1 (Form 1065-B) or other prepared specific instructions.

The partnership must request IRS approval to use other substitute Schedules K-1. To request approval, write to Internal Revenue Service, Attention: Substitute Forms Program, W:CAR:MP:FP:S:SP, 1111 Constitution Avenue, NW, Washington, DC 20224.

Each partner's information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.

The partnership may be subject to a penalty if it files Schedules K-1 that do not conform to the specifications of Rev. Proc. 2002-60, 2002-40 I.R.B. 645.

How Income Is Shared Among Partners

Generally, allocate shares of income, gain, loss, deduction, or credit among the partners according to the partnership agreement for sharing income or loss. However, partners may agree to allocate specific items in a ratio different from the ratio for sharing income or loss.

In determining the amounts required to be separately taken into account by a partner, those provisions of the large partnership rules governing computation of taxable income are applied separately with respect to that partner by taking into account that partner's distributive share of the partnership's items of income, gain, loss, deduction, or credit. This rule permits partnerships to make otherwise valid special allocations of partnership items to partners.

Report the specially allocated items in the appropriate box of the applicable partner's Schedule K-1 and the total on the appropriate line of Schedule K, instead of on Parts I or II of Form 1065-B or Schedules A or D. For example, specially allocated net capital gain from passive activities is entered in box 3 of Schedule K-1, and the total is entered on line 3c of Schedule K, along with any net capital gain from line 18 of Schedule D (Form 1065-B).

If a partner's interest changed during the year, see section 706(d) before determining each partner's distributive share of any item of income, gain, loss, deduction, etc. Income (loss) is allocated to a partner only for the part of the year in which that person is a member of the partnership. The partnership will either allocate on a daily basis or divide the partnership year into segments and allocate income, loss, or special items in each segment among the persons who were partners during that segment. Partnerships that report their income on the cash basis must allocate interest expense, taxes, and any payment for services or for the use of property on a daily basis if there is any change in any partner's interest during the year. See Pub. 541 for more details.

Special rules on the allocation of income, gain, loss, and deductions generally apply if a partner contributes property to the partnership and the FMV of that property at the time of contribution differs from the contributing partner's adjusted tax basis. Under these rules, the partnership must use a reasonable method of making allocations of income, gain, loss, and deductions from the property so that the contributing partner receives the tax burdens and benefits of any built-in gain or loss (for example, precontribution appreciation or diminution of value of the contributed property). See Regulations section 1.704-3 for details on how to make these allocations, including a description of specific allocation methods that are generally reasonable.

See Dispositions of Contributed Property on page 9 for special rules on the allocation of income, gain, loss, and deductions on the disposition of property contributed to the partnership by a partner.

If the partnership agreement does not provide for the partner's share of income, gain, loss, deduction, or credit, or if the allocation under the agreement does not have substantial economic effect, the partner's share is determined according to the partner's interest in the partnership. See Regulations section 1.704-1 for more information.

Specific Instructions for Schedules K and K-1

Generally, the partnership is required to prepare and give a Schedule K-1 to each person who was a partner in the partnership at any time during the year.

However, if a foreign partnership meets each of the following four requirements, it is not required to file or provide Schedule K-1 for foreign partners (unless the foreign partner is a passthrough entity through which a U. S. person holds an interest in the foreign partnership):

• The partnership had no gross income effectively connected with the conduct of a trade or business within the United States 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.
• The partnership is not a withholding foreign partnership as defined in Regulations section 1.1441-5(c).

Generally, any person who holds an interest in a partnership as a nominee for another person must furnish to the partnership the name, address, etc., of the other person.

On each Schedule K-1, enter the names, addresses, and identifying numbers of the partner and partnership and the partner's distributive share of each item.

For an individual partner, enter the partner's social security number (SSN) or individual taxpayer identification number (ITIN). For all other partners, enter the partner's EIN. However, if a partner is an individual retirement arrangement (IRA), enter the identifying number of the custodian of the IRA. Do not enter the SSN of the person for whom the IRA is maintained.

Foreign partners without a U.S. taxpayer identifying number should be notified by the partnership of the necessity of obtaining one. Certain aliens who are not eligible to obtain an SSN can apply for an ITIN on Form W-7, Application for IRS Individual Taxpayer Identification Number.

If a husband and wife each had an interest in the partnership, prepare a separate Schedule K-1 for each of them. If a husband and wife held an interest together, prepare one Schedule K-1 if the two of them are considered to be one partner.

Using the codes beginning on page 30, box 9 of Schedule K-1 can be used to report several items. If more space is needed, include the information in an attachment to box 9.

Due date.   Unlike other partnerships, an electing large partnership must provide a Schedule K-1 to each partner by the first March 15 following the close of the partnership's tax year. For calendar year 2002 partnerships, the due date is March 15, 2003.

Partner's Share of Liabilities (Schedule K-1)

Enter each partner's share of:

• Nonrecourse liabilities.
• Partnership-level qualified nonrecourse financing.
• Other liabilities.

Nonrecourse liabilities are those liabilities of the partnership for which no partner bears the economic risk of loss. The extent to which a partner bears the economic risk of loss is determined under the rules of Regulations section 1.752-2. Do not include partnership-level qualified nonrecourse financing (defined below) on the line for nonrecourse liabilities.

If the partner terminated his or her interest in the partnership during the year, enter the share that existed immediately before the total disposition. In all other cases, enter it as of the end of the year.

If the partnership is engaged in two or more different types of at-risk activities, or a combination of at-risk activities and any other activity, attach a statement showing the partner's share of nonrecourse liabilities, partnership-level qualified nonrecourse financing, and other liabilities for each activity. See Pub. 925, Passive Activity and At-Risk Rules, to determine if the partnership is engaged in more than one at-risk activity.

The at-risk rules of section 465 generally apply to any activity carried on by the partnership as a trade or business or for the production of income. These rules generally limit the amount of loss and other deductions a partner can claim from any partnership activity to the amount for which that partner is considered at risk. However, for partners who acquired their partnership interests before 1987, the at-risk rules do not apply to losses from an activity of holding real property the partnership placed in service before 1987. The activity of holding mineral property does not qualify for this exception. Identify on an attachment to Schedule K-1 the amount of any losses that are not subject to the at-risk rules.

If the partnership is engaged in an activity subject to the limitations of section 465(c)(1) (such as films or videotapes, leasing section 1245 property, farming, or oil and gas property), give each partner his or her share of the total pre-1976 losses from that activity for which there existed a corresponding amount of nonrecourse liability at the end of each year in which the losses occurred. See Form 6198, At-Risk Limitations, and related instructions for more information.

Qualified nonrecourse financing secured by real property used in an activity of holding real property that is subject to the at-risk rules is treated as an amount at risk. Qualified nonrecourse financing generally includes financing for which no one is personally liable for repayment that is borrowed for use in an activity of holding real property and that is loaned or guaranteed by a Federal, state, or local government or that is borrowed from a qualified person. Qualified persons include any person actively and regularly engaged in the business of lending money, such as a bank or savings and loan association. Qualified persons generally do not include related parties (unless the nonrecourse financing is commercially reasonable and on substantially the same terms as loans involving unrelated persons), the seller of the property, or a person who receives a fee for the partnership's investment in the real property. See section 465 for more information on qualified nonrecourse financing.

The partner as well as the partnership must meet the qualified nonrecourse rules. Therefore, the partnership must enter on an attached statement any other information the partner needs to determine if the qualified nonrecourse rules are also met at the partner level.

Tax Shelter Registration Number (Schedule K-1)

If the partnership is a registration-required tax shelter or has invested in a registration-required tax shelter, it must enter the tax shelter registration number on Schedule K-1. Also, a partnership that has invested in a registration-required tax shelter must furnish a copy of its Form 8271 to its partners. See Form 8271 for more details.

Note:   The following line numbers correspond with Schedule K. However, each line instruction also provides reporting information for Schedule K-1. Letter codes required for entries in box 9 of Schedule K-1 begin on page 30.

Line 1 - Taxable Income (Loss) From Passive Loss Limitation Activities

Enter the amount from Form 1065-B, page 1, line 25, on Schedule K, line 1a. Enter the income or loss without reference to (a) the basis of the partners' interests in the partnership, (b) the partners' at-risk limitations, or (c) the passive activity limitations. These limitations, if applicable, are determined at the partner level.

Allocate the income (loss) from passive loss limitation activities (line 1a of Schedule K) to interests held as a general partner as follows:

Step 1. Allocate the amount reported on line 1a to the following categories:

• Trade or business activities.
• Rental real estate activities.
• Other rental activities.

Step 2. Report on lines 1b(1), 1b(2), and 1b(3) of Schedule K that portion of each amount from Step 1 that will be allocated to interests held as a general partner (the combined distributive shares and any separate allocations for all general partner interests).

General partners in an electing large partnership must separately account for any items attributable to passive loss limitation activities to the extent necessary to comply with the passive activity rules.

Because general partners must comply with the passive activity rules, report the information on lines 1b(1), 1b(2), and 1b(3) of Schedule K separately for each activity of the partnership using Codes A1, B1, and C1 in box 9 of Schedule K-1. The remaining amount on line 1d of Schedule K is reported in box 1 of Schedule K-1 for limited partners (including interests held as a limited partner by general partners).

Line 2 - Taxable Income (Loss) From Other Activities

On Schedule K enter the amount from Form 1065-B, Part II, line 13. Report amounts for both general and limited partners in box 2 of Schedule K-1.

Qualified 5-Year Gain Worksheet (Keep for your records.)

1.	Enter the total gains reported on line 5, column (f), of Schedule D from dispositions of property held more than 5 years. Do not reduce these gains by any losses	1.
2.	Enter the total of all gains from dispositions of property held more than 5 years from Form 4797, Part I, but only if Form 4797, line 7, is more than zero. Do not reduce these gains by any losses	2.
3.	Enter the total of all capital gains from dispositions of property held more than 5 years from Form 4684, line 4 (but only if Form 4684, line 15, is more than zero); Form 6252; Form 6781, Part II; and Form 8824. Do not reduce these gains by any losses	3.
4.	Enter the total of any qualified 5-year gain reported to the partnership from (a) a RIC or a REIT or (b) a partnership, S corporation, estate, or trust (do not include gains from section 1231 property; take them into account on line 2 above, but only if Form 4797, line 7, is more than zero)	4.
5.	Add lines 1 through 4	5.
6.	Enter the part, if any, of the gain on line 5 that is attributable to section 1202 qualified small business stock or 28% rate gain or included on line 6, 10, or 11 of the Unrecaptured Section 1250 Gain Worksheet on page 30	6.
7.	Subtract line 6 from line 5	7.
8.	Redetermine the amount on line 7 by taking into account only gains from passive loss limitation activities. Enter on Schedule K, line 3b. Report this amount to all partners using Code Q in box 9 of Schedule K-1	8.
9.	Subtract line 8 from line 7. Enter on Schedule K, line 4b. Report this amount to all partners using Code Q in box 9 of Schedule K-1	9.
Note: If amounts are reported on both lines 8 and 9, add them together and report them as a single amount in box 9 of Schedule K-1 using Code Q.

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