Changes To Note

• Additional guidance has been issued allowing qualifying small businesses to use the cash method of accounting. For details, see Rev. Proc. 2002-28, 2002-18, I.R.B. 815. Also see Cost of Goods Sold on page 18.
• As a result of changes to the North American Industry Classification System, some of the codes for Principal Business Activities have changed beginning in 2002. These changes have mainly occurred in the Construction, Wholesale Trade, and Information sectors. See pages 33 through 35 for the new applicable codes that should be entered in item C of page 1 of Form 1065-B.
• For tax years ending on or after December 31, 2001, if the partnership must make a section 481(a) adjustment because of an accounting method change, the adjustment period for a negative adjustment is now 1 year. For details, including special rules and exceptions, see Rev. Proc. 2002-19, 2002-13 I.R.B. 696, as amplified and clarified by Rev. Proc. 2002-54, 2002-35 I.R.B. 432, and Change in accounting method on page 5.
• Additional guidance was issued regarding the procedures under which a taxpayer may obtain automatic consent of the Commissioner to change certain methods of accounting. See Rev. Proc. 2002-9, 2002-3 I.R.B. 327, as modified and clarified by Rev. Proc. 2002-19 and 2002-54.
• The partnership must file a disclosure statement for each reportable tax shelter transaction in which it participated, directly or indirectly, if the transaction is reasonably expected to affect any partner's Federal income tax liability. See Tax shelter disclosure statement on page 7 for more details.

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:

• Order IRS products on-line.
• 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, 2002 Federal Tax Products 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 $22 (no handling fee), or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD-ROM for $22 (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.

General Instructions

Purpose of Form

Form 1065-B is an information return used to report the income, deductions, gains, losses, etc., from the operation of an electing large partnership (as defined in section 775). An electing large partnership may be required to pay certain taxes, such as recapture of the investment credit, but generally it passes through any profits or losses to its partners. Partners must include these partnership items on their tax returns.

A regular partnership is required to separately report to each partner the partner's distributive share of any item of income, gain, loss, deduction, or credit that if separately taken into account by any partner would result in an income tax liability for that partner different from that which would result if the item was not taken into account separately. Unlike a regular partnership, an electing large partnership combines most items at the partnership level and passes through net amounts to partners. These electing large partnership rules override the regular partnership tax rules to the extent they are inconsistent with the regular partnership tax rules.

Electing Large Partnership Status

A partnership chooses electing large partnership status by filing Form 1065-B instead of Form 1065. The election applies to the tax year for which it was made and all later tax years and cannot be revoked without IRS consent.

To make the election, the partnership must have had 100 or more partners during the preceding tax year. Thus, a partnership cannot make the election for its first tax year. The number of partners is determined by counting only persons directly holding partnership interests, including persons holding through nominees. Service partners are not counted as partners for this purpose. Service partners are those partners who perform substantial services in connection with the partnership's activities or who have performed such services in the past.

Service partnerships are not eligible to make the election if substantially all of the partners are:

• Individuals performing substantial services in connection with the partnership's activities.
• Personal service corporations with the owner-employees performing the services.
• Retired partners who had performed the services.
• Spouses of partners performing or who had performed the services.

In addition, commodity partnerships are not eligible to make the election. Commodity partnerships have as their principal activity the buying and selling of commodities (other than inventory described in section 1221(a)(1)) or options, futures, or forwards relating to commodities.

Once a partnership has made an election by filing Form 1065-B, this treatment on the return will bind the partnership and all of its partners. The IRS, however, is not bound by the treatment on the return. To the extent provided in future regulations, a partnership may cease to be treated as an electing large partnership for a tax year in which the number of its partners falls below 100.

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.

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.

Termination of the Partnership

An electing large partnership terminates when 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. Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period.

The partnership's tax year ends on the date of termination which is the date the partnership winds up its affairs.

Special rules apply in the case of a merger, consolidation, or division of a partnership. See Regulations section 1.708-1(b)(2) for details.

When To File

Generally, a domestic partnership must file Form 1065-B by the 15th day of the 4th month following the date its tax year ended as shown at the top of Form 1065-B. For partnerships that keep their records and books of account outside the United States and Puerto Rico, an extension of time to file and pay is granted to the 15th day of the 6th month following the close of the tax year. If the due date falls on a Saturday, Sunday, or legal holiday, file by the next business day.

Caution:   Unlike regular partnerships, an electing large partnership is required to furnish Schedules K-1 to its partners by the first March 15 following the close of the partnership's tax year.

Private Delivery Services

The partnership can use certain private delivery services designated by the IRS to meet the timely mailing as timely filing/paying rule for Form 1065-B. The most recent list of designated private delivery services was published by the IRS in September 2002. The list includes only the following:

• Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, Second Day Service.
• DHL Worldwide Express (DHL): DHL Same Day Service, DHL USA Overnight.
• Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
• United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Extension

If you need more time to file a partnership return, file Form 8736, Application for Automatic Extension of Time To File U.S. Return for a Partnership, REMIC, or for Certain Trusts, for an automatic 3-month extension. File Form 8736 by the regular due date of the partnership return. The automatic 3-month extension period includes any 2-month extension granted to partnerships that keep their records and books of account outside the United States and Puerto Rico.

If, after you have filed Form 8736, you still need more time to file the partnership return, file Form 8800, Application for Additional Extension of Time To File U.S. Return for a Partnership, REMIC, or for Certain Trusts, for an additional extension of up to 3 months. The partnership must provide a full explanation of the reasons for requesting the extension in order to get this additional extension. Form 8800 must be filed by the extended due date of the partnership return.

Period Covered

Form 1065-B is an information return for calendar year 2002 and fiscal years beginning in 2002 and ending in 2003. If the return is for a fiscal year or a short tax year, fill in the tax year space at the top of the form.

Where To File

Note:   For 2002, Form 1065-B cannot be filed electronically or on magnetic media.

File Form 1065-B with the Internal Revenue Service Center, Ogden, UT 84201.

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