assignment of shares in partnership

Assignment Of Partnership Interest

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What is an assignment of partnership interest.

• Information about the partnership like the name of the business
• The type of interest being transferred
• The names and information of both the assignor and the assignee
• Information about the remaining partners

Common Sections in Assignments Of Partnership Interest

Below is a list of common sections included in Assignments Of Partnership Interest. These sections are linked to the below sample agreement for you to explore.

Assignment Of Partnership Interest Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.37 15 dex1037.htm FORM OF AGREEMENT AND ASSIGNMENT OF PARTNERSHIP INTEREST , Viewed October 25, 2021, View Source on SEC .

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Lawyers with backgrounds working on assignments of partnership interest work with clients to help. Do you need help with an assignment of partnership interest?

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Jason has been providing legal insight and business expertise since 2001. He is admitted to both the Virginia Bar and the Texas State Bar, and also proud of his membership to the Fellowship of Ministers and Churches. Having served many people, companies and organizations with legal and business needs, his peers and clients know him to be a high-performing and skilled attorney who genuinely cares about his clients. In addition to being a trusted legal advisor, he is a keen business advisor for executive leadership and senior leadership teams on corporate legal and regulatory matters. His personal mission is to take a genuine interest in his clients, and serve as a primary resource to them.

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Legal Templates

Home Business Assignment Agreement Partnership Interest

Assignment of Partnership Interest Form

Use our free Assignment of Partnership Interest to sell a stake in a partnership to a new partner.

Updated February 5, 2024 Reviewed by Brooke Davis

A partner uses an Assignment of Partnership Interest form to sell their interest in the partnership to a new partner. Through the Assignment of Partnership Interest, the potential new partner (known as “the assignee”) agrees to pay the current partner (known as “the assignor”) in exchange for all the financial interests and obligations included in the partnership rights.

Keep in mind that in some cases, full partnership rights cannot be sold to the new partner unless all current partners also agree. Economic partnership rights, however, can still be sold without the agreement of all partners.

What is an Assignment of Partnership Interest?

When is a partnership assignment needed, the consequences of not having a partnership assignment, common uses for an assignment of partnership interest, what should be included in a partnership assignment, assignment of partnership interests sample.

An Assignment of Partnership Interest is a legal document that transfers the rights to receive benefits from an original business partner (“Assignor”) to a new business partner (“Assignee”).

It’s essential to learn about the types of partnerships and potential advantages and disadvantages of a partnership before entering into this business relationship.

This document will identify the following essential elements:

• Partnership Details : legal name of the business, its purpose, and date established
• Assignee : name and address of the new partner receiving the business interest
• Assignor : name and address of the old partner giving the business interest
• Partners : name and address of the remaining partners of the business
• Consideration : the amount of money exchanged for the business transfer
• Closing Date : when the assignment will end
• Signatures : all members of the original partnership and the assignee must sign

This document is needed to formally document a business transaction between the old and new partners.

Some partnership agreements contain a right of first refusal so that the original partners have a right to purchase the interest before an outside party. [1]

What happens if I do not have one?

Without this document, neither the old nor new partners are legally obligated to follow through with their promises to buy or sell the business’s shares. The Assignment may also clarify whether the new partner has the right to participate in the business’s operation, finances, or management.

For example, a full-fledged partner usually has the right to inspect the books, take possession of partnership property, and make decisions with other partners.

Otherwise, the new partner only has the right to receive a share of the profits and any distributions if the partnership ends.

Most partnership agreements only allow the transfer of the partner’s interest in the business so that the new partner can only receive the old partner’s share of the money but not have a say in the business operations or finances.

An Assignment of Partnership Interest is usually just one of several legal documents needed during the sale process. A Confidentiality Agreement plus a Purchase Order are also used to complete the transaction.

Here are just a few of the situations when this document is commonly used:

• Cash flow needs of the business change [2]
• Business assets are allocated differently
• The strategy of the partnership changes
• The regulatory environment presents new challenges

An Assignment of Partnership Interest should generally address the following:

• Who will be giving and receiving the business interest
• What rights does the assignee have in terms of operation or management
• Where is the business partnership located
• When was the partnership first established
• How much will the old partner receive in return for giving a part of their interests

Here’s what an assignment of partnership interests typically looks like:

Use can download the free template in PDF & Word format or use our document builder to help guide you through the writing process.

Legal Templates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we keep our content accurate, reliable and trustworthy.

• Assignment of Partnership Interests. http://delcode.delaware.gov/title6/c017/sc07/index.shtml
• ADAM HAYES. Cash Flow. https://www.investopedia.com/terms/c/cashflow.asp

Related Documents

• Purchase Agreement : Outlines the terms and conditions of an item sale.
• Business Purchase Agreement : A legally enforceable contract that documents the sale of a business.
• Stock Purchase Agreement : Record the purchase of stock and protect the buying and selling parties.
• Shareholder Agreement : Use this document to explain the structure and nature of shareholders' relationships to the corporation and to one another.
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Tax issues to consider when a partnership interest is transferred.

By Colleen McHugh - Co‑Partner‑in‑Charge, Alternative Investments

There can be several tax consequences as a result of a transfer of a partnership interest during the year. This article discusses some of those tax issues applicable to the partnership.

Adjustments to the Basis of Partnership Property Upon a transfer of a partnership interest, the partnership may elect to, or be required to, increase/decrease the basis of its assets. The basis adjustments will be for the benefit/detriment of the transferee partner only.

• If the partnership has a special election in place, known as an IRS Section 754 election, or will make one in the year of the transfer, the partnership will adjust the basis of its assets as a result of the transfer. IRS Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner.
• The partnership will be required to adjust the basis of its assets when an interest in the partnership is transferred if the total adjusted basis of the partnership’s assets is greater than the total fair market value of the partnership’s assets by more than $250,000 at the time of the transfer.

Ordinary Income Recognized by the Transferor on the Sale of a Partnership Interest Typically, when a partnership interest is sold, the transferor (seller) will recognize capital gain/loss. However, a portion of the gain/loss could be treated as ordinary income to the extent the transferor partner exchanges all or a part of his interest in the partnership attributable to unrealized receivables or inventory items. (This is known as “Section 751(a) Property” or “hot” assets).

• Unrealized receivables – includes, to the extent not previously included in income, any rights (contractual or otherwise) to payment for (i) goods delivered, or to be delivered, to the extent the proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or (ii) services rendered, or to be rendered.
• Property held primarily for sale to customers in the ordinary course of a trade or business.
• Any other property of the partnership which would be considered property other than a capital asset and other than property used in a trade or business.
• Any other property held by the partnership which, if held by the selling partner, would be considered of the type described above.

Example – Partner A sells his partnership interest to D and recognizes gain of $500,000 on the sale. The partnership holds some inventory property. If the partnership sold this inventory, Partner A would be allocated $100,000 of that gain. As a result, Partner A will recognize $100,000 of ordinary income and $400,000 of capital gain.

The partnership needs to provide the transferor with sufficient information in order to determine the amount of ordinary income/loss on the sale, if any.

Termination/Technical Termination of the Partnership A transfer of a partnership interest could result in an actual or technical termination of the partnership.

• The partnership will terminate on the date of transfer if there is one tax owner left after the transfer.
• The partnership will have a technical termination for tax purposes if within a 12-month period there is a sale or exchange of 50% or more of the total interest in the partnership’s capital and profits.

Example – D transfers its 55% interest to E. The transfer will result in the partnership having a technical termination because 50% or more of the total interest in the partnership was transferred. The partnership will terminate on the date of transfer and a “new” partnership will begin on the day after the transfer.

Allocation of Partnership Income to Transferor/Transferee Partners When a partnership interest is transferred during the year, there are two methods available to allocate the partnership income to the transferor/transferee partners: the interim closing method and the proration method.

• Interim closing method – Under this method, the partnership closes its books with respect to the transferor partner. Generally, the partnership calculates the taxable income from the beginning of the year to the date of transfer and determines the transferor’s share of that income. Similarly, the partnership calculates the taxable income from the date after the transfer to the end of the taxable year and determines the transferee’s share of that income. (Note that certain items must be prorated.)

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the interim closing method, the partnership calculates the taxable income from 1/1 – 6/30 to be $100,000 and from 7/1-12/31 to be $50,000. Partner A will be allocated $10,000 [$100,000*10%] and Partner H will be allocated $5,000 [$50,000*10%].

• Proration method – this method is allowed if agreed to by the partners (typically discussed in the partnership agreement). Under this method, the partnership allocates to the transferor his prorata share of the amount of partnership items that would be included in his taxable income had he been a partner for the entire year. The proration may be based on the portion of the taxable year that has elapsed prior to the transfer or may be determined under any other reasonable method.

Example – Partner A transfers his 10% interest to H on June 30. The partnership’s taxable income for the year is $150,000. Under the proration method, the income is treated as earned $74,384 from 1/1 – 6/30 [181 days/365 days*$150,000] and $75,616 from 7/1-12/31 [184 days/365 days*$150,000]. Partner A will be allocated $7,438 [$74,384*10%] and Partner H will be allocated $7,562 [$75,616*10%]. Note that this is one way to allocate the income. The partnership may use any reasonable method.

Change in Tax Year of the Partnership The transfer could result in a mandatory change in the partnership’s tax year. A partnership’s tax year is determined by reference to its partners. A partnership may not have a taxable year other than:

• The majority interest taxable year – this is the taxable year which, on each testing day, constituted the taxable year of one or more partners having an aggregate interest in partnership profits and capital of more than 50%.

Example – Partner A, an individual, transfers his 55% partnership interest to Corporation D, a C corporation with a year-end of June 30. Prior to the transfer, the partnership had a calendar year-end. As a result of the transfer, the partnership will be required to change its tax year to June 30 because Corporation D now owns the majority interest.

• If there is no majority interest taxable year or principal partners, (a partner having a 5% or more in the partnership profits or capital) then the partnership adopts the year which results in the least aggregate deferral.

Change in Partnership’s Accounting Method A transfer of a partnership interest may require the partnership to change its method of accounting. Generally, a partnership may not use the cash method of accounting if it has a C corporation as a partner. Therefore, a transfer of a partnership interest to a C corporation could result in the partnership being required to change from the cash method to the accrual method.

As described in this article, a transfer of a partnership interest involves an analysis of several tax consequences. An analysis should always be done to ensure that any tax issues are dealt with timely.

If you or your business are involved in a transfer described above, please contact your Marcum Tax Professional for guidance on tax treatment.

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Assignment of Membership Interest: The Ultimate Guide for Your LLC

LegalGPS : May 9, 2024 at 12:00 PM

As a business owner, there may come a time when you need to transfer ownership of your company or acquire additional members. In these situations, an assignment of membership interest is a critical step in the process. This blog post aims to provide you with a comprehensive guide on everything you need to know about the assignment of membership interest and how to navigate the procedure efficiently. So, let's dive into the world of LLC membership interest transfers and learn how to secure your business!

Table of Contents

Necessary approvals and consent, impact on ownership, voting, and profit rights, complete assignment, partial assignment.

• Key elements to include

Step 1: Gather Relevant Information

Step 2: review the llc's operating agreement, step 3: obtain necessary approvals and consents, step 4: outline the membership interest being transferred, step 5: determine the effective date of the assignment, step 6: specify conditions and representations, step 7: address tax and liability issues, step 8: draft the entire agreement and governing law clauses, step 9: review and sign the assignment agreement.

• Advantages of using a professionally-created template
• How our contract templates stand out from the rest

Frequently Asked Questions (FAQs) about Assignment of Membership Interest

Do you need a lawyer for this.

What is an Assignment of Membership Interest?

An assignment of membership interest is a document that allows a member of an LLC to transfer their ownership share in the company to another person or entity. This can be done in the form of a sale or gift, which are two different scenarios that generally require different types of paperwork. An assignment is typically signed by the parties involved and delivered to the Secretary of State's office for filing. However, this process can vary depending on where you live and whether your LLC has members other than yourself as well as additional documents required by state law.

Before initiating the assignment process, it's essential to review the operating agreement of your LLC, as it may contain specific guidelines on how to assign membership interests.

Often, these agreements require the express consent of the other LLC members before any assignment can take place. To avoid any potential disputes down the line, always seek the required approvals before moving forward with the assignment process.

It's essential to understand that assigning membership interests can affect various aspects of the LLC, including ownership, voting rights, and profit distribution. A complete assignment transfers all ownership rights and obligations to the new member, effectively removing the original member from the LLC. For example, if a member assigns his or her interest, the new member inherits all ownership rights and obligations associated with that interest. This includes any contractual obligations that may be attached to the membership interest (e.g., a mortgage). If there is no assignment of interests clause in your operating agreement, then you will need to get approval from all other members for an assignment to take place.

On the other hand, a partial assignment permits the original member to retain some ownership rights while transferring a portion of their interest to another party. To avoid unintended consequences, it's crucial to clearly define the rights and responsibilities of each party during the assignment process.

Types of Membership Interest Transfers

Membership interest transfers can be either complete or partial, depending on the desired outcome. Understanding the differences between these two types of transfers is crucial in making informed decisions about your LLC.

A complete assignment occurs when a member transfers their entire interest in the LLC to another party, effectively relinquishing all ownership rights and obligations. This type of transfer is often used when a member exits the business or when a new individual or entity acquires the LLC.

For example, a member may sell their interest to another party that is interested in purchasing their share of the business. Complete assignment is also used when an individual or entity wants to purchase all of the interests in an LLC. In this case, the seller must receive unanimous approval from the other members before they can transfer their entire interest.

Unlike a complete assignment, a partial assignment involves transferring only a portion of a member's interest to another party. This type of assignment enables the member to retain some ownership in the business, sharing rights, and responsibilities proportionately with the new assignee. Partial assignments are often used when adding new members to an LLC or when existing members need to redistribute their interests.

A common real-world example is when a member receives an offer from another company to purchase their interest in the LLC. They might want to keep some ownership so that they can continue to receive profits from the business, but they also may want out of some of the responsibilities. By transferring only a partial interest in their membership share, both parties can benefit: The seller receives a lump sum payment for their share of the LLC and is no longer liable for certain financial obligations or other tasks.

How to Draft an Assignment of Membership Interest Agreement

A well-drafted assignment of membership interest agreement can help ensure a smooth and legally compliant transfer process. Here is a breakdown of the key elements to include in your agreement, followed by a step-by-step guide on drafting the document.

Key elements to include:

The names of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name of your LLC and the state where it was formed

A description of the membership interest being transferred (percentage, rights, and obligations)

Any required approvals or consents from other LLC members

Effective date of the assignment

Signatures of all parties involved, including any relevant witnesses or notary public

Before you begin drafting the agreement, gather all pertinent data about the parties involved and the membership interest being transferred. You'll need information such as:

The names and contact information of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name and formation details of your LLC, including the state where it was registered

The percentage and value of the membership interest being transferred

Any specific rights and obligations associated with the membership interest

Examine your LLC's operating agreement to ensure you adhere to any predetermined guidelines on assigning membership interests. The operating agreement may outline specific procedures, required approvals, or additional documentation necessary to complete the assignment process.

If your LLC doesn't have an operating agreement or if it's silent on this matter, follow your state's default LLC rules and regulations.

Before drafting the assignment agreement, obtain any necessary approvals or consents from other LLC members as required by the operating agreement or state law. You may need to hold a members' meeting to discuss the proposed assignment and document members' consent in the form of a written resolution.

Detail the membership interest being transferred in the Assignment of Membership Interest Agreement. Specify whether the transfer is complete or partial, and include:

The percentage of ownership interest being assigned

Allocated profits and losses, if applicable

Voting rights associated with the transferred interest

The assignor's rights and obligations that are being transferred and retained

Any capital contribution requirements

Set an effective date for the assignment, which is when the rights and obligations associated with the membership interest will transfer from the assignor to the assignee.

This date is crucial for legal and tax purposes and helps both parties plan for the transition. If you don’t specify an effective date in the assignment agreement, your state's law may determine when the transfer takes effect.

In the agreement, outline any conditions that must be met before the assignment becomes effective. These could include obtaining certain regulatory approvals, fulfilling specific obligations, or making required capital contributions.

Additionally, you may include representations from the assignor attesting that they have the legal authority to execute the assignment. Doing this is important because it can prevent a third party from challenging the assignment on grounds of lack of authority. If the assignor is an LLC or corporation, be sure to specify that it must be in good standing with all necessary state and federal regulatory agencies.

Clearly state that the assignee will assume responsibility for any taxes, liabilities, and obligations attributable to the membership interest being transferred from the effective date of the assignment. You may also include indemnification provisions that protect each party from any potential claims arising from the other party's actions.

For example, you can include a provision that provides the assignor with protection against any claims arising from the transfer of membership interests. This is especially important if your LLC has been sued by a member, visitor, or third party while it was operating under its current management structure.

In the closing sections of the assignment agreement, include clauses stating that the agreement represents the entire understanding between the parties concerning the assignment and supersedes any previous agreements or negotiations. Specify that any modifications to the agreement must be made in writing and signed by both parties. Finally, identify the governing law that will apply to the agreement, which is generally the state law where your LLC is registered.

This would look like this:

Once you've drafted the Assignment of Membership Interest Agreement, ensure that all parties carefully review the document to verify its accuracy and completeness. Request a legal review by an attorney, if necessary. Gather the assignor, assignee, and any necessary witnesses or notary public to sign the agreement, making it legally binding.

Sometimes the assignor and assignee will sign the document at different times. If this is the case, then you should specify when each party must sign in your Assignment Agreement.

Importance of a Professionally-drafted Contract Template

To ensure a smooth and error-free assignment process, it's highly recommended to use a professionally-drafted contract template. While DIY options might seem tempting, utilizing an expertly-crafted template provides several distinct advantages.

Advantages of using a professionally-created template:

Accuracy and Compliance: Professionally-drafted templates are designed with state-specific regulations in mind, ensuring that your agreement complies with all necessary legal requirements.

Time and Cost Savings: With a pre-written template, you save valuable time and resources that can be better spent growing your business.

Reduced Legal Risk: Legal templates created by experienced professionals significantly reduce the likelihood of errors and omissions that could lead to disputes or litigations down the road.

How our contract templates stand out from the rest:

We understand the unique needs of entrepreneurs and business owners. Our contract templates are designed to provide a straightforward, user-friendly experience that empowers you with the knowledge and tools you need to navigate complex legal processes with ease. By choosing our Assignment of Membership Interest Agreement template, you can rest assured that your business is in safe hands. Click here to get started!

As you embark on the journey of assigning membership interest in your LLC, here are some frequently asked questions to help address any concerns you may have:

Is an assignment of membership interest the same as a sale of an LLC? No. While both processes involve transferring interests or assets, a sale of an LLC typically entails the sale of the entire business, whereas an assignment of membership interest relates to the transfer of some or all membership interests between parties.

Do I need an attorney to help draft my assignment of membership interest agreement? While not mandatory, seeking legal advice ensures that your agreement complies with all relevant regulations, minimizing potential legal risks. If you prefer a more cost-effective solution, consider using a professionally-drafted contract template like the ones we offer at [Your Company Name].

Can I assign my membership interest without the approval of other LLC members? This depends on your LLC's operating agreement and state laws. It's essential to review these regulations and obtain any necessary approvals or consents before proceeding with the assignment process.

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes ( especially if you have multiple owners ). But often for single-owner businesses, you don't   need a lawyer to start your business .

Many business owners instead use tools like  Legal GPS for Business , which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

We hope this guide provides valuable insight into the process of assigning membership interest in your LLC. By understanding the legal requirements, implications, and steps involved, you can navigate this essential task with confidence. Ready to secure your business with a professionally-drafted contract template? Visit our website to purchase the reliable and user-friendly Assignment of Membership Interest Agreement template that enables your business success.

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Withholding and information reporting on the transfer of private partnership interests

November 2020

Treasury and the IRS released on October 7 Final Regulations (the Final Regulations ) under Sections 1446(f) and 864(c)(8). Section 1446(f), added to the Code by the 2017 tax reform legislation, provides rules for withholding on the transfer or disposition of a partnership interest. Proposed Regulations were issued in May 2019, which laid the framework for guidance on withholding and reporting obligations under Section 1446(f) (the Proposed Regulations). The Proposed Regulations also addressed information reporting under Section 864(c)(8); these rules were finalized in September 2020. The Final Regulations retain the basic structure and guidance of the Proposed Regulations, but with various modifications. 

The Final Regulations apply to both publicly traded partnerships (PTPs) and private partnerships. This insight summarizes some of the changes applicable to PTPs but primarily focuses on private partnerships. A separate detailed Insight will be circulated with respect to PTPs. 

The Final Regulations generally are applicable to transfers occurring on or after the date that is 60 days after their publication in the Federal Register. However, the backstop withholding rules only apply to transfers that occur on or after January 1, 2022.

PTPs . Significantly, beginning January 1, 2022, the Final Regulations will require withholding under Section 1446(f) on both dispositions of and distributions by PTPs. This is a significant evolution of these rules, which to date have not been extended to PTPs due to the informational and operational challenges associated with imposing withholding taxes in respect of publicly traded securities. As will be discussed in more detail in the separate alert, these challenges result from the expansion of withholding obligations to new parties (e.g., executing brokers) that traditionally may not have been withholding agents and a substantial expansion of the qualified intermediary (QI) obligations. 

Other partnerships . The Final Regulations retain the presumption that withholding is required unless an applicable certification is provided. However, they now provide a limitation on the transferee’s liability to the extent the transferee can establish the transferor had no tax liability under Section 864(c)(8). The Final Regulations also include new or expanded exceptions to the withholding requirements. These include the ability to rely on a valid Form W-9 to prove US status as well as a new exception from withholding for partnerships that are not engaged in a US trade or business.

Download the full publication Withholding and information reporting on the transfer of private partnership interests

The takeaway.

The Final Regulation package retains the basic approach and structure of the Proposed Regulations, with some modifications. Taxpayers (particularly minority partners and taxpayers in tiered structures) who are intending to either eliminate or reduce the withholding tax should be mindful of the time restrictions in order to be compliant with a reduction or elimination of withholding and the potential difficulty in obtaining information from a partnership and should plan accordingly.

• Final Regulations modify treatment of gain or loss on sale of partnership interest by foreign partner (October 21, 2020)
• PwC Client Comments re Section 1446(f) Proposed Regulations (July 12, 2019)
• Proposed regulations address tax withholding, information reporting on partnerships with US trade or business (May 31, 2019)

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Organizations formed after 1996.

Limited liability company (LLC).

Organizations formed before 1997.

Community property.

Gift of capital interest.

Purchase considered gift.

Applicable partnership interest (API).

Applicable trade or business.

Specified assets.

Business Owned and Operated by Spouses

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Date of termination.

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Partnership Return (Form 1065)

Effect on partner's basis.

Effect on partnership.

Certain distributions treated as a sale or exchange.

Substantially appreciated inventory items.

Qualified opportunity investment.

Marketable securities treated as money.

Loss on distribution.

Distribution of partner's debt.

Net precontribution gain.

Effect on basis.

Exceptions.

Complete liquidation of partner's interest.

Partner's holding period.

Basis divided among properties.

Allocating a basis increase.

Allocating a basis decrease.

Distributions before August 6, 1997.

Partner's interest more than partnership basis.

Special adjustment to basis.

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Basis of contributed property.

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Distribution of contributed property to another partner.

Disposition of certain contributed property.

Capital interest.

Profits interest.

Interest acquired by gift, etc.

Partner's liabilities assumed by partnership.

Book value of partner's interest.

When determined.

Alternative rule for figuring adjusted basis.

Partner's basis increased.

Partner's basis decreased.

Assumption of liability.

Related person.

Property subject to a liability.

Partner's share of recourse liabilities.

Constructive liquidation.

Limited partner.

Partner's share of nonrecourse liabilities.

Abandoned or worthless partnership interest.

Partnership election to adjust basis of partnership property.

Installment reporting for sale of partnership interest.

Unrealized receivables.

Other items treated as unrealized receivables.

Determining gain or loss.

Inventory items.

Notification required of partner.

Information return required of partnership.

Statement required of partner.

Partner's disposition of distributed unrealized receivables or inventory items.

Exception for inventory items held more than 5 years.

Substituted basis property.

Foreign partner's transfer of an interest in a partnership engaged in the conduct of a U.S. trade or business.

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Calculation and reporting for the API 1-year distributive share amount and 3-year distributive share amount by a pass-through entity

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What Is TAS?

How can you learn about your taxpayer rights, what can tas do for you, how can you reach tas, how else does tas help taxpayers, tas for tax professionals, low income taxpayer clinics (litcs), section 1061 worksheets and tables, publication 541 - additional material, publication 541 (03/2022), partnerships.

Revised: March 2022

Publication 541 - Introductory Material

Section 1061 reporting. Section 1061 recharacterizes certain long-term capital gains of a partner that holds one or more applicable partnership 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 respect to items of international tax relevance, including claiming deductions and credits. See the Instructions for Schedules K-2 and K-3 for more information.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC) . Photographs of missing children selected by the Center may appear in this publication 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.

Introduction

This publication provides supplemental federal income tax information for partnerships and partners. It supplements the information provided in the Instructions for Form 1065, U. S. Return of Partnership Income; the Partner's Instructions for Schedule K-1 (Form 1065); and Instructions for Schedule K-2 and Schedule K-3 (Form 1065). Generally, a partnership doesn't pay tax on its income but “passes through” any profits or losses to its partners. Partners must include partnership items on their tax returns.

For a discussion of business expenses a partnership can deduct, see Pub. 535, Business Expenses. Members of oil and gas partnerships should read about the deduction for depletion in chapter 9 of that publication.

For tax years beginning before 2018, certain partnerships must have a tax matters partner (TMP) who is also a general partner.

The TMP has been replaced with partnership representative for partnership tax years beginning after 2017. Each partnership must designate a partnership representative unless the partnership has made a valid election out of the centralized partnership audit regime. See Designated partnership representative in the Form 1065 instructions and Regulations section 301.6223-1.

A partnership that has foreign partners or engages in certain transactions with foreign persons may have one (or more) of the following obligations.

A partnership may have to withhold tax on distributions to a foreign partner or a foreign partner’s distributive share when it earns income not effectively connected with a U.S. trade or business. A partnership may also have to withhold on payments to a foreign person of FDAP income not effectively connected with a U.S. trade or business. See section 1441 or 1442 for more information.

If a partnership acquires a U.S. real property interest from a foreign person or firm, the partnership may have to withhold tax on the amount it pays for the property (including cash, the fair market value (FMV) of other property, and any assumed liability). See section 1445 for more information.

If a partnership has income effectively connected with a trade or business in the United States (including gain on the disposition of a U.S. real property interest), it must withhold on the ECTI allocable to its foreign partners. See section 1446(a) for more information.

A purchaser of a partnership interest, which may include the partnership itself, may have to withhold tax on the amount realized by a foreign partner on the sale for that partnership interest if the partnership is engaged in a trade or business in the United States. See section 1446(f) for more information.

A partnership may have to withhold tax on distributions to a foreign partner of a foreign partner’s distributive share when it earns withholdable payments. A partnership may also have to withhold on withholdable payments that it makes to a foreign entity. See sections 1471 through 1474 for more information. A partnership that has a duty to withhold but fails to withhold may be held liable for the tax, applicable penalties, and interest. See section 1461 for more information.

For more information on withholding on nonresident aliens and foreign entities, see Pub. 515.

We welcome your comments about this publication and suggestions for future editions.

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Publication

334 Tax Guide for Small Business

505 Tax Withholding and Estimated Tax

515 Withholding of Tax on Nonresident Aliens and Foreign Entities

535 Business Expenses

537 Installment Sales

538 Accounting Periods and Methods

544 Sales and Other Dispositions of Assets

551 Basis of Assets

925 Passive Activity and At-Risk Rules

946 How To Depreciate Property

See How To Get Tax Help at the end of this publication for information about getting publications and forms.

Publication 541 - Main Contents

Forming a partnership.

The following sections contain general information about partnerships.

Organizations Classified as Partnerships

An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants.

The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996.

An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following.

An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic.

An organization formed under a state law that refers to it as a joint-stock company or joint-stock association.

An insurance company.

Certain banks.

An organization wholly owned by a state, local, or foreign government.

An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).

Certain foreign organizations identified in Regulations section 301.7701-2(b)(8).

A tax-exempt organization.

A real estate investment trust (REIT).

An organization classified as a trust under Regulations section 301.7701-4 or otherwise subject to special treatment under the Internal Revenue Code.

Any other organization that elects to be classified as a corporation by filing Form 8832.

An 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. However, if the LLC is an employer, an LLC member may be liable for employer-related penalties. See Pub. 15, Employer’s Tax Guide (Circular E), and Pub. 3402, Taxation of Limited Liability Companies. An LLC may be classified for federal income tax purposes as either 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 and Regulations section 301.7701-3 for more details.

An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and doesn't elect to be classified as a corporation by filing Form 8832.

Spouses who own a qualified entity (defined below) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. A change in reporting position will be treated for federal tax purposes as a conversion of the entity.

A qualified entity is a business entity that meets all the following requirements.

The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States.

No person other than one or both spouses would be considered an owner for federal tax purposes.

The business entity is not treated as a corporation.

For more information about community property, see Pub. 555, Community Property. Pub. 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Partnership Interests Created by Gift

If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions.

It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership.

The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital.

For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. The FMV of the purchased interest is considered donated capital. For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons).

Partnership Interests Held in Connection With Performance of Services

Section 1061 recharacterizes certain net long-term capital gains of a partner that holds one or more applicable partnership interests as short-term capital gains. The provision generally requires that a capital asset be held for more than 3 years for capital gain and loss allocated with respect to any applicable partnership interest (API) to be treated as long-term capital gain or loss. Proposed Regulations ( REG-107213-18 ) were published in the Federal Register on August 14, 2020. Final regulations (Treasury Decision (T.D.) 9945) were published in the Federal Register on January 19, 2021. T.D. 9945, 2021-5 I.R.B. 627, is available at IRS.gov/irb/2021-5_IRB#TD-9945 . Owner taxpayers and pass-through entities may rely on the proposed regulations for tax years beginning before January 19, 2021, (the date final regulations were published in the Federal Register) provided they follow the proposed regulations in their entirety and in a consistent manner. An owner taxpayer or pass-through entity may choose to apply the final regulations to a tax year beginning after December 31, 2017, provided that they consistently apply the final section 1061 regulations in their entirety to that year and all subsequent years. Owner taxpayers and pass-through entities must apply the final regulations to tax years beginning on or after January 19, 2021. See Section 1061 Reporting Instructions , later.

An API is any interest in a partnership that, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any “applicable trade or business.” The special recharacterization rule applies to:

Capital gains recognized by a partner from the sale or exchange of an applicable partnership interest under sections 741(a) and 731(a); and

Capital gains recognized by a partnership, allocated to a partner with respect to an API.

An applicable trade or business means any activity conducted on a regular, continuous, and substantial basis (regardless of whether the activity is conducted through one or more entities) which consists in whole or in part of raising and returning capital, and either :

Investing in or disposing of “specific assets” (or identifying specified assets for investing or disposition), or

Developing specified assets.

Specified assets are:

Securities (as defined in section 475(c)(2), under rules for mark-to-market accounting for securities dealers);

Commodities (as defined under rules for mark-to-market accounting for commodities dealers in section 475(e)(2));

Real estate held for rental or investment;

Options or derivative contracts with respect to such securities;

Cash or cash equivalents; or

An interest in a partnership to the extent of the partnership’s proportionate interest in the foregoing.

A security for this purpose means any of the following.

Share of corporate stock.

Partnership interest or beneficial ownership interest in a widely held or publicly traded partnership or trust.

Note, bond, debenture, or other evidence of indebtedness.

Interest rate, currency, or equity notional principal contract.

Interest in, or derivative financial instrument in, any such security or any currency (regardless of whether section 1256 applies to the contract).

Position that is not such a security and is a hedge with respect to such a security and is clearly identified.

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. However, the spouses can elect not to treat the joint venture as a partnership by making a qualified joint venture election.

A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. A qualified joint venture conducts a trade or business where the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or an LLC.

Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore doesn't have a Form 1065 filing requirement. All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Each spouse takes into account their respective share of these items as a sole proprietor. Each spouse would account for their respective share on the appropriate form, such as Schedule C (Form 1040). For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (that is, based on their respective interests in the venture).

If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry their share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Each spouse should include their respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax.

This generally doesn't increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. However, this may not be true if either spouse exceeds the social security tax limitation.

For more information on qualified joint ventures, go to IRS.gov/QJV .

The partnership agreement includes the original agreement and any modifications. The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. The agreement or modifications can be oral or written.

Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. This filing date doesn't include any extension of time.

If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement.

Terminating a Partnership

A 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.

See Regulations section 1.708-1(b)(1) for more information on the termination of a partnership. For special rules that apply to a merger, consolidation, or division of a partnership, see Regulations sections 1.708-1(c) and 1.708-1(d).

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

If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. The return is due the 15 th day of the 3 rd month following the date of termination. See Partnership Return (Form 1065) , later, for information about filing Form 1065.

The conversion of a partnership into an LLC classified as a partnership for federal tax purposes doesn't terminate the partnership. The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year doesn't close; and the LLC can continue to use the partnership's taxpayer identification number (TIN).

However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. If a decrease in a partner's share of liabilities exceeds the partner's basis, they must recognize gain on the excess. For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest , later.

The same rules apply if an LLC classified as a partnership is converted into a partnership.

Certain partnerships with more than 100 partners are required to file Form 1065; Schedule K-1; and related forms and schedules electronically. For tax years beginning after July 1, 2019, a religious or apostolic organization exempt from income tax under section 501(d) must file Form 1065 electronically. Other partnerships generally have the option to file electronically. For details about electronic filing, see the Instructions for Form 1065.

Exclusion From Partnership Rules

Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. All the partners must agree to make the choice, and the partners must be able to figure their own taxable income without figuring the partnership's income. However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year.

An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements.

They own the property as co-owners.

They reserve the right separately to take or dispose of their shares of any property acquired or retained.

They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Each separate participant can delegate authority to purchase, sell, or exchange their share of the investment property for the time being for their account, but not for a period of more than a year.

An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements.

They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights.

They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used.

They don't jointly sell services or the property produced or extracted. Each separate participant can delegate authority to sell their share of the property produced or extracted for the time being for their account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than 1 year.

An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. This filing date includes any extension of time. See Regulations section 1.761-2(b) for the procedures to follow.

Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. The return must be signed by a partner. If an LLC is treated as a partnership, it must file Form 1065 and one of its members must sign the return.

A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes.

See the Instructions for Form 1065 for more information about who must file Form 1065.

Partnership Distributions

Partnership distributions include the following.

A withdrawal by a partner in anticipation of the current year's earnings.

A distribution of the current year's or prior years' earnings not needed for working capital.

A complete or partial liquidation of a partner's interest.

A distribution to all partners in a complete liquidation of the partnership.

A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. If any gain or loss from the distribution is recognized by the partner, it must be reported on their return for the tax year in which the distribution is received. Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year.

A partner's adjusted basis in their partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. See Adjusted Basis under Basis of Partner's Interest , later.

A partnership generally doesn't recognize any gain or loss because of distributions it makes to partners. The partnership may be able to elect to adjust the basis of its undistributed property.

When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution.

Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money.

Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items.

See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest , later.

This treatment doesn't apply to the following distributions.

A distribution of property to the partner who contributed the property to the partnership.

Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments.

Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total FMV is more than 120% of the partnership's adjusted basis for the property. However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded.

Partner's Gain or Loss

A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. If partnership property (other than marketable securities treated as money) is distributed to a partner, they generally don't recognize any gain until the sale or other disposition of the property.

For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain , later. Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest , later.

The adjusted basis of Jo's partnership interest is $14,000. She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and an FMV of $3,000. Because the cash received doesn't exceed the basis of her partnership interest, Jo doesn't recognize any gain on the distribution. Any gain on the land will be recognized when she sells or otherwise disposes of it. The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)].

If you held a qualified investment in a qualified opportunity fund (QOF) at any time during the year, you must file your return with Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, attached. See the Form 8997 instructions.

Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. This treatment, however, doesn't generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner.

The amount treated as money is the security's FMV when distributed, reduced (but not below zero) by the excess (if any) of:

The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their FMV immediately before the transaction resulting in the distribution, over

The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the FMV in (1).

For more information, including the definition of marketable securities, see section 731(c).

A partner doesn't recognize loss on a partnership distribution unless all the following requirements are met.

The adjusted basis of the partner's interest in the partnership exceeds the distribution.

The partner's entire interest in the partnership is liquidated.

The distribution is in money, unrealized receivables, or inventory items.

There are exceptions to these general rules. See the following discussions. Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest , later.

If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the FMV of the debt differs from the basis of the debt (determined under the rules discussed under Partner's Basis for Distributed Property , later).

The partner is treated as having satisfied the debt for its FMV. If the issue price (adjusted for any premium or discount) of the debt exceeds its FMV when distributed, the partner may have to include the excess amount in income as canceled debt.

Similarly, a deduction may be available to a corporate partner if the FMV of the debt at the time of distribution exceeds its adjusted issue price.

A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution.

The gain recognized is the lesser of the following amounts.

The excess of:

The FMV of the property received in the distribution; over

The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution.

The “net precontribution gain” of the partner. This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. For information about the distribution of contributed property to another partner, see Contribution of Property under Transactions Between Partnership and Partners , later.

The character of the gain is determined by reference to the character of the net precontribution gain. This gain is in addition to any gain the partner must recognize if the money distributed is more than their basis in the partnership.

For these rules, the term “money” includes marketable securities treated as money, as discussed earlier under Marketable securities treated as money .

The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. See Basis of Partner's Interest , later.

The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule.

Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. For this purpose, the partner's previously contributed property doesn't include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership.

Recognition of gain under this rule also doesn't apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier under Certain distributions treated as a sale or exchange .

Partner's Basis for Distributed Property

Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. However, the basis of the property to the partner cannot be more than the adjusted basis of their interest in the partnership reduced by any money received in the same transaction.

The adjusted basis of Emily's partnership interest is $30,000. She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Her basis for the property is $20,000.

The adjusted basis of Steve's partnership interest is $10,000. He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives).

The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction.

A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included.

If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. For property distributed after August 5, 1997, allocate the basis using the following rules.

Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess.

Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess.

Allocate any basis increase required in rule (2) above first to properties with unrealized appreciation to the extent of the unrealized appreciation. If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Allocate any remaining basis increase among all the properties in proportion to their respective FMVs.

Eun's basis in her partnership interest is $55,000. In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Property A has an adjusted basis to the partnership of $5,000 and an FMV of $40,000. Property B has an adjusted basis to the partnership of $10,000 and an FMV of $10,000.

To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). She first allocates $35,000 to property A (its unrealized appreciation). The remaining $5,000 is allocated between the properties based on their FMVs. $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000).

Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier.

Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation.

Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)).

Armando's basis in his partnership interest is $20,000. In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Property C has an adjusted basis to the partnership of $15,000 and an FMV of $15,000. Property D has an adjusted basis to the partnership of $15,000 and an FMV of $5,000.

To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). He allocates the entire $10,000 to property D (its unrealized depreciation). Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000).

For property distributed before August 6, 1997, allocate the basis using the following rules.

Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership.

Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership.

If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest.

A partner who acquired any part of their partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest.

If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment.

The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. If the choice doesn't have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax.

A partner choosing this special basis adjustment must attach a statement to their tax return that the partner chooses under section 732(d) to adjust the basis of property received in a distribution. The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated.

Chin Ho purchased a 25% interest in X partnership for $17,000 cash. At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and an FMV of $16,000. Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500.

Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. The value of the inventory received was 25% of the value of all partnership inventory. (It is immaterial whether the inventory he received was on hand when he acquired his interest.)

Because the partnership from which Chin Ho withdrew didn't make the optional adjustment to basis, he chose to adjust the basis of the inventory received. His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 FMV of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition.

The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). The remaining $11,500 is allocated to his new basis for the other property he received.

A partner doesn't always have a choice of making this special adjustment to basis. The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest.

The FMV of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership.

If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties ) would have decreased the basis of property that couldn't be depreciated, depleted, or amortized and increased the basis of property that could be.

The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed.

Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. The statement must provide information necessary for the partner to figure the special basis adjustment.

A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. See Marketable securities treated as money under Partner’s Gain or Loss , earlier. The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase.

Transactions Between Partnership and Partners

For certain transactions between a partner and their partnership, the partner is treated as not being a member of the partnership. These transactions include the following.

Performing services for, or transferring property to, a partnership if:

There is a related allocation and distribution to a partner; and

The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner.

Transferring money or other property to a partnership if:

There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and

The transfers together are properly characterized as a sale or exchange of property.

A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. However, this rule doesn't apply to guaranteed payments made to a partner, which are generally deductible when accrued.

Guaranteed Payments

Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding.

The partnership generally deducts guaranteed payments on Form 1065, line 10, as a business expense. They are also listed on Schedules K and K-1 of the partnership return. The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with their distributive share of the partnership's other ordinary income.

Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Generally, organizational and syndication expenses are not deductible by the partnership. However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065 ). Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedules K-1 as guaranteed payments.

If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment.

Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. The partnership has net income of $20,000. Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement.

If the partnership net income had been $30,000, there would have been no guaranteed payment because her share, without regard to the guarantee, would have been greater than the guarantee.

Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. The partnership can deduct the payments as a business expense, and the partner must include them in gross income. However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums.

A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on their behalf as an adjustment to income. The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. For more information on the self-employed health insurance deduction, see chapter 6 of Pub. 535.

Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends.

Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Her distributive share of the partnership income is 10%. The partnership has $50,000 of ordinary income after deducting the guaranteed payment. She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends.

Lamont is a calendar year taxpayer who is a partner in a partnership. The partnership uses a fiscal year that ended January 31, 2021. Lamont received guaranteed payments from the partnership from February 1, 2020, until December 31, 2020. He must include these guaranteed payments in income for 2021 and report them on his 2021 income tax return.

If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. The partner separately takes into account their distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest.

Sale or Exchange of Property

Special rules apply to a sale or exchange of property between a partnership and certain persons.

Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%.

If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed.

The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss.

If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain.

Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met.

More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s).

The property in the hands of the transferee immediately after the transfer is not a capital asset. Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business.

To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply.

An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries.

An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants.

If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner.

Individuals A and B and Trust T are equal partners in Partnership ABT. A's husband, AH, is the sole beneficiary of Trust T. Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. As a result, A is a more-than-50% partner. This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain.

For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Pub. 544.

Contribution of Property

Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. This applies whether a partnership is being formed or is already operating. The partnership's holding period for the property includes the partner's holding period.

The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. The exchange is not subject to the rules explained later under Disposition of Partner's Interest .

A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met.

The distribution wouldn't have been made but for the contribution.

The partner's right to the distribution doesn't depend on the success of partnership operations.

All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale.

A partner must attach Form 8275, Disclosure Statement, (or other statement) to their return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. For exceptions to this requirement, see Regulations section 1.707-3(c)(2).

A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership.

Form 8275 must include the following information.

A caption identifying the statement as a disclosure under section 707.

A description of the transferred property or money, including its value.

A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. See Regulations section 1.707-3(b)(2) for a description of the facts and circumstances considered in determining if the transfers are a disguised sale.

Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated.

A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies (RICs) and REITs. For more information, see section 351(e)(1) and the related regulations. Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property.

This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated.

A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, if either of the following applies.

Immediately after the contribution, the partnership owned, directly, indirectly, or by attribution, at least a 10% interest in the foreign partnership.

The FMV of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000.

The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. See the form instructions for more information.

If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.

The FMV of property at the time it is contributed may be different from the partner's adjusted basis. The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner.

The partnership can use different allocation methods for different items of contributed property. A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. See Regulations section 1.704-3 for allocation methods generally considered reasonable.

If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership.

Areta and Sofia formed an equal partnership. Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with an FMV of $10,000 and an adjusted basis of $4,000. The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000.

In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its FMV when contributed. To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions.

However, because the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. The entire $400 must be allocated to Areta.

If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution.

The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its FMV when it was distributed. This amount is the difference between the property's basis and its FMV at the time of contribution. The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss.

The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property.

Unrealized receivables. If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items . When reading the definition, substitute “partner” for “partnership.”

Inventory items. If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Inventory items are defined later under Payments for Unrealized Receivables and Inventory Items .

Capital loss property. If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's FMV immediately before the contribution.

Substituted basis property. If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction.

Contribution of Services

A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed.

A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at FMV and the proceeds were distributed in a complete liquidation of the partnership. This determination is generally made at the time of receipt of the partnership interest. The FMV of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. The capital interest transferred as compensation for services is subject to the rules for restricted property discussed under Employee Compensation in Pub. 525, Taxable and Nontaxable Income.

The FMV of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier under Guaranteed Payments .

A profits interest is a partnership interest other than a capital interest. If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. However, this doesn't apply in the following situations.

The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease.

Within 2 years of receipt, the partner disposes of the profits interest.

The profits interest is a limited partnership interest in a publicly traded partnership.

A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests.

Basis of Partner's Interest

The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. If the partner must recognize gain as a result of the contribution, this gain is included in the basis of their interest. Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner.

If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Pub. 551.

Adjusted Basis

The basis of an interest in a partnership is increased or decreased by certain items.

A partner's basis is increased by the following items.

The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities.

The partner's distributive share of taxable and nontaxable partnership income.

The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners.

The partner's basis is decreased (but never below zero) by the following items.

The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership.

The partner's distributive share of the partnership losses (including capital losses).

The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on their individual income tax return.

The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner.

A partner’s distributive share of foreign taxes paid or accrued by the partnership for tax years beginning after 2017.

A partner’s distributive share of the adjusted basis of a partnership’s property donation to charity.

If the property’s FMV exceeds its adjusted basis, a special rule provides that the basis limitation on partner losses does not apply to the extent of the partner’s distributive share of the excess for tax years beginning after 2017.

If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. This partner must reduce their basis because the assumption of the liability is treated as a distribution of money to that partner. The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. See Effect of Partnership Liabilities , later.

Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. The partnership assumed payment of the mortgage. The basis of Ivan's interest is:

If, in Example 1 , the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. However, this gain wouldn't increase the basis of his partnership interest.

The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account.

Enzo contributes to his partnership property that has an adjusted basis of $400 and an FMV of $1,000. His partner contributes $1,000 cash. While each partner has increased his capital account by $1,000, which will be reflected in the partnership’s books, the adjusted basis of Enzo's interest is only $400 and the adjusted basis of his partner's interest is $1,000.

The adjusted basis of a partner's partnership interest is ordinarily determined at the end of the partnership's tax year. However, if there has been a sale or exchange of all or part of the partner's interest or a liquidation of their entire interest in a partnership, the adjusted basis is determined on the date of sale, exchange, or liquidation.

In certain cases, the adjusted basis of a partnership interest can be figured by using the partner's share of the adjusted basis of partnership property that would be distributed if the partnership terminated.

This alternative rule can be used in either of the following situations.

The circumstances are such that the partner cannot practicably apply the general basis rules.

It is, in the opinion of the IRS, reasonable to conclude that the result produced will not vary substantially from the result under the general basis rules.

Adjustments may be necessary in figuring the adjusted basis of a partnership interest under the alternative rule. For example, adjustments would be required to include in the partner's share of the adjusted basis of partnership property any significant discrepancies that resulted from contributed property, transfers of partnership interests, or distributions of property to the partners.

Effect of Partnership Liabilities

A partner's basis in a partnership interest includes the partner's share of a partnership liability only if, and to the extent that, the liability:

Creates or increases the partnership's basis in any of its assets;

Gives rise to a current deduction to the partnership; or

Is a nondeductible, noncapital expense of the partnership.

A partner's share of accrued but unpaid expenses or accounts payable of a cash basis partnership is not included in the adjusted basis of the partner's interest in the partnership.

If a partner's share of partnership liabilities increases, or a partner's individual liabilities increase because they assume partnership liabilities, this increase is treated as a contribution of money by the partner to the partnership.

If a partner's share of partnership liabilities decreases, or a partner's individual liabilities decrease because the partnership assumes their individual liabilities, this decrease is treated as a distribution of money to the partner by the partnership.

Generally, a partner or related person is considered to assume a partnership liability only to the extent that:

They’re personally liable for it,

The creditor knows that the liability was assumed by the partner or related person,

The creditor can demand payment from the partner or related person, and

No other partner or person related to another partner will bear the economic risk of loss on that liability immediately after the assumption.

Related persons, for these purposes, includes all the following.

An individual and their spouse, ancestors, and lineal descendants.

An individual and a corporation if the individual directly or indirectly owns 80% or more in value of the outstanding stock of the corporation.

Two corporations that are members of the same controlled group.

A grantor and a fiduciary of any trust.

Fiduciaries of two separate trusts if the same person is a grantor of both trusts.

A fiduciary and a beneficiary of the same trust.

A fiduciary and a beneficiary of two separate trusts if the same person is a grantor of both trusts.

A fiduciary of a trust and a corporation if the trust or the grantor of the trust directly or indirectly owns 80% or more in value of the outstanding stock of the corporation.

A person and a tax-exempt educational or charitable organization controlled directly or indirectly by the person or by members of the person's family.

A corporation and a partnership if the same persons own 80% or more in value of the outstanding stock of the corporation and 80% or more of the capital or profits interest in the partnership.

Two S corporations or an S corporation and a C corporation if the same persons own 80% or more in value of the outstanding stock of each corporation.

An executor and a beneficiary of an estate.

A partnership and a person owning, directly or indirectly, 80% or more of the capital or profits interest in the partnership.

Two partnerships if the same persons directly or indirectly own 80% or more of the capital or profits interests.

If property contributed to a partnership by a partner or distributed by the partnership to a partner is subject to a liability, the transferee is treated as having assumed the liability to the extent it doesn't exceed the FMV of the property.

A partnership liability is a recourse liability to the extent that any partner or a related person, defined earlier under Related person , has an economic risk of loss for that liability. A partner's share of a recourse liability equals their economic risk of loss for that liability. A partner has an economic risk of loss if that partner or a related person would be obligated (whether by agreement or law) to make a net payment to the creditor or a contribution to the partnership with respect to the liability if the partnership were constructively liquidated. A partner who is the creditor for a liability that would otherwise be a nonrecourse liability of the partnership has an economic risk of loss in that liability.

Generally, in a constructive liquidation, the following events are treated as occurring at the same time.

All partnership liabilities become payable in full.

All of the partnership's assets have a value of zero, except for property contributed to secure a liability.

All property is disposed of by the partnership in a fully taxable transaction for no consideration except relief from liabilities for which the creditor's right to reimbursement is limited solely to one or more assets of the partnership.

All items of income, gain, loss, or deduction are allocated to the partners.

The partnership liquidates.

Juan and Teresa form a cash basis general partnership with cash contributions of $20,000 each. Under the partnership agreement, they share all partnership profits and losses equally. The partnership borrows $60,000 and purchases depreciable business equipment. This debt is included in the partners' basis in the partnership because incurring it creates an additional $60,000 of basis in the partnership's depreciable property.

If neither partner has an economic risk of loss in the liability, it is a nonrecourse liability. Each partner's basis would include their share of the liability, $30,000.

If Teresa is required to pay the creditor if the partnership defaults, she has an economic risk of loss in the liability. Her basis in the partnership would be $80,000 ($20,000 + $60,000), while Juan's basis would be $20,000.

A limited partner generally has no obligation to contribute additional capital to the partnership and therefore doesn't have an economic risk of loss in partnership recourse liabilities. Thus, absent some other factor, such as the guarantee of a partnership liability by the limited partner or the limited partner making the loan to the partnership, a limited partner generally doesn't have a share of partnership recourse liabilities.

A partnership liability is a nonrecourse liability if no partner or related person has an economic risk of loss for that liability. A partner's share of nonrecourse liabilities is generally proportionate to their share of partnership profits. However, this rule may not apply if the partnership has taken deductions attributable to nonrecourse liabilities or the partnership holds property that was contributed by a partner.

For more information on the effect of partnership liabilities, including rules for limited partners and examples, see Regulations sections 1.752-1 through 1.752-5.

Disposition of Partner's Interest

The following discussions explain the treatment of gain or loss from the disposition of an interest in a partnership.

A loss incurred from the abandonment or worthlessness of a partnership interest is an ordinary loss only if both of the following tests are met.

The transaction is not a sale or exchange.

The partner has not received an actual or deemed distribution from the partnership.

For information on how to report an abandonment loss, see the Instructions for Form 4797. See Revenue Ruling 93-80 for more information on determining if a loss incurred on the abandonment or worthlessness of a partnership interest is a capital or an ordinary loss.

Generally, a partnership's basis in its assets is not affected by a transfer of an interest in the partnership, whether by sale or exchange or because of the death of a partner. However, the partnership can elect to make an optional adjustment to basis in the year of transfer.

Sale, Exchange, or Other Transfer

The sale or exchange of a partner's interest in a partnership usually results in capital gain or loss. However, see Payments for Unrealized Receivables and Inventory Items , later, for certain exceptions. Gain or loss is the difference between the amount realized and the adjusted basis of the partner's interest in the partnership. If the selling partner is relieved of any partnership liabilities, that partner must include the liability relief as part of the amount realized for their interest.

Kumar became a limited partner in the ABC Partnership by contributing $10,000 in cash on the formation of the partnership. The adjusted basis of his partnership interest at the end of the current year is $20,000, which includes his $15,000 share of partnership liabilities. The partnership has no unrealized receivables or inventory items. Kumar sells his interest in the partnership for $10,000 in cash. He had been paid his share of the partnership income for the tax year.

Kumar realizes $25,000 from the sale of his partnership interest ($10,000 cash payment + $15,000 liability relief). He reports $5,000 ($25,000 realized − $20,000 basis) as a capital gain.

The facts are the same as in Example 1 , except that Kumar withdraws from the partnership when the adjusted basis of his interest in the partnership is zero. He is considered to have received a distribution of $15,000, his relief of liability. He reports a capital gain of $15,000.

A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. For requirements and other information on installment sales, see Pub. 537.

Part of the gain from the installment sale may be allocable to unrealized receivables or inventory items. See Payments for Unrealized Receivables and Inventory Items next. The gain allocable to unrealized receivables and inventory items must be reported in the year of sale. The gain allocable to the other assets can be reported under the installment method.

Payments for Unrealized Receivables and Inventory Items

If a partner receives money or property in exchange for any part of a partnership interest, the amount due to their share of the partnership's unrealized receivables or inventory items results in ordinary income or loss. This amount is treated as if it were received for the sale or exchange of property that is not a capital asset.

This treatment applies to the unrealized receivables part of payments to a retiring partner or successor in interest of a deceased partner only if that part is not treated as paid in exchange for partnership property. See Liquidation at Partner's Retirement or Death , later.

Unrealized receivables include any rights to payment not already included in income for the following items.

Goods delivered or to be delivered to the extent the payment would be treated as received for property other than a capital asset.

Services rendered or to be rendered.

These rights must have arisen under a contract or agreement that existed at the time of sale or distribution, even though the partnership may not be able to enforce payment until a later date. For example, unrealized receivables include accounts receivable of a cash method partnership and rights to payment for work or goods begun but incomplete at the time of the sale or distribution of the partner's share.

The basis for any unrealized receivables includes all costs or expenses for the receivables that were paid or accrued but not previously taken into account under the partnership's method of accounting.

Unrealized receivables include potential gain that would be ordinary income if the following partnership property were sold at its FMV on the date of the payment.

Mining property for which exploration expenses were deducted.

Stock in a domestic international sales corporation (DISC).

Certain farmland for which expenses for soil and water conservation or land clearing were deducted.

Franchises, trademarks, or trade names.

Oil, gas, or geothermal property for which intangible drilling and development costs were deducted.

Stock of certain controlled foreign corporations.

Market discount bonds and short-term obligations.

Property subject to recapture of depreciation under sections 1245 and 1250. Depreciation recapture is discussed in chapter 3 of Pub. 544.

The income or loss realized by a partner upon the sale or exchange of its interest in unrealized receivables and inventory items, discussed below, is the amount that would have been allocated to the partner if the partnership had sold all of its property for cash at FMV, in a fully taxable transaction, immediately prior to the partner's transfer of interest in the partnership. Any gain or loss recognized that is attributable to the unrealized receivables and inventory items will be ordinary gain or loss.

You are a partner in ABC Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or inventory items. You sell your interest in the partnership for $10,000 in cash and you report the entire amount as a gain because your adjusted basis in the partnership is zero. You report as ordinary income your $5,000 share of potential ordinary income from the partnership's depreciable property. The remaining $5,000 gain is a capital gain.

Inventory items are not limited to stock-in-trade of the partnership. They also include the following property.

Property that would properly be included in the partnership's inventory if on hand at the end of the tax year or that is held primarily for sale to customers in the normal course of business.

Property that, if sold or exchanged by the partnership, wouldn't be a capital asset or section 1231 property (real or depreciable business property held more than 1 year). For example, accounts receivable acquired for services or from the sale of inventory and unrealized receivables are inventory items.

Property held by the partnership that would be considered inventory if held by the partner selling the partnership interest or receiving the distribution.

If a partner exchanges a partnership interest attributable to unrealized receivables or inventory for money or property, they must notify the partnership in writing. This must be done within 30 days of the transaction or, if earlier, by January 15 of the calendar year following the calendar year of the exchange. A partner may be subject to a $50 penalty for each failure to notify the partnership about such a transaction, unless the failure was due to reasonable cause and not willful neglect.

When a partnership is notified of an exchange of partnership interests involving unrealized receivables or inventory items, the partnership must file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests. Form 8308 is filed with Form 1065 for the tax year that includes the last day of the calendar year in which the exchange took place. If notified of an exchange after filing Form 1065, the partnership must file Form 8308 separately, within 30 days of the notification.

On Form 8308, the partnership provides its telephone number and states the date of the exchange and the names, addresses, and TINs of the partnership filing the return and the transferee and transferor in the exchange. The partnership must provide a copy of Form 8308 (or a written statement with the same information) to each transferee and transferor by the later of January 31 following the end of the calendar year or 30 days after it receives notice of the exchange.

The partnership may be subject to a penalty for each failure to timely file Form 8308 and a penalty for each failure to furnish a copy of Form 8308 to a transferor or transferee, unless the failure is due to reasonable cause and not willful neglect. If the failure is intentional, a higher penalty may be imposed. See sections 6722, 6723, and 6724 for details.

If a partner sells or exchanges any part of an interest in a partnership having unrealized receivables or inventory, they must file a statement with their tax return for the year in which the sale or exchange occurs. The statement must contain the following information.

The date of the sale or exchange.

The amount of any gain or loss attributable to the unrealized receivables or inventory.

The amount of any gain or loss attributable to capital gain or loss on the sale of the partnership interest.

In general, any gain or loss on a sale or exchange of unrealized receivables or inventory items a partner received in a distribution is an ordinary gain or loss. For this purpose, inventory items do not include real or depreciable business property, even if they are not held more than 1 year.

Oscar, a distributee partner, received his share of accounts receivable when his law firm dissolved. The partnership used the cash method of accounting, so the receivables had a basis of zero. If Oscar later collects the receivables or sells them, the amount he receives will be ordinary income.

If a distributee partner sells inventory items held for more than 5 years after the distribution, the type of gain or loss depends on how they are being used on the date sold. The gain or loss is capital gain or loss if the property is a capital asset in the partner's hands at the time sold.

Marucia receives, through dissolution of her partnership, inventory that has a basis of $19,000. Within 5 years, she sells the inventory for $24,000. The $5,000 gain is taxed as ordinary income. If she had held the inventory for more than 5 years, her gain would have been capital gain, provided the inventory was a capital asset in her hands at the time of sale.

If a distributee partner disposes of unrealized receivables or inventory items in a nonrecognition transaction, ordinary gain or loss treatment applies to a later disposition of any substituted basis property resulting from the transaction.

Section 864(c)(8) requires a foreign partner that transfers part or all of an interest in a partnership engaged in the conduct of a trade or business in the United States (U.S. trade or business) to include in income the effectively connected gain or loss from the transfer. A partnership distribution is considered a transfer when it results in recognition of gain or loss. See Regulations section 1.731-1(a).

In general, any foreign person, any domestic partnership that has a foreign person as a direct partner, and any domestic partnership that has actual knowledge that a foreign person indirectly holds, through one or more partnerships, an interest in the domestic partnership that transfers an interest in a partnership engaged in a U.S. trade or business must notify the partnership of the transfer in writing within 30 days after the transfer. The notification must include:

The names and addresses of the notifying transferor and the transferee or transferees;

The U.S. TIN of the notifying transferor and, if known, of the transferee or transferees; and

The date of the transfer.

This notification requirement does not apply to the transfer of an interest in a publicly traded partnership if the interest is publicly traded on an established securities market or is readily tradable on a secondary market (or the substantial equivalent thereof). It also does not apply to a notifying transferor that is treated as transferring an interest in the partnership because it received a distribution from the partnership. This notification may be combined with or provided at the same time as the statement required of a partner that sells or exchanges any part of an interest in a partnership having unrealized receivables or inventory, provided that it satisfies the requirements of both sections. For more information, see Regulations section 1.864(c)(8)-2.

To determine the amount of gain or loss described in section 864(c)(8), generally, a foreign transferor must first determine its outside gain or loss on the transfer of a partnership interest. For this purpose, outside gain or loss is determined under all relevant provisions of the Code and regulations thereunder. A foreign transferor may recognize outside capital gain or loss and outside ordinary gain or loss on the transfer of its partnership interest and must separately apply section 864(c)(8) with respect to its capital gain or loss and its ordinary gain or loss.

The foreign transferor must compare the outside gain or loss amounts with the relevant aggregate deemed sale effectively connected gain or loss that the partnership calculates based on the foreign transferor's distributive share of gain or loss that would have been effectively connected if the partnership had sold all of its assets at FMV. This information will be provided to the notifying transferor on or before the due date (with extensions) for issuing Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. The foreign transferor only includes in income the lower of the outside amount and the deemed sale effectively connected amount. This determination is made separately with respect to capital gain or loss and ordinary gain or loss. For example, a foreign transferor would compare its outside ordinary gain to its aggregate deemed sale effectively connected ordinary gain, treating the former as effectively connected gain only to the extent it does not exceed the latter. For more information, see Regulations section 1.864(c)(8)-1.

Liquidation at Partner's Retirement or Death

Payments made by the partnership to a retiring partner or successor in interest of a deceased partner in return for the partner's entire interest in the partnership may have to be allocated between payments in liquidation of the partner's interest in partnership property and other payments. The partnership's payments include an assumption of the partner's share of partnership liabilities treated as a distribution of money.

For income tax purposes, a retiring partner or successor in interest of a deceased partner is treated as a partner until their interest in the partnership has been completely liquidated.

Payments made in liquidation of the interest of a retiring or deceased partner in exchange for their interest in partnership property are considered a distribution, not a distributive share or guaranteed payment that could give rise to a deduction (or its equivalent) for the partnership.

Payments made for the retiring or deceased partner's share of the partnership's unrealized receivables or goodwill are not treated as made in exchange for partnership property if both of the following tests are met.

Capital is not a material income-producing factor for the partnership. Whether capital is a material income-producing factor is explained under Partnership Interests Created by Gift , earlier.

The retiring or deceased partner was a general partner in the partnership.

Unrealized receivables include, to the extent not previously includible in income under the method of accounting used by the partnership, any rights (contractual or otherwise) to payment for (1) goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset; or (2) services rendered, or to be rendered.

Generally, the partners' valuation of a partner's interest in partnership property in an arm's-length agreement will be treated as correct. If the valuation reflects only the partner's net interest in the property (total assets less liabilities), it must be adjusted so that both the value of, and the basis for, the partner's interest include the partner's share of partnership liabilities.

Upon the receipt of the distribution, the retiring partner or successor in interest of a deceased partner will recognize gain only to the extent that any money (and marketable securities treated as money) distributed is more than the partner's adjusted basis in the partnership. The partner will recognize a loss only if the distribution is in money, unrealized receivables, and inventory items. No loss is recognized if any other property is received. See Partner's Gain or Loss under Partnership Distributions , earlier.

Payments made by the partnership to a retiring partner or successor in interest of a deceased partner that are not made in exchange for an interest in partnership property are treated as distributive shares of partnership income or guaranteed payments. This rule applies regardless of the time over which the payments are to be made. It applies to payments made for the partner's share of unrealized receivables and goodwill not treated as a distribution.

If the amount is based on partnership income, the payment is taxable as a distributive share of partnership income. The payment retains the same character when reported by the recipient that it would have had if reported by the partnership.

If the amount is not based on partnership income, it is treated as a guaranteed payment. The recipient reports guaranteed payments as ordinary income. For additional information on guaranteed payments, see Transactions Between Partnership and Partners , earlier.

These payments are included in income by the recipient for their tax year that includes the end of the partnership tax year for which the payments are a distributive share or in which the partnership is entitled to deduct them as guaranteed payments.

Former partners who continue to make guaranteed periodic payments to satisfy the partnership's liability to a retired partner after the partnership is terminated can deduct the payments as a business expense in the year paid.

Section 1061 Reporting Instructions

The instructions for owner taxpayer filing requirements and pass-through entity filing and reporting requirements are in accordance with Regulations section 1.1061-6. For more information, see T.D. 9945, 2021-5, I.R.B. 627, available at IRS.gov/irb/2021-5_IRB#TD-9945 , for specific rules and definitions.

Pass-Through Entity Reporting to API Holders

A pass-through entity is required to attach Worksheet A to the API holder’s Schedule K-1 for tax returns filed after December 31, 2021, in which a pass-through entity applies the final regulations under T.D. 9945. A pass-through entity means a partnership, trust, estate, S corporation described in Regulations section 1.1061-3(b)(2)(i), or a passive foreign investment company (PFIC) described in Regulations section 1.1061-3(b)(2)(ii). The pass-through entity must provide the information in Worksheet A to each API holder, including owner taxpayer, as an attachment to the Schedule K-1 for the applicable form, noting the proper box and code. For the 2021 Form 1065, it’s box 20, code AH. For the 2021 Form 1120-S, U.S. Income Tax Return for an S Corporation, it’s box 17, code AD. For the 2021 Form 1041, U.S. Income Tax Return for Estate and Trusts, it’s box 14, code Z

See Regulations section 1.1061-6(c) for the section 1061 reporting rules of a RIC and a REIT. In the case of RICs and REITs, the information will be furnished in connection with the Form 1099-DIV, Dividends and Distributions.

Regulations section 1.1061-6(d) permits a PFIC with respect to which the shareholder is an API holder who has a qualified electing fund election (as described in section 1295(a)) in effect for the tax year to provide additional information to the shareholder to determine the amount of the shareholder's inclusion that would be included in the Section 1061 Worksheet A: API 1-Year Distributive Share Amount and API 3-Year Distributive Share Amount. If the PFIC furnishes this information to the shareholder, the shareholder must retain a copy of this information along with the other information required to be retained under Regulations section 1.1295-1(f)(2)(ii).

A pass-through entity that is not required to and does not choose to apply the final regulations to tax returns filed after December 31, 2021, for a tax year beginning before January 19, 2021, must attach a worksheet to the API holder's Schedule K-1 that contains similar information as Worksheet A , and must disclose whether the information was determined under the proposed regulations or another method.

Section 1061 Worksheet A .

Owner Taxpayer Calculation of Amount Treated as Short-Term Capital Gain Under Section 1061

An owner taxpayer is the person who is subject to federal income tax on the recharacterization amount, and could be an individual, estate, or trust. An owner taxpayer uses information provided by all the pass-through entities in which it holds an API, directly or indirectly, to determine the amount that is recharacterized as short-term capital gain under sections 1061(a) and (d) for a tax year. For tax returns filed after December 31, 2021, in which an owner taxpayer applies the final regulations under T.D. 9945, Worksheet B must be used to determine the amount of the owner taxpayer’s recharacterization amount. Worksheet B , along with Table 1 and Table 2 , are to be attached to the owner taxpayer’s tax return.

An owner taxpayer that is not required to and does not choose to apply the final regulations to tax returns filed after December 21, 2021, for a tax year beginning before January 19, 2021, must attach worksheets to its return that contain similar information as Worksheet B , Table 1 , and Table 2 ; and must disclose whether the information was determined under proposed regulations or another method.

Section 1061 Worksheet B .

Section 1061 Table 1: API 1-Year Disposition Amount .

Section 1061 Table 2: API 3-Year Disposition Amount .

An owner taxpayer reports long- and short-term API gains and losses on Schedule D (Form 1040) or Schedule D (Form 1041) and on Form 8949, Sales and Other Dispositions of Capital Assets, as if section 1061 does not apply. In addition, if the owner taxpayer has a recharacterization amount as computed on line 7 of Worksheet B, and/or any amounts resulting from the application of section 1061(d) (transfer of an API to a related person) on line 8 of Worksheet B (see Regulations section 1.1061-5(c)), the owner taxpayer will increase the reported short-term capital gain by listing as a transaction identified as "Section 1061 Adjustment" on Form 8949, Part I, line 1, column (a), and entering the amount from line 9 of Worksheet B as proceeds (column (d) of the Form 8949) and zero as basis (column (e) of the Form 8949). The owner taxpayer will make corresponding entries on Form 8949, Part II, line 1, to reduce the reported long-term capital gain by listing as a transaction identified as "Section 1061 Adjustment" in column (a) of the Form 8949 and entering zero as proceeds (column (d) of the Form 8949) and the amount from line 9 of Worksheet B as basis (column (e) of the Form 8949).

The Owner Taxpayer Reporting of Collectibles Gain and Unrecaptured Section 1250 Gain

Pending further guidance, if the owner taxpayer sells an API and recognizes collectibles gain or loss or unrecaptured section 1250 gain, or if a pass-through entity reports that collectibles gain or loss or unrecaptured section 1250 gain is treated as API gain or loss, the owner taxpayer must use a reasonable method to compute the amount of the inclusion of collectibles gain and/or unrecaptured section 1250 gain in the recharacterization amount that is calculated in Worksheet B. If the owner taxpayer has received an API 1-year distributive share amount and an API 3-year distributive share amount that includes collectibles gain or loss and/or unrecaptured section 1250 gain from a pass-through entity, the owner taxpayer should include those amounts on lines 1 and 4, respectively, of Worksheet B. If the owner taxpayer has received an API 1-year distributive share amount and an API 3-year distributive share amount that includes collectibles gain or loss and/or unrecaptured section 1250 gain from a pass-through entity, the owner taxpayer should include those amounts on lines 1 and 4, respectively, of Worksheet B .

On line 10 of Worksheet B , the owner taxpayer must report the total amount of collectibles gains for the tax year that the owner taxpayer has with respect to any interest in a pass-through entity (pass-through interests) that it owns. It must also report the amount of collectibles gain that is recharacterized as short-term capital gain under section 1061 and the amount of collectibles gain that is not recharacterized and that is included in the 28% Rate Gain Worksheet (see line 18 of the Schedule D (Form 1040), or line 18c of the Schedule D (Form 1041)). Collectibles gain or loss that is API gain or loss and is included in the calculation of the recharacterization amount, but not recharacterized, must be included in the 28% Rate Gain Worksheet. Collectibles gain or loss with respect to a pass-through interest that is treated as capital interest gain or loss must also be included in the 28% Rate Gain Worksheet.

Similarly, on line 11 of Worksheet B , the owner taxpayer must report the total amount of unrecaptured section 1250 gain for the tax year that the owner taxpayer has with respect to any pass-through interests that it owns. It must also report the amount of unrecaptured section 1250 gain that is recharacterized as short-term capital gain under section 1061 and the amount of unrecaptured section 1250 gain that is not recharacterized and that is included 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)). Unrecaptured section 1250 gain or loss that is API gain or loss and is included in the calculation of the recharacterization amount, but not recharacterized, must be included in the Unrecaptured Section 1250 Gain Worksheet. Unrecaptured section 1250 gain or loss with respect to a pass-through interest that is treated as capital interest gain or loss must also be included in the Unrecaptured Section 1250 Gain Worksheet.

Owner Taxpayer M, an individual, holds an API in XYZ Partnership and receives a Schedule K-1 with Worksheet A attached from XYZ Partnership for the tax year 2021, that contains a long-term capital gain of $55,000 in box 9a of the Schedule K-1. Taxpayer M did not dispose of an API in 2021. The following is a summary of Worksheet A that XYZ Partnership attached to Taxpayer M's Schedule K-1: Line 4 has an API 1-year distributive share amount of $55,000 and line 7 has an API 3-year distributive share amount of $20,000.

Taxpayer M reports a $55,000 long-term capital gain from XYZ Partnership on Schedule D (Form 1040), line 12. Taxpayer M chose to follow the final regulations under T.D. 9945 in preparation of their 2021 tax return and prepares and attaches Worksheet B to their Form 1040. Worksheet B has a 1-year gain amount on line 3 of $55,000, a 3-year gain amount of $20,000 on line 6, a recharacterization amount on line 7 of $35,000, and a section 1061 adjustment on line 9 of $35,000. In addition to reporting the long-term capital gain of $55,000 on Schedule D (Form 1040), line 12, Taxpayer M reports on Form 8949, Part I, line 1, a short-term capital gain of $35,000, and on Part II, line 1, a long-term capital loss of ($35,000). Both Form 8949 items are described in column (a) as "Section 1061 Adjustment."

TEFRA is the common acronym used for a set of consolidated examination, processing, and judicial procedures which determine the tax treatment of partnership items at the partnership level for partnerships and LLCs that file as partnerships. TEFRA created the unified partnership audit and litigation procedures (TEFRA partnership procedures) of sections 6221 through 6234 (prior to the amendments by the BBA). For additional information on TEFRA partnership procedures, see the January 2016 revision of Pub. 541.

Bipartisan Budget Act of 2015 (BBA)

The BBA created a new centralized partnership audit regime effective for partnership tax years beginning after 2017. The new regime replaces the consolidated audit proceedings under TEFRA and the electing large partnership provisions. The new audit regime applies to all partnerships unless the partnership is an eligible partnership and elects out by making a valid election. See the Instructions for Form 1065 and BBA Centralized Partnership Audit Regime .

Under the centralized partnership audit regime, partnerships are required to designate a partnership representative. The partnership representative will have the sole authority to act on behalf of the partnership under the centralized partnership audit regime. The designated partnership representative is a partner or other person with substantial presence in the United States. If the designated partnership representative is an entity, the partnership must also appoint a designated individual to act on behalf of the entity partnership representative. The partnership must include information regarding the partnership representative and designated individual (if applicable) on Form 1065, Schedule B. For more information, see the Instructions for Form 1065.

A partnership can elect out of the centralized partnership audit regime for a tax year if the partnership is an eligible partnership that year. A partnership is an eligible partnership for a tax year if it has 100 or fewer eligible partners. A partner is an eligible partner if it is an individual, a C corporation, a foreign entity that would be treated as a C corporation if it were domestic, an S corporation, or an estate of a deceased partner. The determination as to whether the partnership has 100 or fewer partners is made by adding the number of Schedules K-1 required to be issued by the partnership to the number of Schedules K-1 required to be issued by any partner that is an S corporation to its shareholders for the tax year of the S corporation ending with or within the partnership tax year. A partnership is not an eligible partnership if it is required to issue a Schedule K-1 to any of the following partners.

A partnership.

A foreign entity that would not be treated as a C corporation were it a domestic entity.

A disregarded entity described in Regulations section 301.7701-2(c)(2)(i).

An estate of an individual other than a deceased partner.

Any person that holds an interest in the partnership on behalf of another person. See the Instructions for Form 1065 if electing out of the centralized partnership audit regime.

An annual election out of the centralized partnership audit regime must be made on the eligible partnership’s timely filed return, including extensions, for the tax year to which the election applies. The election is made by including the following information on Schedule B-2 (Form 1065) and filing with the tax return.

The name of each partner.

The TIN of each partner.

The federal tax classification for each partner.

If an S corporation is a partner, provide the names, TINs, and federal tax classification of any shareholder of the S corporation for the tax year of the S corporation ending with or within the partnership’s tax year.

This annual election once made may not be revoked without the consent of the IRS. A partnership that elects out of the centralized partnership audit regime must notify each of its partners of the election within 30 days of making the election. By making the election out of the centralized partnership audit regime, you are affirming that all of the partners in the partnership meet the eligibility requirements under section 6221(b)(1)(C) and you have provided all of the required information with the Form 1065.

Administrative Adjustment Request

Rather than filing an amended return, a partnership that is subject to the centralized partnership audit regime must file an Administrative Adjustment Request (AAR) to change the amount or treatment of one or more partnership-related items. If filing electronically, file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with a Form 1065, or Form 1065-X, Amended Return or Administrative Adjustment Request (AAR).

Partnerships subject to the centralized partnership audit regime and filing an AAR that results in an imputed underpayment and any interest or penalties related to the imputed underpayment should report the imputed underpayment and any related interest and penalties on Form 1065 or 1065-X (as applicable). See the Instructions for Form 1065.

See the instructions for Form 8082 or 1065-X (as applicable) for the following.

Information pertaining to certain modifications that are allowable for the partnership to include in its calculation of an AAR imputed underpayment.

Information pertaining to the ability for the partnership to make an election under section 6227(b)(2) to have the adjustments of the AAR taken into account by the reviewed year partners, rather than the partnership making an imputed underpayment.

Section 6225(c) allows a BBA partnership under examination to request specific types of modifications of any imputed underpayment proposed by the IRS. One type of modification (under section 6225(c)(2)) that may be requested is when one or more (reviewed year) partners file amended returns for the tax years of the partners which includes the end of the reviewed year of the BBA partnership under examination and for any tax year with respect to which tax attributes are affected. See the Instructions for Form 8980.

How To Get Tax Help

If you have questions about a tax issue; need help preparing your tax return; or want to download free publications, forms, or instructions, go to IRS.gov to find resources that can help you right away.

After receiving all your wage and earnings statements (Forms W-2, W-2G, 1099-R, 1099-MISC, 1099-NEC, etc.); unemployment compensation statements (by mail or in a digital format) or other government payment statements (Form 1099-G); and interest, dividend, and retirement statements from banks and investment firms (Forms 1099), you have several options to choose from to prepare and file your tax return. You can prepare the tax return yourself, see if you qualify for free tax preparation, or hire a tax professional to prepare your return.

Go to IRS.gov to see your options for preparing and filing your return online or in your local community, if you qualify, which include the following.

Free File. This program lets you prepare and file your federal individual income tax return for free using brand-name tax-preparation-and-filing software or Free File fillable forms. However, state tax preparation may not be available through Free File. Go to IRS.gov/FreeFile to see if you qualify for free online federal tax preparation, e-filing, and direct deposit or payment options.

VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate incomes, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. Go to IRS.gov/VITA , download the free IRS2Go app, or call 800-906-9887 for information on free tax return preparation.

TCE. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. Go to IRS.gov/TCE , download the free IRS2Go app, or call 888-227-7669 for information on free tax return preparation.

MilTax. Members of the U.S. Armed Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to MilitaryOneSource ( MilitaryOneSource.mil/MilTax ).

Also, the IRS offers Free Fillable Forms, which can be completed online and then filed electronically regardless of income.

Go to IRS.gov/Tools for the following.

The Earned Income Tax Credit Assistant ( IRS.gov/EITCAssistant ) determines if you’re eligible for the earned income credit (EIC).

The Online EIN Application ( IRS.gov/EIN ) helps you get an employer identification number (EIN) at no cost.

The Tax Withholding Estimator ( IRS.gov/W4app ) makes it easier for everyone to pay the correct amount of tax during the year. The tool is a convenient, online way to check and tailor your withholding. It’s more user-friendly for taxpayers, including retirees and self-employed individuals. The features include the following.

▶ Easy to understand language.

▶ The ability to switch between screens, correct previous entries, and skip screens that don’t apply.

▶ Tips and links to help you determine if you qualify for tax credits and deductions.

▶ A progress tracker.

▶ A self-employment tax feature.

▶ Automatic calculation of taxable social security benefits.

The First-Time Homebuyer Credit Account Look-up ( IRS.gov/HomeBuyer ) tool provides information on your repayments and account balance.

The Sales Tax Deduction Calculator ( IRS.gov/SalesTax ) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040).

IRS.gov/Help : A variety of tools to help you get answers to some of the most common tax questions.

IRS.gov/ITA : The Interactive Tax Assistant, a tool that will ask you questions and, based on your input, provide answers on a number of tax law topics.

IRS.gov/Forms : Find forms, instructions, and publications. You will find details on 2021 tax changes and hundreds of interactive links to help you find answers to your questions.

You may also be able to access tax law information in your electronic filing software.

There are various types of tax return preparers, including tax preparers, enrolled agents, certified public accountants (CPAs), attorneys, and many others who don’t have professional credentials. If you choose to have someone prepare your tax return, choose that preparer wisely. A paid tax preparer is:

Primarily responsible for the overall substantive accuracy of your return,

Required to sign the return, and

Required to include their preparer tax identification number (PTIN).

Although the tax preparer always signs the return, you're ultimately responsible for providing all the information required for the preparer to accurately prepare your return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters. For more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer on IRS.gov.

From July through December 2021, advance payments were sent automatically to taxpayers with qualifying children who met certain criteria. The advance child tax credit payments were early payments of up to 50% of the estimated child tax credit that taxpayers may properly claim on their 2021 returns. Go to IRS.gov/AdvCTC for more information about these payments and how they can affect your taxes.

Go to IRS.gov/Coronavirus for links to information on the impact of the coronavirus, as well as tax relief available for individuals and families, small and large businesses, and tax-exempt organizations.

The Social Security Administration (SSA) offers online service at SSA.gov/employer for fast, free, and secure online W-2 filing options to CPAs, accountants, enrolled agents, and individuals who process Form W-2, Wage and Tax Statement, and Form W-2c, Corrected Wage and Tax Statement.

Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, products, and services. At the IRS, privacy and security are our highest priority. We use these tools to share public information with you. Don’t post your social security number (SSN) or other confidential information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

Youtube.com/irsvideos .

Youtube.com/irsvideosmultilingua .

Youtube.com/irsvideosASL .

The IRS Video portal ( IRSVideos.gov ) contains video and audio presentations for individuals, small businesses, and tax professionals.

You can find information on IRS.gov/MyLanguage if English isn’t your native language.

The IRS is committed to serving our multilingual customers by offering OPI services. The OPI Service is a federally funded program and is available at Taxpayer Assistance Centers (TACs), other IRS offices, and every VITA/TCE return site. The OPI Service is accessible in more than 350 languages.

Taxpayers who need information about accessibility services can call 833-690-0598. The Accessibility Helpline can answer questions related to current and future accessibility products and services available in alternative media formats (for example, braille, large print, audio, etc.).

Go to IRS.gov/Forms to view, download, or print all of the forms, instructions, and publications you may need. Or, you can go to IRS.gov/OrderForms to place an order.

You can also download and view popular tax publications and instructions (including the Instructions for Form 1040) on mobile devices as eBooks at IRS.gov/eBooks .

IRS eBooks have been tested using Apple's iBooks for iPad. Our eBooks haven’t been tested on other dedicated eBook readers, and eBook functionality may not operate as intended.

Go to IRS.gov/Account to securely access information about your federal tax account.

View the amount you owe and a breakdown by tax year.

See payment plan details or apply for a new payment plan.

Make a payment or view 5 years of payment history and any pending or scheduled payments.

Access your tax records, including key data from your most recent tax return, your EIP amounts, and transcripts.

View digital copies of select notices from the IRS.

Approve or reject authorization requests from tax professionals.

View your address on file or manage your communication preferences.

This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account . For more information, go to IRS.gov/TaxProAccount .

The fastest way to receive a tax refund is to file electronically and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information on where to find a bank or credit union that can open an account online.

The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts . Click on either “Get Transcript Online” or “Get Transcript by Mail” to order a free copy of your transcript. If you prefer, you can order your transcript by calling 800-908-9946.

Tax-related identity theft happens when someone steals your personal information to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

The IRS doesn’t initiate contact with taxpayers by email, text messages, telephone calls, or social media channels to request personal or financial information. This includes requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

Go to IRS.gov/IdentityTheft , the IRS Identity Theft Central webpage, for information on identity theft and data security protection for taxpayers, tax professionals, and businesses. If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, you can learn what steps you should take.

Get an Identity Protection PIN (IP PIN). IP PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return with your SSN. To learn more, go to IRS.gov/IPPIN .

Go to IRS.gov/Refunds .

Download the official IRS2Go app to your mobile device to check your refund status.

Call the automated refund hotline at 800-829-1954.

The IRS can’t issue refunds before mid-February 2022 for returns that claimed the EIC or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Go to IRS.gov/Payments for information on how to make a payment using any of the following options.

IRS Direct Pay : Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

Debit or Credit Card : Choose an approved payment processor to pay online or by phone.

Electronic Funds Withdrawal : Schedule a payment when filing your federal taxes using tax return preparation software or through a tax professional.

Electronic Federal Tax Payment System : Best option for businesses. Enrollment is required.

Check or Money Order : Mail your payment to the address listed on the notice or instructions.

Cash : You may be able to pay your taxes with cash at a participating retail store.

Same-Day Wire : You may be able to do same-day wire from your financial institution. Contact your financial institution for availability, cost, and time frames.

The IRS uses the latest encryption technology to ensure that the electronic payments you make online, by phone, or from a mobile device using the IRS2Go app are safe and secure. Paying electronically is quick, easy, and faster than mailing in a check or money order.

Go to IRS.gov/Payments for more information about your options.

Apply for an online payment agreement ( IRS.gov/OPA ) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. For more information on the Offer in Compromise program, go to IRS.gov/OIC .

You can now file Form 1040-X electronically with tax filing software to amend 2019 or 2020 Forms 1040 and 1040-SR. To do so, you must have e-filed your original 2019 or 2020 return. Amended returns for all prior years must be mailed. Go to IRS.gov/Form1040X for information and updates.

Go to IRS.gov/WMAR to track the status of Form 1040-X amended returns.

It can take up to 3 weeks from the date you filed your amended return for it to show up in our system, and processing it can take up to 16 weeks.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

You can use Schedule LEP, Request for Change in Language Preference, to state a preference to receive notices, letters, or other written communications from the IRS in an alternative language, when these are available. Once your Schedule LEP is processed, the IRS will determine your translation needs and provide you translations when available. If you have a disability requiring notices in an accessible format, see Form 9000.

Keep in mind, many questions can be answered on IRS.gov without visiting an IRS TAC. Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment, so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC and to check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You

TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights .

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

Your problem is causing financial difficulty for you, your family, or your business;

You face (or your business is facing) an immediate threat of adverse action; or

You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

TAS has offices in every state, the District of Columbia, and Puerto Rico . Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us . You can also call them at 877-777-4778.

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, report it to them at IRS.gov/SAMS .

TAS can provide a variety of information for tax professionals, including tax law updates and guidance, TAS programs, and ways to let TAS know about systemic problems you’ve seen in your practice.

LITCs are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee for eligible taxpayers. To find an LITC near you, go to TaxpayerAdvocate.IRS.gov/about-us/Low-Income-Taxpayer-Clinics-LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List .

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Selling Your Partnership Interest? Form 8308, and New Penalty Relief, May Apply

by Shawn Smith, Jeffrey McMichael

Beginning with tax year 2023, partnerships that sell or exchange partnership interests must report additional information to the IRS, both on Form 8308 “Report of a Sale or Exchange of Certain Partnership Interests” and on their Schedule K-1 disclosures. The additional information is intended to help partners determine their tax liability when selling or exchanging their interests.  In October 2023, the IRS released a revised version of Form 8308 that adds a new part IV requiring calculations of gain or loss on the sale or exchange of certain partnership interests. The completed Form 8308, including the new part IV, must be sent to the transferor and transferee partners by January 31, 2024. Commentators have expressed concern to the IRS because, in many cases, partnerships will not have all of the information required to complete part IV of Form 8308 by the January 31, 2024, deadline.  As a result, in mid-January 2024 IRS Notice 2024-19 granted penalty relief for taxpayers who are unable to furnish a completed copy of Form 8308 to the transferor and transferee partners by the January 31 deadline. However, the completed form is still due to the IRS on that date. Below offers guidance on Form 8308 and the new penalty relief.

What Information Is Needed on Form 8308 When a Partnership Sells or Exchanges an Interest?

Partnerships must generally file Form 8308 to report the sale or exchange by a partner of all of part of their partnership interest where any money or other property received in the sale or exchange is attributable to unrealized receivables or inventory items as defined in Section 751(a), more commonly referred to as “hot assets.” The partnership must attach the completed Form 8308 to its timely filed tax return (including extensions) and furnish copies to the transferor and transferee partners of the transaction. The October 2023 revision to Form 8308 affects transfers occurring on or after January 1, 2023, and has expanded the reporting requirements of parts I and II, and added new parts III and IV: 

• Parts I-III require the partnership to disclosure more information about the transferor and transferee partners, the record holder and beneficial owner of the partnership interest immediately before and after the transaction, and the date and type of transfer. 
• Section 751(a) for “hot assets,” taxed at ordinary rates up to 37%;
• Section 1(h)(5) for collectibles, taxed at higher capital gain rates up to 28%; and
• Unrecaptured 1250 gain for real property, taxed at 25%.

In addition, the partnership must disclose the above gains on the transferor partner’s 2023 Schedule K-1 that is filed with the partnership’s Form 1065 tax return. The amounts are disclosed in Boxes 20AB, 20AC and 20AD, respectively. If a partnership is required to file Form 8308 due to a sale or exchange described in Section 751(a) and its regulations, the partnership must furnish a statement to the transferor and transferee involved in the transaction by the later of:

• January 31 of the year following the calendar year in which the exchange occurred, or
• 30 days after the partnership has received notice of the exchange. 

Generally, a partnership must use a completed Form 8308 as the required statement. However, the partnership can also furnish a separate statement to the transferor and transferee that includes the required information to be shown on Form 8308 with respect to the Section 751(a) transaction.

What Type of Penalty Relief Does Notice 2024-19 Provide for Form 8308?

Notice 2024-19 acknowledges the concerns taxpayers have with being able to timely furnish the information required in part IV of Form 8308 to the transferor and transferee partners. Therefore, the IRS will not impose penalties under Section 6722 for failure to furnish a completed Form 8308 to the transferor and transferee partners of a Section 751(a) exchange by the January 31, 2024, due date.  However, keep in mind this penalty relief applies only to the partnership furnishing the Form 8308 to the transferor and transferee partners , not to attaching a completed Form 8308 to the partnership’s timely filed tax return (including extensions).

How Does My Partnership Qualify for Relief Under Notice 2014-19?

To qualify for relief under Notice 2024-19, the partnership must do the following:

• Timely and correctly furnish the transferor and transferee partners a copy of Form 8308 with parts I, II and III completed, or a statement that includes the same information, by the later of January 31, 2024, or 30 days after the partnership is notified of the Section 751(a) exchange; and
• Provide the transferor and transferee partners a copy of the complete Form 8308, including part IV, or a statement that includes the same information, by the later of the due date of the partnership’s Form 1065 (including extensions) or 30 days after the partnership is notified of the Section 751(a) exchange.

Taxpayers that were involved in a sale or exchange of their partnership interest should notify their tax professional of the transaction and determine if filing Form 8308 is required, then discuss next steps to comply with the new reporting requirements for tax year 2023. Contact Shawn Smith at [email protected] , Jeffrey McMichael at [email protected] or a member of your service team to discuss this topic further. Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

About the Authors

Shawn smith, cpa, jeffrey mcmichael, jd, related insights, new calculation method may result in fewer employee benefit plan audits moving forward, irs recommits to scrutiny of limited partners providing services to private funds, what entities are required to collect and report beneficial ownership information, sign up for our private company newsletter.

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LLC Membership Interest Assignment

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An LLC Membership Interest Assignment is a document used when one member of an LLC* wishes to transfer their interest to another party entirely. LLC Membership Interest Assignments are often used where a member in an LLC is leaving or otherwise wants to relinquish the entirety of their interest in the company. Using this document, the current owner of shares in the LLC would transfer their entire interest in the LLC to another person or entity.

A Limited Liability Company, commonly known as an LLC, is a corporate structure that protects its owners from being personally pursued for repayment of debts and liabilities owed by the company. LLCs do not pay taxes on their profits directly. Instead, profits and losses are passed through to the individual members who report them on their personal tax returns.

An LLC Membership Interest Assignment normally happens well after the LLC has already been operating . To form a limited liability company in most states, any party must begin with Articles of Organization (sometimes called Certificates of Formation or other varying names).

How to use this document

This document can be used when any party would like to transfer the ownership of an interest in an LLC or when any party would like a membership interest in an LLC transferred to them, as long as the current owner of the membership interest agrees. It should be used it when both parties understand that the membership interest will be completely assigned and wish to create a record of their agreement, as well as a document that the LLC will likely keep on file.

This document will allow the form-filler to input details of the identities of both parties, as well as the details of the membership interest, such as percentage and whether or not it comes with voting rights . It also has an optional addendum at the end, in case full consent is needed from all the rest of the members of the LLC .

Please keep in mind that this form requires both signatures , from the party assigning the interest and the party receiving it.

Once the LLC Membership Interest Assignment has been completed, all members of the LLC should be notified of the transfer. This notification usually happens by providing a copy of the Assignment and any related documents to the LLC's registered agent or manager. Information about the process is typically specified in the LLC Operating Agreement. In some states, transfer of interest in an LLC requires that formation documents be updated and refiled with the appropriate state office to reflect changes in membership. This may also involve filing an amendment to the Articles of Organization. The LLC should be sure to update its bank accounts, contracts, licenses, and permits as necessary to reflect the membership change. Finally, the LLC should maintain accurate records of the transfer of interest , saving for future reference copies of the Assignment Agreement, amended Operating Agreement , consent of members, and any other relevant documents.

Applicable law

LLC Membership Interest Assignments are subject to the laws of individual states . There is no one federal law covering these documents, because each individual state governs the businesses formed within that state.

How to modify the template

You fill out a form. The document is created before your eyes as you respond to the questions.

At the end, you receive it in Word and PDF formats. You can modify it and reuse it.

Guides to help you

• How to Sell your Percentage in an LLC
• How to Sell your Business
• How to Transfer Business Ownership

Other names for the document:

Assignment of Interest for LLC Member, Interest Assignment for LLC Membership, LLC Interest Assignment Agreement, Member Interest Transfer for LLC, Membership Assignment for LLC

Country: United States

Business Structure - Other downloadable templates of legal documents

• Articles Of Organization
• Shareholder Agreement
• Articles Of Incorporation
• Partnership Agreement
• Business Sale Agreement
• Corporate Bylaws
• Stock Sale and Purchase Agreement
• LLC Membership Purchase Agreement
• Founders' Agreement
• Business Merger Agreement
• Limited Partnership Agreement
• Other downloadable templates of legal documents

Trending News

Related Practices & Jurisdictions

• Administrative & Regulatory
• All Federal

The US Department of the Treasury and Internal Revenue Service (IRS) recently issued  final regulations under section 1446(f) , a provision enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) that generally imposes a withholding obligation on transfers of certain partnership interests (Note: All references to “section” are to the Internal Revenue Code of 1986, as amended (the “Code”) unless otherwise indicated). That provision, in conjunction with the enactment of section 864(c)(8) also under the TCJA, imposes a new statutory scheme in response to the ruling of the Tax Court in  Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner , 149 TC No. 3 (2017), aff’d, 926 F.3d 819 (DC Cir. June 11, 2019). The final regulations largely retained the rules set forth in the proposed regulations, with some additions and modifications. The following discusses some of the noteworthy provisions in the regulations.

SECTIONS 864(C)(8) AND 1446(F): IN GENERAL

Section 864(c)(8) generally provides that gain or loss derived by a nonresident individual or foreign corporation from the sale or exchange (or other disposition) of an interest in a partnership engaged in a US trade or business is treated as effectively connected income (ECI) to the same extent as such partner’s portion of distributive share of gain or loss that would have been ECI if the partnership had sold all of its assets at their fair market value as of the date of the partner’s sale or exchange. Section 864(c)(8) further provides that withholding is not required to the extent a transferor provides a nonforeign affidavit to the transferee, or if other regulatory exceptions are adopted (as discussed below).

Section 1446(f) generally requires a transferee of a partnership interest described in section 864(c)(8) to withhold 10% of the amount realized by the transferor. Moreover, if the transferee fails to withhold such amount, the partnership is required to deduct and withhold from distributions to the transferee a tax equal to the amount the transferee failed to withhold plus interest.

EFFECTIVE DATES

Generally, the final regulations apply to transfers of partnership interests occurring on or after 60 days after the final regulations are published in the Federal Register ( i.e. , December 2020). However, a partnership’s requirement to withhold amounts not withheld by the transferee applies to transfers that occur on or after January 1, 2022.

AMOUNT TO WITHHOLD

Amount realized.

The final regulations retained the definition of “amount realized” set forth in the proposed regulations, namely, that it generally includes (i) consideration paid by the transferee and (ii) the transferor’s share of partnership liabilities (determined under section 752 and the regulations promulgated thereunder). Thus, the amount realized includes any reduction in the transferor’s share of partnership liabilities. One commentator suggested the inclusion of any reduction to a transferor’s share of partnership liabilities could cause liquidity concerns when the amount of liabilities assumed exceeds the cash or other property exchanged in the transfer. Treasury and the IRS concluded that it was inappropriate to exclude a reduction in a transferor’s share of partnership liabilities from the amount realized, citing that such concerns are addressed in regulation 1.1446(f)-2(c)(3).

For purposes of determining the amount realized, the final regulations retain the look-through rule set forth in the proposed regulations for situations involving a transfer by a foreign partnership transferor that has a direct or indirect partner not subject to tax on gain from such transfer as a result of an applicable US income tax treaty. Specifically, the final regulations provide that a treaty-eligible partner is not a presumed foreign taxable person for purposes of determining the modified amount realized. A foreign partnership that provides a certification of modified amount realized must include, in addition to IRS Form W-8IMY ( Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting ) and a withholding statement, the certification of treaty benefits (on IRS Form W-8BEN ( Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) ) or Form W-8BEN-E ( Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) ), as applicable from each direct or indirect partner that is not a presumed foreign taxable person.

Certification of Maximum Tax Liability

The final regulations adopt the procedure in the proposed regulations limiting the withholding amount based on the maximum tax liability the transferor would be required to pay on the gain attributable to the partnership interest transfer. Specifically, the procedure allows a transferee to withhold based on a certification received from the transferor containing certain information relating to the transferor and the transfer, including the transferor’s maximum tax liability. A transferee may rely on a certification received from a transferor that is a foreign corporation, a nonresident alien individual or a foreign partnership regarding the transferor’s maximum tax liability. In addition, the final regulations permit transferors that are foreign trusts to use the maximum tax liability procedure to reduce the amount otherwise required to be withheld. Similar to the approach taken with respect to foreign partnerships, such rules treat the foreign trust as a nonresident alien individual for purposes of computing its maximum tax liability.

OBLIGATION TO WITHHOLD

In general, as noted earlier, the transferee of a partnership interest must withhold a tax equal to 10% of the amount realized by the transferor on any transfer of a partnership interest unless an applicable exception applies (as discussed below).

The final regulations maintain this broad presumption, despite comments to the proposed regulations noting that such presumption may impose a withholding obligation on  any  transfer of a partnership interest, regardless of whether the partnership in question has assets in, or a connection to, the United States. Treasury and the IRS justified this broad approach in the final regulations by noting that a transferee will not know whether a transfer results in tax on gain without information from the transferor or the partnership. Therefore, the transferee must presume that a transfer is subject to withholding unless it obtains a certification establishing otherwise.

Given the broad application of the final regulations, even non-US partners in non-US partnerships may be caught up in the withholding requirements of partnership interest transfers. This can be a trap for the unwary because it is not always obvious whether a non-US entity or investment vehicle is, by default, classified as a partnership for US income tax purposes. For example, in the absence of a US entity classification election confirming its US income tax classification, the US income tax classification of Brazilian funds, such as FIMs ( fundos de investimento multimercado ) and FIPs ( fundos de investimento em participações ), depends on certain peculiarities of the given entity’s governing documents. Thus, investors and their advisors should be careful to consider the impact of the final regulations not only on US partnerships but also on non-US partnerships and investment vehicles.

The final regulations provide that a partnership is permitted to determine that it does not have a withholding obligation under the final regulations if it possesses a valid IRS Form W-9 ( Request for Taxpayer Identification Number and Certification)  for the transferor to establish the transferor’s non-foreign status, even if the transferee does not provide a withholding certificate to the partnership.

LIABILITY FOR FAILING TO WITHHOLD

As noted above, if a transferee fails to withhold any amount required to be withheld, the partnership must deduct and withhold from distributions to the transferee a tax in an amount equal to the amount the transferee failed to withhold, plus interest. A partnership may determine its withholding obligation by relying on information provided in a certification received from the transferee ( i.e. , a withholding certificate). Generally, a transferee is required to provide a partnership with a certification that it has complied with its partnership interest transfer withholding obligation, including whether it is relying upon an exemption from such withholding. The final regulations add a provision that any person required to withhold is not liable for failure to withhold, including any interest or penalties resulting therefrom, if such person establishes to the satisfaction of the IRS that the transferor had no effectively connected gain subject to tax on the transfer of the partnership interest. However, it may be difficult for the withholding agent to convince the IRS that no such taxable gain exists without cooperation from the transferor.

Because partnerships can become liable for deducting and withholding tax (and interest) that a transferee failed to withhold from a transferor, partnerships should consider reviewing their partnership agreements and due diligence requirements related to transfers of partnership interests. For instance, a partnership may include provisions in its partnership agreement that a transfer of a partnership interest may only be permitted if (among other customary requirements) a transferee provides a valid certificate establishing an exception to withholding or certifies that it will withhold on the transfer (accompanied by proof of such actual withholding).

RELIANCE ON CERTIFICATIONS PROVIDED BY TRANSFEROR, TRANSFEREE AND PARTNERSHIP

In order not to withhold or to withhold a reduced amount, a transferee is permitted to rely on a certification it receives from a transferor or the partnership unless it has actual knowledge that the certification is incorrect or unreliable. Moreover, the partnership may rely on a certification received from the transferee unless the partnership knows or has reason to know it is incorrect or unreliable. Such “reason to know” standard requires the partnership to review the certification to confirm that it does not have information suggesting the certificate is incorrect or unreliable. On that basis, transferees might consider including a pre-closing condition (and other relevant contractual provisions) in a purchase agreement that the partnership will confirm the certification from the transferor and/or the partnership will itself provide a certification.

WITHHOLDING EXCEPTIONS

The final regulations generally retain the withholding exceptions of the proposed regulations with certain modifications. Importantly, the transferor’s distributive share of ECI exception no longer requires effectively connected income or loss in a given tax year, and a new no trade or business exception has been adopted.

The final regulations do not include any withholding exceptions for: (i) disguised sales; (ii) transferors that are “withholding foreign partnerships” and “withholding foreign trusts” if they enter into a withholding agreement with the IRS; and (iii) earnout payments entitling the transferor to future payments based on specific goals or metrics.

Non-Foreign Status

The transferor may provide a certificate to a transferee certifying as to its non-foreign status. For that purpose, a certification of non-foreign status includes a valid IRS Form W-9. Moreover, a transferee may rely on a valid Form W-9 it already possesses from the transferor provided it meets the certification requirement as set forth in the final regulations.

The transferor may provide a certification that no gain will be realized by the transferor. Importantly, the transferor must certify that ordinary income attributable to property described in Code section 751 (“hot assets”) utilized in or attributable to a US trade or business would not be recognized in connection with the transfer.

Deemed Sale

A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the partnership that if the partnership sold all of its assets on the “determination date,” either: (1) the partnership would have no effectively connected gain, or if the partnership would have a net amount of such gain, the amount of the partnership’s net gain that would have been effectively connected gain would be less than 10% of the total net gain; or (2) the transferor would not have a distributive share of net gain from the partnership that would be ECI, or if the transferor would have a distributive share of ECI, the transferor’s allocable share of the partnership’s net ECI would be less than 10% of the transferor’s distributive share of the total net gain from the partnership. For this purpose, and generally, the “determination date” is the transfer date or any day that is no more than 60 days before the date of the transfer.

No US Trade or Business

Addressing comments to the proposed regulations, Treasury and the IRS included a new exception from withholding not included in the proposed regulations. Specifically, a transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the partnership that it was not engaged in a US trade or business during the partnership’s tax year, up to and including the date of the transfer. Partnerships that invest in assets that do not give rise to ECI ( e.g. , corporations, real estate investment trusts, etc.) should find this exception useful.

Transferor’s Distributive Share of ECI

A transferee (other than a partnership that is a transferee because it makes a distribution) may rely on a certification from the transferor stating that: (a) it has held its partnership interest for the prior three tax years (the “look-back period”); (b) the transferor’s (and its related partners’ within the meaning of sections 267(b) and 707(b)) distributive share of gross ECI in each of the taxable years within the look-back period was less than $1 million in the aggregate; (C) the transferor’s distributive share of gross ECI in each of the years within the look-back period is less than 10% of its total distributive share of gross partnership income; and (D) the transferor’s share of ECI was timely reported on its tax return and all US taxes on such ECI were timely paid.

Notably, a transferor may only provide a certificate pursuant to that exception if it has received a Schedule K-1 from the partnership reflecting distributable gross income for each of the years within the look-back period. Importantly, unlike the proposed regulations, the final regulations do not require that the transferor have received an IRS Form 8805 ( Foreign Partner’s Information Statement of Section 1446 Withholding Tax ) and have effectively connected gain or loss, thus making this exception available for partners of partnerships without ECI. Practically, the use of this exception may be limited because some partnerships do not provide K-1s to their foreign partners unless and until the partnership derives ECI.

Certification of Nonrecognition by Transferor

A transferee may rely on a certification from the transferor stating that by reason of the operation of a nonrecognition provision of the Code, the transferor is not required to recognize any gain or loss with respect to the transfer of the partnership interest. The final regulations also contain a partial nonrecognition exception that may apply in certain circumstances.

Treaty Claims

A transferor may provide a certification to the transferee that it is not subject to tax on any gain upon transfer of the partnership interest because of an applicable tax treaty limiting the ability of the United States to tax income that does is not attributable to a permanent establishment. To avail itself of that exception, the transferor must make the certification on a valid IRS Form W-8BEN, or Form W-8BEN-E. In addition, the transferee must mail a copy of the certification to the IRS within 30 days of the transfer. Before making such certification for purposes of invoking the treaty claim exception, a transferor should consider other factors that may give rise to a permanent establishment, including whether the US office of the partnership constitutes a fixed place of business as defined by the applicable treaty.

The IRS indicated its intention to revise the instructions to Forms W-8BEN and W-8BEN-E to describe the information required to be provided for making a treaty benefits claim for purposes of section 1446(f), including a treaty claim made with respect to a transfer of a publicly traded partnership (PTP) interest.

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How to Transfer Business Interests into a Trust

After you create a trust, your next step is to transfer your assets into your trust. But what if you own a business interest? Should you transfer that into your trust too? Transferring business interests into a trust can be complicated, but here’s an overview of the basics.

Why Transfer Business Interests into a Trust?

Some people who create a trust choose to transfer their business interests into it for the following reasons: 

• Avoiding Probate: Just like any other asset, business interests that exceed the California probate threshold can trigger a lengthy, expensive, and public probate proceeding. Assets that are placed in a trust do not need to be probated.
• Incapacity Planning: A trust ensures that your business can continue operating not only upon your death, but also if you become incapacitated due to an accident or illness. If your business interests are placed in a trust and you become incapacitated, your successor trustee can immediately take over your duties to keep your business operating during your absence. 

What to Know Before Transferring Assets

Before transferring your business interests into a trust, you should always consult an experienced estate planning attorney . Depending on what kind of business interest you own, they can help ensure that this transfer won’t violate a corporation’s bylaws, an LLC operating agreement, or a shareholders’ buy-sell agreement. 

Your attorney can also draft a trust that specifically grants the trustee powers to manage your business. Each type of business interest has its own requirements so working with an attorney is key to avoiding any potential missteps. 

How to Transfer a Business Interest into a Trust 

The process for transferring your business interest into a trust varies depending on what kind of business interest you own and how it was set up. Here are a few of the most common types. 

Sole Proprietorship

In a sole proprietorship, you are the only business owner. Because of this, you do not need the agreement or permission of anyone else to transfer your business interest into your trust. You would simply assign your business assets and interests into the trust. This is accomplished with an Assignment of Interest agreement. Just like it sounds, this agreement assigns your interests into your trust so that it becomes a trust asset. 

Corporations

If you own stock or shares in a corporation, you should contact the corporation and fill out any necessary documents to transfer your stock or shares to a trust. Often this document is called an “Assignment of Stock”. Submit this document to the corporation and have them file it. 

Next, the corporation will re-issue you new stock documents listing the trust as the owner. Check with your corporation on any additional terms or conditions when making trust transfers. 

LLC or General or Limited Partnership

When it comes to a Limited Liability Company (LLC) or a general or limited partnership, you may own a complete or only a partial interest in the business. You’ll want to first review the terms and conditions of your LLC or partnership agreement to review the requirements for transferring your portion into a trust. If there are other partners, they may need to vote on and approve the change.

Next, seek counsel from your attorney on the best way to transfer your portion of the business into your trust. This will vary, depending on how your business was set up. For an LLC, you may need to execute an “Assignment of Interest”, notify your partners, and sign a document agreeing to the change. For a partnership, you may need to change your partnership ownership certificate to you as the owner of the share. 

When transferring business interests into a trust, an experienced estate planning attorney can provide legal advice on how to best achieve your goals. If you have any questions about transferring business interests into a trust, feel free to contact our law firm.

Law Offices of Daniel A. Hunt

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.

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Special Issues Related to Distributions of Partnership Interests by Estates and Trusts

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Editor: Greg A. Fairbanks, J.D., LL.M.

With the popularity of family limited partnerships, it is not uncommon to find a partnership interest held by an estate or trust. However, eventually the estate or trust must distribute the partnership interest. The complex rules governing the tax treatment of distributions from estates and trusts are further complicated when a partnership interest is distributed.

General Rule

When an estate or trust distributes cash or property, the distribution is taxed to the beneficiary to the extent that the trust or estate has distributable net income (i.e., generally taxable in come not including capital gain) (Sec. 662). This means that the beneficiary, rather than the estate or trust, is taxed on the entity’s income up to the amount of the distribution. In the case of property, the distribution amount is the lesser of the property’s tax basis or its fair market value (FMV) (Sec. 643(e)(2)). Nevertheless, regardless of how the property distribution is measured, the beneficiary’s tax basis in the property will be the same as the estate or trust’s cost basis prior to the distribution.

In addition, there are situations in which an estate or trust will recognize gain as a result of the distribution of appreciated property, which will re quire an adjustment to the property’s basis: (1) the property is distributed in satisfaction of a specific pecuniary be quest; (2) the property is subject to liabilities in excess of basis; or (3) the fiduciary elects (under Sec. 643(e)(3)) to treat the distribution as a sale to the beneficiary for the property’s FMV. Further, if the property distributed is a partnership interest and the estate or trust has a negative tax capital account (this occurs when the liabilities of the partnership allocable to the interest ex ceed the estate or trust’s share of the partnership basis of its assets), then a gain will be recognized equal to the negative capital as a result of the requirement of Sec. 752(d) to include the partner’s liabilities in the amount realized.

Sec. 761(e)

Sec. 761(e) provides that any distri-bution of an interest in a partnership that is not otherwise treated as a sale or ex change, as discussed above, will still be treated as a sale or exchange for purposes of Secs. 708 and 743.

While the legislative history of this provision indicates that the IRS might issue regulations providing that estates and trusts would not be subject to this provision, no regulations have been issued to date. It seems relatively certain that any distribution by an estate or trust is a sale or exchange for Secs. 708 and 743.

Not all transfers of partnership in terests to a beneficiary are treated as distributions. For example, a transfer of a partnership interest specifically be queathed to a beneficiary is not a distribution and is therefore not subject to Sec. 761(e).

Under Sec. 708(b)(1)(B), a partnership terminates if 50% or more of the total interest in partnership capital and profits is sold or exchanged in any 12-month period. If the partnership terminates, the old partnership is deemed to contribute its assets and liabilities to a new partnership in ex change for a partnership interest and immediately distributes the new partnership interest in liquidation of the old partnership.

A partnership’s termination can result in both favorable and unfavorable tax consequences. The termination of the old partnership results in the creation of a new partnership that can choose its own tax accounting method and tax year end and does not inherit the old partnership’s elections (e.g., Sec. 754).

One particularly bad consequence of a termination for partnerships containing a significant amount of depreciable property is that the step-into-the-shoes rule of Sec. 168(i)(7) does not apply in the case of a Sec. 708(b)(1)(B) termination. As a consequence, the adjusted basis of the depreciable property would be depreciated over the applicable asset life as if it were newly acquired property. This provision is a trap for the unwary, but if recognized it can be easily avoided by ensuring that distributions are planned over a greater than 12-month period so as not to violate the 50%-or-more rule.

A distribution of a partnership interest by a fiduciary is treated as a sale or exchange for purposes of Sec. 743. Therefore, if the partnership has a Sec. 754 election in place, the transfer of the interest will require the partnership to adjust the basis of partnership property for the benefit of the transferee partner (i.e., beneficiary).

However, if the partnership does not have a Sec. 754 election in place, it will need a thorough review of inside basis of the partnership assets and their estimated FMVs to determine if a Sec. 754 election should be made or if the partnership has a substantial built-in loss that requires negative basis adjustments under Sec. 743(b). If Sec. 743(b) applies, then consideration should be given in these circumstances not to make a Sec. 754 election, since the election would affect future transfers of partnership interest.

Sec. 1245 Recapture

Sec. 1245(a)(1) requires taxpayers to recapture depreciation on tangible personal property as ordinary income on disposition of the property, not withstanding any other provision. Sec. 1245(b) provides exceptions to this general rule. One of the exceptions applies to “transfers at death,” but distributions from estates and trusts are not on the list. Applying the general rule of Sec. 643(e), without the Sec. 643(e)(3) election, should result in the estate or trust’s not recognizing re capture income. Regs. Sec. 1245-4(b) states that the transfer-at-death exception applies if the basis of the property to the beneficiary is determined under Sec. 1014. However, as discussed above, the beneficiary’s tax basis for in-kind distributions is determined under Sec. 643(e).

The uncertainty of distributions of Sec. 1245 assets held directly by the estate or trust is compounded when the recapture property is owned by a partnership. This determination will involve whether the aggregate theory of partnership taxation should be applied. Under this theory, each partner would be viewed as the owner of a direct undivided interest in each partnership asset. This is an issue that the IRS needs to clarify for taxpayers.

EditorNotes

Greg A. Fairbanks, J.D., LL.M., works for Grant Thornton LLPWashington, DC

Unless otherwise indicated, contributors are members of or associated with Grant Thornton LLP.

If you would like additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or [email protected] .

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UFC, Kingdom of Saudi Arabia extend partnership for another event, sponsorship deal

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The UFC’s ties to the Middle East grew deeper on Tuesday with the promotion extending a deal with the Kingdom of Saudi Arabia for another event to land there along with a strategic partnership to sponsor the upcoming card at The Sphere in Las Vegas.

Turki Alalshikh, the chairman of the board of directors of the general entertainment authority in Saudi Arabia, announced that Riyadh Season was extended an agreement with the UFC. UFC CEO Dana White also celebrated the news on his Instagram page.

Under terms of the deal, the UFC will bring another event to Saudi Arabia sometime in 2024 or 2025, which follows the upcoming card scheduled on June 22, which features former middleweight champion Robert Whittaker against Khamzat Chimaev in the main event.

In addition to the UFC returning to Saudi Arabia for another event, Riyadh Season, which is the annual sports and entertainment festival in the country, has agreed to sponsor the upcoming UFC 306 card at The Sphere in Las Vegas.

A strategic agreement has been signed between Riyadh Season and the Ultimate Fighting Championship (UFC), including the sponsorship of the UFC event in Las Vegas, the UFC event in Riyadh, and Power Slap competitions ❤️ #RiyadhSeason pic.twitter.com/JFe6hVE4jO — TURKI ALALSHIKH (@Turki_alalshikh) May 7, 2024

The event is expected to take place on Sept. 14, which is the weekend prior to Mexican Independence Day. UFC Noche, a highly successful card that took place this past September, celebrated Mexican Independence Day as well with White later stating that he planned to make it an annual event.

“This agreement is a continuation of Riyadh Season’s aims to host and partner with prominent and international events of mass interest,” Turki Alashikh said in a press release. “It also enhances our efforts for Riyadh Season to produce diverse content in order to engage and attract and even wider audience with different interests from around the world. UFC is the most prominent mixed martial arts organization in the world and their platform of global fans is unrivalled.”

In addition to this deal with Saudi Arabia, WWE — the other half of TKO Group Holdings alongside the UFC — has a longstanding relationship with the country. WWE has an event scheduled in Jeddah, Saudi Arabia on May 25.

The previous deal reportedly paid the UFC around a $20 million site fee to bring the promotion to Saudi Arabia so it’s almost certain this new deal is even more lucrative, especially with the additional sponsorship for UFC 306.

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Local News | Evanston Mayor Daniel Biss discusses…

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Local News | Evanston Mayor Daniel Biss discusses Northwestern partnership, government overreach in State of City address

His speech began with an anecdote in government overreach. He cited the example of a proposed public restroom in a San Francisco park where preliminary costs grew out of control and reached $1.7 million at one point, with blame falling in part on bureaucratic systems put in place in the name of environmentalism. Biss stated situations like this arise when government systems make bold action difficult.

This hit home when Biss discussed the struggles to build affordable housing with Evanston’s single-family home zoning laws getting in the way.

“I look at our zoning code as a system of rules that makes it hard to do what we say we want to do,” Biss said Wednesday night at SPACE. “It’s hard to build high and it’s hard to build without adding parking. There are so many ways in which we make it difficult to add to the supply of housing and then we act puzzled about the fact that with demand high and supply not going up, the cost keeps going through the roof.”

He and his family live in an adjoining town home on Central Street but, according to Biss, zoning regulations prevent a similar-style home from being built just around the corner because only single-family homes are permitted. These zoning regulations were often put in place decades ago in an effort to promote racial segregation.

Biss hopes to kill two birds with one stone by replacing vacant downtown storefronts with residential density, saying his most commonly heard complaint from residents concerns the empty spaces. He pointed to the Envision Evanston 2045 project, a new comprehensive plan for the city, as a path forward.

“What an opportunity to do both?” he said. “It’s not going to be easy and it’s not going to be painless and it’s not going to be uncontroversial. Change is hard … so I am asking myself and I’m asking all of us to be willing to be bold.”

A 15-year community-benefits deal between the city and Northwestern is one of Biss’ proudest accomplishments of 2023. The deal, which Biss said would “fundamentally transform” the financial relationship between the city and school, would bring $150 million in funding to the city. His tie-breaking vote at the Nov. 20, 2023, City Council meeting brought the deal to fruition.

Northwestern existed 12 years before Evanston became incorporated in 1863 and Biss described the relationship between the two as filled with tension over the university’s use of land, city services and lack of tax payments. According to Biss, this community-benefits package marks a change in trajectory for the partnership.

He stated it would be difficult for Northwestern to step back from collaboration with the city when the agreement runs its course because residents will have grown accustomed to the funding and the university had shown there is space in its budget to provide more.

“If we look around the country, these kinds of agreements have expiration dates. Usually less than 15 years,” Biss said. “When they get re-upped or when they expire, they tend to be re-upped at a higher level. That’s not a guarantee.”

He also stated how proud he is of the city’s response to pro-Palestine protesters on Northwestern’s campus in the past few weeks, reflecting on how other communities responded following these protests and in the wake of George Floyd’s murder in 2020. Evanston police communicated with Northwestern police throughout the protests but did not end up getting involved or arresting any protestors.

“We, the city of Evanston, should not be involved in interfering with protests or arresting protesters unless there is an absolute essential reason to do so,” Biss said. “We believe to our core that it is not our job to police protesting because of what the protests stand for, for how they call for it, for what they say, or who they make uncomfortable — even for who they offend. Even if they offend me.”

Despite this, Biss remained opposed to seeing City Council adopt a cease-fire resolution for the war in Gaza, arguing the city shouldn’t get involved in issues outside its purview unless the action brings the city together and makes the city stronger.

Biss said passing such a  resolution would be picking at wounds from previous discussions that would lead to further division and make it harder to tackle future issues directly impacting Evanstonians.

However, Evanston residents have been directly impacted by the war in Gaza. Two residents, Natalie and Judith Raanan, were taken hostage for nearly two weeks by Hamas following the initial attacks on Oct. 7, 2023, and have since returned home .

Evanston City Council has taken stances on issues outside its purview in the past including an 8-1 vote in September 2005 on a resolution to pull United States troops out of the Iraq War and another resolution in May 2008 stating the city’s opposition to U.S. military intervention in Iran.

The mayor hopes focus in the coming year can be placed on assistance the city can provide to migrants who have been shipped from Texas to the Chicago area by Texas Gov. Greg Abbott. City Policy Coordinator Alison Leipsiger has been searching for properties that could be retrofitted with county grant funding as shelters.

“We’re Evanston. We don’t see a crisis like that and conclude it’s someone else’s problem,” Biss said. “We’re gonna figure out what we can do to help and if we can’t help it’s not going to be for lack of trying.”

Other focuses for the year include passage of a healthy building ordinance to bring the 500 most emission-producing buildings more aligned with the city’s Climate Action Plan, finding a solution for deteriorating city properties including the Lorraine H. Morton Civic Center and continued efforts to build affordable housing.

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Buchanan Introduces Bill to Strengthen U.S.-Israel Health Care Partnership

May 9 , 2024.

WASHINGTON  –  Congressman Vern Buchanan,   Vice Chairman of the House Ways and Means Committee and Chairman of the Health Subcommittee  introduced   legislation   to increase and facilitate close coordination between the United States and Israel on new and improved health care technologies. Congresswoman Miller-Meeks (R-IA) and Congressman Soto (D-FL) joined as original cosponsors.   Specifically, the  Maximizing   Israel -U.S. Research Advancement and Collaborative Leadership in Emerging Medical Technology Act , or simply,   the   (MIRACLE) Medical Technology Act would: 

• Promote R&D between the U.S. and Israel
• Support innovation hubs to accelerate the development and commercialization of new and emerging health technologies
• Protect health IP protections for biological products shared between the countries
• Facilitate best practices for health care system strengthening, including hospital cybersecurity efforts
• Enhance telemedicine infrastructure between the two countries 
• Increase disease prevention initiatives
• Promote exchange programs and training initiatives
• Establish a U.S. Israel Health Care Collaboration Center

“Similar to the United States, Israel is a leading hub for new and innovative health-related technology,”  said Congressman Buchanan . “I am pleased to introduce this important bipartisan legislation with Congresswoman Miller-Meeks and Congressman Soto to help foster and build stronger ties in health care between the United States and our greatest ally in the Middle East, Israel.” 

“Israel is not only an outpost of freedom in the Middle East, it is an innovation and technological powerhouse. Our bipartisan bill would enhance cooperation with our great ally and advance important research in health technology to benefit humanity,”  said Congresswoman Miller-Meeks . “At a time when Israel is under attack, it is critical that potential medical breakthroughs are not stifled. I am proud to join Reps. Buchanan and Soto in this bipartisan effort and I will continue to stand with Israel.”

“I am proud to work with Congressman Buchanan on this effort to strengthen collaboration between the United States and Israel in the healthcare space,”  said Congressman Soto . “As the U.S. secures itself as a leader in the global community, we must welcome opportunities to improve our development of medical devices, pharmaceuticals, and other solutions such as early-stage clinical trials. I look forward to working with my colleagues on both sides of the aisle to move this innovative proposal forward.”

This legislation is supported by AIPAC, Combat Antisemitism Movement, Conference of Presidents of Major American Jewish Organizations and the Jewish Federations. 

"The U.S.-Israel relationship is built on shared values and interests, and the deepened collaboration fostered by this vital legislation will only further strengthen the enduring alliance and promote the health and prosperity of the peoples of both nations,”  said Sacha Roytman, CEO of the Combat Antisemitism Movement.

“We applaud the bipartisan introduction of the MIRACLE Medical Technology Act. The U.S.-Israel relationship is mutually beneficial in many respects – technological and health research and development being a key facet of that,”  said William C. Daroff, CEO of the Conference of Presidents of the Major American Jewish Organizations . “The MIRACLE Medical Technology Act will help to streamline this cooperation by establishing a U.S. Israel Health Care Collaboration Center and will strengthen telemedicine infrastructure, disease prevention, hospital cybersecurity, and more.”

“Now, more than ever, it is critical that the United States continue to strengthen its relationship with Israel, expanding to new horizons that foster innovation and research with lasting healthcare impacts for both the United States and its ally,"  said Karen Paikin Barall, Vice President of Government Relations for the Jewish Federations.  

In addition to being the Vice Chairman and most senior Republican on the powerful U.S. House Ways and Means Committee, Buchanan is also the Chairman of the Health Subcommittee, which has broad jurisdiction over traditional Medicare, the Medicare prescription drug benefit program, and Medicare Advantage.

Permalink: https://buchanan.house.gov/2024/5/buchanan-introduces-bill-to-strengthen-u-s-israel-health-care-partnership

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Microsoft's partnership with OpenAI was 'basically a bet,' says CTO Kevin Scott

• Kevin Scott said Microsoft's partnership with OpenAI was a strategic "bet" on Sam Altman's company. 
• The Microsoft chief technology officer gave insight into the investment on the "Possible" podcast.
• He said he thought working with OpenAI would push Microsoft to "build better infrastructure."

Microsoft's chief technology officer said partnering with OpenAI was "basically a bet" on Sam Altman's company.

Kevin Scott gave insight into his decision-making that led to Microsoft's alliance with OpenAI in 2019 on an episode of Reid Hoffman's podcast " Possible " last week.

"This partnership with OpenAI was like basically a bet saying this particular team at the time also understood that this was a game of scaling, compute, and doing incredible things with it in a very disciplined way," he said.

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Scott, who's been Microsoft's CTO since 2017, said he realized pretty early into his tenure that the progress of artificial intelligence was accelerating.

He said he knew that for Microsoft to remain competitive, it had to advance its infrastructure, which he started to think about how to build in 2018.

In an email sent to the Microsoft cofounder Bill Gates and CEO Satya Nadella the following year, Scott said he was "very, very worried" about Google's AI capabilities at the time.

The email, which was recently made public as part of the Department of Justice's antitrust case against Google , had the subject line " Thoughts on OpenAI ." It was sent just weeks before Microsoft announced its $1 billion investment in OpenAI and subsequent partnership. A large section of Scott's email was redacted.

Scott also told the podcast that the key drivers behind the partnership were knowing Microsoft couldn't do everything by itself and realizing OpenAI could forecast what it could get from investing in computing. "And I was like, if we work with them, they will push us to build better infrastructure, and we can enable them to do their best work," he said.

The Information reported on Monday that Microsoft was building its own large language model to take on those from Google and OpenAI. The report said the new model, named MAI-1, would have roughly 500 billion parameters. OpenAI's GPT-4 is thought to have about one trillion parameters.

Scott appeared to confirm the report about MAI-1 in a LinkedIn post on Monday: "Microsoft, and the teams making and operating things on occasion need to do their own custom work, whether that's training a model from scratch, or fine tuning a model that someone else has built." He added: "There will be more of this in the future too. Some of these models have names like Turing, and MAI. Some, like Phi for instance, we even open source."

Microsoft didn't immediately respond to a request for comment from Business Insider, sent outside normal working hours.

Axel Springer, Business Insider's parent company, has a global deal to allow OpenAI to train its models on its media brands' reporting.

Watch: Sam Altman moves to Microsoft after OpenAI fires him as CEO

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Columbus Blue Jackets

2024-25 season corporate partnership sales internship.

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• Recognize practices and processes to drive sponsorship revenue that are employed by an NHL Corporate Partnerships department
• Develop knowledge, communication, and process management skills in the area of Partnership Sales and Activation
• Generate new leads for the sales team through prospect and category research
• Scour social media, game highlights, and websites of other professional sports teams to identify brands that are actively investing in corporate partnerships and how they activate
• Utilize in-depth market research to evaluate best practices, category/sponsor trends, and the competitive landscape to contribute to the sales process
• Prepare company overview reports and executive backgrounds for meetings and presentations
• Use third party data to provide quantitative support for partner presentations
• Actively participate in cross-departmental brainstorm sessions to create partnership platforms
• Observe in prospective client meetings, pitches, and recap reports with members from sales and activation teams
• Create activation recap reports with proof-of-performance images, data, and supporting elements
• Assist with game night partner activations on an as-needed basis
• Perform administrative tasks, as needed to support the sales team
• End of the season final project using knowledge gained from the experience
• 20 intern office and game hours available each week 
• Internship timeline – September– End of NHL Season 
• Must be enrolled in four-year college or university, working towards a Bachelor’s degree in business, marketing or sport management. 
• Course credit required for internship 
• Proficient in Microsoft Office (Outlook, Word, PowerPoint and Excel) 
• Detail-oriented. 
• Excellent verbal and written communication skills 
• Ability to intern weeknights, weekends and holidays in addition to normal business hours and home games 
• This is an in-arena internship and remote opportunities are not available

Job Questions:

What is your availability from September- April?

Do you plan to apply for other internship(s) with the Columbus Blue Jackets? If yes, which internship(s)?

I understand that this is an in-person internship and I will be in Columbus, Ohio for this opportunity.

Will you be enrolled in a college or university during the internship?

Will you be receiving credit for this internship?