taxation of partnerships and partners - …€¦ · 5. a limited partnership limits the liability...

H Chapter Nine H

TAXATION OF PARTNERSHIPSAND PARTNERS

INTRODUCTION AND STUDY OBJECTIVES

Partnerships are a popular form of business organization governed by Subchapter K of the Internal Revenue Code.Every partnership doing business is required to file a return, principally for information purposes, regardless of itsincome or loss. The partnership itself is not a taxable entity and any profits or losses are reported by the respectivepartners.

When Congress enacted Subchapter K in 1954, the intent was for a simple, informal provision to providepartners with flexibility in forming the entity. The complexity of some of the partnership rules, however, is inmarked contrast to the ease of formation.

In studying the rules of partnerships taxation, the student should have these objectives:

1. To understand the definition of partners and partnerships and be familiar with the relationship betweenthe two.

2. To learn how a partnership is formed and the effects of various transfers to the entity.

3. To be familiar with the operations of a partnership and how its results are reported for tax purposes.

STUDY HIGHLIGHTS

DEFINITIONS OF PARTNERSHIP AND PARTNER

1. Partnerships are not tax-paying entities; rather, they are conduits through which income is passed to thepartners. A partnership is defined as a syndicate, group, joint venture, or other unincorporatedorganization through which a business is carried on.

2. The term partnership is much broader than its common law meaning and may include groups that arenot commonly referred to as partnerships. On the other hand, mere ownership of property by more thantwo individuals is not a partnership. If the services are provided with the jointly owned property, then theventure may be characterized as a partnership.

3. A partner is any person who is a member of a partnership. To be considered a valid partner, one mustshare in the profits and losses, contribute capital or services, participate in management, be personallyliable for debts, and be able to liquidate one’s interest.

4. The entity concept and the aggregate concept have a significant effect on the tax ramifications of thepartnership. The entity concept treats partners and partnerships as distinct separate legal units. Theaggregate concept treats the partnership as a mere conduit through which income, credits, and deductionsflow to the partners.

9-1

5. A limited partnership limits the liability of a partner. A limited partnership possesses the followingcharacteristics:

l At least one general partner is required.

l Liability for the limited partners is limited.

l Limited partners are not allowed to participate in management.

l Death or retirement of a limited partner will not dissolve the partnership.

l Limited partners’ interests are transferrable.

l A limited partner’s basis is increased by nonrecourse debts, but not by recourse debt.

FORMING A PARTNERSHIP

6. No gain or loss is recognized to the partnership or any partner when property is contributed to thepartnership in exchange for an interest in that partnership. This provision will not apply to a contributionof services for an interest or a contribution of property for anything other than a partnership interest.

Example. A, B, and C, all individuals, form partnership P. A contributes cash of $20,000 for a 40%, Bcontributes property with a FMV of $25,000 (basis of $10,000) for a 50%, and C contributes servicesworth $5,000 for a 10%. The transfer is nontaxable with respect to A and B, but C must report ordinaryincome of $5,000.

7. The basis of a partner’s interest resulting from a contribution of property is the sum of moneycontributed, adjusted basis of property contributed, and gain, if any, recognized to the partner on thetransfer. The holding period for that interest varies depending on the classification of the assets transferred.

Example. In the above example, A’s basis in the partnership is $20,000 (the cash contributed); B’s basisis $10,000 (basis of property contributed); and C’s basis is $5,000 (gain recognized).

8. The partner’s share of liabilities affects his or her adjusted basis. An increase in a partner’s share ofliabilities will increase the basis. A decrease in the partner’s share of liabilities will be considered adistribution of money to the partner and will reduce the basis.

9. All partnership debts are classified as either recourse or nonrecourse. A liability is said to be recourse ifa partner bears an economic risk of loss. Otherwise, the debt is considered to be nonrecourse. Recoursedebt is added to the basis of general partners; nonrecourse debt is added to the basis of both general andlimited partners.

10. When a partner contributes property to a partnership with a liability attached, he is deemed to bepersonally liable for the recourse portion of the debt or any nonrecourse debt in excess of his partnershipbasis.

11. A contribution of property with depreciation recapture potential will not trigger gain on the transfer. ITCrecapture may be triggered if the contributing partner does not obtain a substantial interest in thepartnership. This is true even though the 1986 Tax Act repealed the investment tax credit.

12. If a partner renders services in exchange for an unrestricted partnership interest, the service partnerrecognizes ordinary income when he first receives the interest. If the service partner receives a restrictedinterest, he recognizes ordinary income when the restrictions are removed. A § 83 election may offersubstantial benefits to the partner with a restricted interest.

9-2 Taxation of Partnerships and Partners

OPERATING THE PARTNERSHIP

13. The partnership’s tax year is generally the same as that of its principal partners, unless a businesspurpose can be established for designating a different tax year. A principal partner holds at least a5 percent interest in the partnership. Generally, no other fiscal year will be allowed unless thepartnership makes an election under § 444 and prepays its deferred taxes.

14. No deduction is allowed to a partnership for amounts paid or incurred in organizing a partnership. Thepartnership, however, may elect to amortize organizational expenses over a period of not less than60 months beginning with the month it starts its business.

15. A partnership must file an information return, Form 1065, showing partnership income and deductionswith each partner’s share listed on a schedule K-1. The due date for this return is the fifteenth day of thefourth month following the end of the tax year. Failure to file a return can result in a penalty beingassessed against the partnership. The penalty is $50 per month per partner. The penalty cannot exceed$250 multiplied by the number of partners.

16. The taxable income of a partnership must be computed in the same way as the taxable income of an individualexcept that certain items of gain or loss are separately stated. Certain items are not available to a partnership:

l The personal exemption

l The deduction for foreign taxes

l The net operating loss deduction

l The charitable contribution deduction

l Itemized deductions

l The long-term capital gains deduction

l The capital loss carryover

l The depletion deduction under § 611

17. The reporting of a partnership’s taxable income is a two-step process. First, certain items must be reportedseparately on the Form 1065. All items not to be shown separately must be netted at the partnershiplevel. The result of this netting is to determine the ordinary income of the partnership to be reported onthe Form 1065 and Schedule K-1. Items that are required to be separately stated include the following:

l Long-term capital gains and losses

l Short-term capital gains and losses

l Section 1231(b) gains and losses

l Charitable contributions

l Dividend income

l Foreign taxes paid

l Other items specified by the Regulations

9-3Study Highlights

18. A partner’s adjusted basis in the partnership is always changing. The following transactions will affectthe partnership interest:

Increases:

a. Contributions to capital.b. Partner’s share of taxable income.c. Partner’s share of tax-exempt income.d. Increases in the partner’s share of partnership liabilities.

Decreases:

a. Partner’s share of taxable losses.b. Partner’s share of nondeductible expenses.c. Distributions to the partner.d. Decreases in the partner’s share of partnership liabilities.

19. When partners cannot practically determine their bases in a partnership, the IRS allows the partner to usean alternative computation. This alternative rule computes the basis using the adjusted basis of thepartnership assets.

PARTNER’S DISTRIBUTIVE SHARE

20. A partnership’s allocation of taxable income or loss, deductions, or credits will be controlled by thepartnership agreement unless it lacks substantial economic effect. If an allocation is not made, thepartner’s share of income or loss will be determined in accordance with his interest in the partnership.

21. For property contributed to a partnership before April 1, 1984, gains, losses, and credits with respect toproperty contributed by a partner were allocated to partners in the same manner as if the partnership hadacquired the property. If a disparity existed due to a high value—low basis asset, the partnershipagreement could provide for an allocation to correct the tax effects.

22. For property contributed by a partner after March 31, 1984, gains, losses, and credits are to be sharedamong the partners pursuant to regulations prescribed by the IRS. These regulations will take intoaccount the variation between the partnership’s adjusted tax basis of the property and its fair marketvalue at the time of contribution.

23. Each partner reports his distributive share of income, loss, deductions, and credits for the partnership’staxable year that ends within or with the partner’s taxable year.

24. A partner’s estimated taxable income must include the current year distributive share as it is earned bythe partnership. This determination can be complicated when partners and partnerships have differingyear-ends.

25. Operating losses and other deductions pass through from the partnership and may be used to offset thetaxable income of the partner. The amount of loss that passes through may not exceed the partner’s basisin the partnership interest. When losses and deductions exceed the partner’s basis, the excess may becarried over indefinitely to offset future increases in basis.


26. Because a loss is considered to be the last accounting event to occur for the year, basis must first bereduced for actual and constructive distributions. Basis is then increased for contributions to capital. As aresult, year-end losses may be utilized by way of making year-end capital contributions.

Example. L and M are equal partners on a calendar year basis. As of January 1, 2008, L’s basis was$15,000. The partnership sustained an operating loss of $70,000 in 2008 and also earned a profit of$60,000 in 2009. In 2008, only $15,000 of L’s $35,000 distributive share of the loss (50% the $70,000loss) could be deducted. Thus, the basis of L’s interest was zero as of January 1, 2009, and L had tocarry forward the remaining $20,000 of partnership losses. L’s entire $35,000 loss could have beendeducted in 2008 if L had contributed an additional $20,000 or more in capital by December 31.Similarly, if L and M had incurred additional debt of $40,000 or more by the end of 2008, L’s basiswould have been increased to permit the entire share of the distributive loss to be deducted in that year.

27. In order to prevent excessive use of tax shelters, Congress added the passive loss rules in the TaxReform Act of 1986. Under new § 469, income is characterized as either (1) active income, (2) portfolioincome, or (3) passive income. Losses from passive activities, which include tax shelters, rentalactivities, or any other activity in which a taxpayer does not materially participate, can only offsetincome from passive activities. A limited partner will never meet the material participation test.

28. A general partner who invests in a passive activity and who owns at least 10 percent of the value of thepartnership may deduct up to $25,000 of the rental loss against nonpassive income provided the partnershipactively participates in the real estate rental business. This shelter is eliminated when the partner’s AGIreaches $150,000.

29. As a general rule, the partnership agreement controls the allocations of income, expenses, and credits.This is true as long as the allocations provided in the agreement have substantial economic effect.According to the Regulations, substantial economic effect is generally determined by whether theallocation is reflected in the partner’s capital account and the proceeds of a future partnership liquidationare to be distributed with reference to the partner’s capital account balance. The key element is that thepartners intend for this to occur at some point in time.

30. Upon entry into a partnership, new partners may not be allocated any partnership items that occur beforethey acquired their ownership interests. Occasionally, year-end investors can benefit from a cash basispartnership that delays payment of all expenses until year-end. The DRA of 1984 requires that theTreasury issue Regulations that apply an accrual basis to certain deductible payments in an effort toprevent the abusive use of retroactive allocations.

31. The ‘‘at-risk’’ rules of § 465 limit a taxpayer’s loss to the amount that the taxpayer could actually(economically) lose from the activity. The rules are designed to prevent taxpayers from offsettingordinary income by losses from investments in activities that are financed by loans for which thetaxpayer is not personally liable.

32. Under § 465, losses are limited to the amount of the taxpayer’s cash contributions, plus the adjustedbasis of other property contributed, plus any amounts borrowed for use in the activity for which thetaxpayer is personally liable. If the taxpayer is protected against loss (e.g., guarantees, stop-lossagreements), the taxpayer will not be at risk to the extent of such protection.

33. The Tax Reform Act of 1986 significantly prevented a taxpayer from using a loss from a passive activityto shelter active income or portfolio income. This is carried out through § 469, which restricts thedeductions and losses that can offset income from other passive activities.

9-5Study Highlights

TRANSACTIONS BETWEEN A PARTNERSHIP AND ITS PARTNERS

34. Generally, a partner can engage in a transaction with the partnership, and the transaction will beconsidered as occurring between two completely independent entities. There are, however, twoexceptions. First, losses from the sale of property between a controlling partner (more than 50%) and thepartnership are not allowed. Second, gains from the sale of property between a controlling partner (morethan 80%) and the partnership will be characterized as ordinary income. The above rules apply totransactions between commonly controlled partnerships as well. In determining control, the attributionrules of § 267 are employed.

Example. J owns a 25% in the JRD partnership. In the current year, J agrees to sell some property withan adjusted basis of $43,000 to the partnership for its FMV of $25,000. If J is not related to any partners(per the attribution rules), J will recognize a loss of $18,000. Now assume the same case as above, but J,R, and D are all sisters. Thus, under § 267, constructive ownership takes place between sisters, so J isdeemed to own a 100% in JRD. Accordingly, J’s loss is disallowed. If J, R, and D are sisters and thepartnership later sells the property for $35,000, none of the $10,000 gain ($35,000 less adjusted basis of$25,000 [its cost]) will be recognized. The gain on the sale will be offset by the $18,000 loss that waspreviously disallowed. The unused $8,000 of J’s disallowed loss disappears.

35. A fixed or guaranteed payment made to a partner for services or the use of capital is treated as thoughmade to an outsider for purposes of a business expense deduction. Such payment will be taxed asordinary income to the partner receiving the money. A partner who receives a guaranteed payment is notconsidered an employee for withholding purposes.

Example. U is a general partner in the PU partnership and is to receive payments of $10,000 for hisservices plus a 15% of any income or loss. After deducting the payment to U, PU has a gain of $5,000.Of this gain, $750 (15% $5,000) is U’s share, which is to be reported on U’s tax return. Also, U reportshis guaranteed payment of $10,000 as ordinary income.

36. When a partner is entitled to a minimum payment, and his or her percentage of profits is less than theminimum payment, the guaranteed payment is the difference between the minimum payment and thepartner’s distributive share of income.

Example. In the above example, if U’s contract required that he receive 15% the profits but never lessthan $10,000, then the guaranteed payment would amount to $9,250 ($10,000 � $750).

37. Certain transactions between a partner and a partnership are treated on an aggregate basis. Often thesetransactions are governed under provisions outside of subchapter K. Sections 267 and 1239 are twosections that can disallow, defer or even change the character of partner-partnership gains and losses.


STUDY QUESTIONSTrue or False

1. A partnership is considered to be a conduit under the entity theory of taxation.

2. A contribution of property will trigger § 1245 recapture to the contributing partner.

3. Organization expenditures are not deductible and must be amortized over a 60-month period.

4. Transactions between a partner and the partnership are not taxable to a partner with a 30 percentinterest.

5. A partner’s basis is increased by his share of partnership profits and decreased by his withdrawalsfrom the partnership.

6. In computing partnership ordinary income, a contribution to the Red Cross is not deducted.

7. A partnership tax return due April 15, 2009 that is filed without extension on May 22, 2009 willsubject the two partners to a late filing penalty of $200 if reasonable cause is not demonstrated.

8. A partner who is entitled to a minimum fee of $20,000, yet only receives $12,000 in his distributiveshare of income, will receive a guaranteed payment of $8,000.

9. If a partnership has nontaxable income, each partner’s basis in the partnership will increase by his orher pro rata share of the nontaxable income.

10. When determining a partnership’s year-end, a principal partner is any partner with a capital or profitsinterest of more than 5 percent.

11. An operating loss that exceeds a partner’s adjusted basis in the partnership interest may be carriedforward five years to reduce future increases on basis.

12. A partner’s basis in the partnership is generally increased for his share of partnership liabilities.

13. Partner N contributed property with an adjusted basis of $400 and a fair market value of $1,000 toPartnership B. Partner L contributed $1,000 cash. While under the partnership agreement eachpartner will have a capital account in the partnership of $1,000, the adjusted basis of Partner N’sinterest is only $400.

Multiple Choice

1. For Federal income tax purposes, which statement is best attributable to a partnership?

a. A taxable entity similar to a trust or an estate.b. Considered to be a nontaxable entity but must file an information return.c. Treated as an association for tax purposes.d. Required to pay a tax upon its profits, which in turn must be assumed by its partners.e. Is not required to file a return because it is treated as a conduit under the aggregate theory.

9-7Study Questions

2. On July 1, 2009, A was admitted to partnership in the firm of M&M. His contribution to capital consistedof 500 shares of stock in C Corporation, which he bought in 1983 for $10,000 and which had a fairmarket value of $50,000 on July 1, 2009. A’s interest in the partnership’s capital and profits is 25 percent.On July 1, 2009, the fair market value of the partnership’s net assets (after A was admitted) was$200,000. What was A’s gain in 2009 on the exchange of stock for his partnership interest?

a. $0.b. $40,000 ordinary income.c. $40,000 long-term capital gain.d. $40,000 § 1231 gain.e. $50,000 long-term capital gain.

3. On July 1, 2009, A received a 10 percent interest in the capital of N Associates, a partnership, for servicesrendered. N’s net assets on July 1 had a basis of $70,000 and a fair market value of $100,000. What incomemust A include in her 2009 tax return for the partnership interest transferred to her by the other partners?

a. $0.b. $7,000 ordinary income.c. $7,000 long-term capital gain.d. $10,000 ordinary income.e. $10,000 long-term capital gain.

4. M and G are equal partners. On January 1, 2009, each had an adjusted basis in the partnership of $10,000.During 2009, the partnership borrowed $15,000, for which the partners are liable, and had an operatingloss for the year of $20,000. What is the basis of each partner’s interest at the end of 2009?

a. $0.b. $7,500.c. $10,000.d. $17,500.e. ($7,500).

5. A and B are equal partners in XY partnership. The partnership was formed on October 1, 2009, with Acontributing property with an adjusted basis of $500 and a fair market value of $1,000 and B contributing$1,000 in cash. On December 1, 2009, each partner contributed another $500 in cash to the partnership.At the close of its first year, December 31, 2009, XY partnership had $600 in net income and $1,000 inunpaid liabilities. What was the basis of A’s partnership interest on December 31, 2009?

a. $1,000.b. $1,300.c. $1,800.d. $2,300.e. $2,800.

6. In computing the taxable income of a partnership, a deduction is allowed for

a. Fixed salaries paid to partners for services determined without regard to the income of thepartnership.

b. The net operating loss deduction.c. Contributions to charitable organizations.d. Personal exemptions of the partners.e. A short-term capital loss.


7. The partnership of Felix and Oscar had the following items of income during the taxable year endedDecember 31, 2009:

Income from operations $156,000Tax-exempt interest income 8,000Short-term capital gain 6,000Net rental income 12,000

What is the total ordinary income of the partnership for 2009?

a. $156,000.b. $168,000.c. $174,000.d. $176,000.e. $182,000.

8. Which one of the following statements concerning partnership taxation is not correct?

a. Each partner’s distributive share of partnership income or loss must be reported on his or her 1040.b. Generally, a partner’s distributive share of income or loss is determined by the partnership agreement.c. There is a penalty of $50 per month per partner up to a maximum of five months for failure to file a

complete Form 1065.d. Distributions by the partnership are generally not taxable to the partners unless the distributions are

treated as a liquidation, sale, or exchange of their capital interests.e. The partnership is required to file a declaration of estimated tax in any year it anticipates a profit.

9. C files his income tax return on a calendar year basis. He is the principal partner of a partnershipreporting on a June 30 fiscal year basis. C’s share of the partnership’s ordinary income is $24,000 for thefiscal year ended June 30, 2009, and $72,000 for the fiscal year ended June 30, 2010. How much should Creport on his 2009 return as his share of taxable ordinary income from the partnership?

a. $24,000.b. $36,000.c. $48,000.d. $60,000.e. $72,000.

10. B owns a 40 percent interest in the capital and profits of the M and B partnership. During 2009, B soldland to the partnership for its fair market value of $36,000. B’s adjusted tax basis in the land was$24,000. How much gain (before any long-term capital gain deduction) should B recognize on thistransaction on his 2009 tax return?

a. $0.b. $4,800.c. $7,200.d. $12,000.e. $36,000.

9-9Study Questions

11. P uses the calendar year and her partnership uses a fiscal year ending September 30. P receivedguaranteed payments of $1,000 on December 15, 2008 and $1,500 on April 15, 2009. P’s distributiveshare of the partnership income for the partnership year ending September 30, 2009 was $5,000. Whatamount of income must P include on her income tax return for calendar year 2009?

a. $1,000.b. $2,500.c. $5,000.d. $6,500.e. $7,500.

12. In 2008, the partnership of R, S, and T realized an ordinary loss of $90,000. The partnership and partnersare on a calendar year basis. On December 31, 2009, T had an adjusted basis of $30,000 for his interest inthe partnership before taking the 2009 loss into consideration. T has a 40 percent interest in the profitsand losses of the partnership. On his personal income tax return for 2009, what should T deduct relativeto his partnership interest?

a. An ordinary loss of $30,000.b. An ordinary loss of $36,000.c. An ordinary loss of $30,000 and a capital loss of $6,000.d. A capital loss of $36,000.e. None of the above.

13. Which of the following is not a legal characteristic of a general partnership?

a. Unlimited liability of partners for partnership recourse debt.b. Restricted transferability of partnership interests.c. Centralized management.d. Limited life.e. All of the above are legal characteristics of partnerships.

14. T transfers a building ($90,000 market value, $40,000 basis), plus a $60,000 nonrecourse debt on thebuilding, to a partnership in exchange for a 30 percent capital interest valued at $30,000. The partnershiphas no other debt. T’s basis in his partnership interest is

a. $0.b. $2,000.c. $12,000.d. $30,000.e. $40,000.

15. V is to perform services in exchange for a 20 percent capital interest in a partnership. Both the servicesand the capital interest are valued at $30,000. However, the agreement between V and the partnershipstates that the capital interest is forfeited if V violates any part of the service contract during the next fiveyears. V believes the market value of the interest at the end of the fifth year will be $70,000. (Assume this$70,000 value is accurate when choosing among the answers below.) V has a choice of recognizing

a. $0 now or $70,000 at the end of the fifth year.b. $30,000 now or $40,000 at the end of the fifth year.c. $70,000 now or $0 at the end of the fifth year.d. $0 now or $70,000 when the capital interest is sold.e. None of the above.


16. Which of the following is not used to calculate ordinary income (loss) on Form 1065?

a. Business interest income.b. Ordinary income from other partnerships and fiduciaries.c. Payments to Keogh or IRA plans for partners.d. Cost of goods sold.e. Guaranteed payments to partners.

17. Items that may be subject to special tax treatment and that are reported separately on Schedule K of thepartnership return include all of the following except

a. Dividends.b. Capital gains and losses.c. Charitable contributions.d. Tax credits.e. Business bad debts.

Fill In the Blanks

1. Two concepts that have had a significant effect on partnership taxation are known as theand concepts.

2. No gain or loss is recognized to a partner when is contributed to the partnership.

3. An increase in partnership liabilities will the partner’s basis, whereas a decrease in partnershipliabilities will the same basis.

4. Organization expenditures of the partnership will be amortized for a -month period ifunder § 709.

5. A principal partner is one who owns at least percent of the partnership interest.

6. A salary payment to a partner is generally classified as a

7. A partnership must file a Form by the fifteenth day of the month.

8. A partner’s share of tax-exempt earnings will a partner’s basis, whereas a nondeductibleexpense will the basis.

Code Section Recognition

For each of the following Code sections, try to match the response that most properly identifies the underlyingprovision.

1. § 721 a. transfers—risk of forfeiture

2. § 722 b. tainted asset transfers

3. § 752 c. transfers—partner effect

4. § 709 d. organizational costs

9-11Study Questions

5. § 83 e. transfers—liability effect

6. § 724 f. transfers—partner basis

TAX RETURN PROBLEM

On January 4, 2008, Rusty Top and Ryan Bottom form a partnership to engage in the sale of costume jewelry. Ryancontributes cash of $100,000 in exchange for a 20 percent interest in partnership capital and profits. Rustycontributes land (FMV of $50,000; basis of $50,000) and a building (FMV of $350,000; basis of $350,000) inexchange for an 80 percent interest in capital and profits. The building is to be depreciated on a straight-line basisusing an estimated useful life of 35 years for both book and tax purposes. On February 1, 2008, the partnershippurchases furniture and fixtures for $100,000. Rusty will be receiving a guaranteed payment of $10,000 per yearbeginning in 2008.

Additional Information:

I. Gross Receipts $421,000Wages (excluding Rusty’s) 90,000Insurance 5,000Rent 15,000Taxes 8,000Travel 18,000Maintenance 12,000Accounting 40,000Utilities 6,000

II. Beginning Inventory: $ 0Purchases 225,000Ending Inventory 30,000Ending Cash 8,000Ending Accounts Receivable 26,000

III. Partnership Name: Tops and BottomsEmployer ID: 74-3456789Address: 1915 Imitation Lane

Fake, Texas 77700Business Code: 1221Method of Accounting: Accrual

Partners:Rusty Top Ryan Bottom461-98-4858 461-98-48591046 Easy Street 123 Skid RowFake, Texas 77700 Phony, Texas 77001

Required. Prepare the partnership’s 2008 Federal Partnership Return, Form 1065; Rusty Top’s Schedule K-1; andthe 2008 Schedule of Depreciation and Amortization, Form 4562.


OMB No. 1545-0099U.S. Return of Partnership Income1065FormDepartment of the TreasuryInternal Revenue Service � See separate instructions.

Name of partnershipA Principal business activity D Employer identification numberUse theIRSlabel.Other-wise,printor type.

Number, street, and room or suite no. If a P.O. box, see the instructions.Principal product or serviceB E Date business started

City or town, state, and ZIP codeBusiness code numberC F Total assets (see theinstructions)

$

Final return(2)Initial return(1)Check applicable boxes:G (3) Name change

Accrual(2)Cash(1)Check accounting method:H (3) Other (specify) �

Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year �I

Caution. Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information.

1aa1 Gross receipts or sales1c1bb Less returns and allowances22 Cost of goods sold (Schedule A, line 8)33 Gross profit. Subtract line 2 from line 1c4Ordinary income (loss) from other partnerships, estates, and trusts (attach statement)4

Inco

me

55 Net farm profit (loss) (attach Schedule F (Form 1040))66 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797)77 Other income (loss) (attach statement)

8 Total income (loss). Combine lines 3 through 7 8

9 Salaries and wages (other than to partners) (less employment credits)10Guaranteed payments to partners1011

Rent13

12

Interest15

13

Taxes and licenses14 14

Bad debts12

15

Repairs and maintenance11

16aDepreciation (if required, attach Form 4562)16a16c16bLess depreciation reported on Schedule A and elsewhere on returnb17Depletion (Do not deduct oil and gas depletion.)17

1918 Retirement plans, etc.

Employee benefit programs

21

19Other deductions (attach statement)

Ded

ucti

ons

(see

the

inst

ruct

ions

for l

imita

tions

)

Total deductions. Add the amounts shown in the far right column for lines 9 through 2020 20

Ordinary business income (loss). Subtract line 21 from line 821

22Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member manager) is basedon all information of which preparer has any knowledge.Sign

HereDateSignature of general partner or limited liability company member manager

Preparer’s SSN or PTINDatePreparer’ssignature Check if

self-employed �PaidPreparer’sUse Only Firm’s name (or yours

if self-employed),address, and ZIP code

Form 1065 (2008)For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z

18

22

�

� EIN �

Phone no. ( )

For calendar year 2008, or tax year beginning , 2008, ending , 20 .

9

(4) Address change

May the IRS discuss this returnwith the preparer shown below (seeinstructions)? Yes No�

Check if Schedule M-3 attachedJ

(5) Amended return(6) Technical termination - also check (1) or (2)

2008

9-13Study Questions

Form 1065 (2008) Page 2

NoYes1

At any time during the tax year, was any partner in the partnership a disregarded entity, a partnership (including an entity treated as a partnership), a trust, an S corporation, an estate (other than an estate of a deceased partner), or a nominee or similar person?

2

At the end of the tax year:3

What type of entity is filing this return? Check the applicable box:Domestic general partnership Domestic limited partnershipDomestic limited liability company

a b

Other �

c d Domestic limited liability partnershipf

Form 1065 (2008)

Foreign partnershipe

Other InformationSchedule B

Cost of Goods Sold (see the instructions)Schedule AInventory at beginning of year1 1

Purchases less cost of items withdrawn for personal use2 2

Cost of laborAdditional section 263A costs (attach statement)4Other costs (attach statement)

4

Inventory at end of year

556

7788

9aCost of goods sold. Subtract line 7 from line 6. Enter here and on page 1, line 2Check all methods used for valuing closing inventory:

b

Cost as described in Regulations section 1.471-3

cCheck this box if there was a writedown of “subnormal” goods as described in Regulations section 1.471-2(c) �

Check this box if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) �

de

If “Yes,” attach explanation.

Do the rules of section 263A (for property produced or acquired for resale) apply to the partnership?Was there any change in determining quantities, cost, or valuations between opening and closing inventory?

3 3

6Total. Add lines 1 through 5

(i)(ii)(iii)

Lower of cost or market as described in Regulations section 1.471-4Other (specify method used and attach explanation) �

Yes

Yes

No

No

a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), or trust own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership? For rules of constructiveownership, see instructions. If “Yes,” complete (i) through (v) below

(v) MaximumPercentage Owned inProfit, Loss, or Capital

(iii) Type ofEntity

(ii) EmployerIdentification

Number (if any)

(i) Name of Entity (iv) Country ofOrganization

b Did any individual or estate own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of thepartnership? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below

(iv) MaximumPercentage Owned inProfit, Loss, or Capital

(ii) Social Security Number orEmployer Identification Number

(if any)

(i) Name of Individual or Estate (iii) Country ofCitizenship (see instructions)

At the end of the tax year, did the partnership:4a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock

entitled to vote of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below

(iv) PercentageOwned in Voting

Stock

(ii) Employer IdentificationNumber (if any)

(i) Name of Corporation (iii) Country ofIncorporation


Form 1065 (2008) Page 3

5 Did the partnership file Form 8893, Election of Partnership Level Tax Treatment, or an election statement undersection 6231(a)(1)(B)(ii) for partnership-level tax treatment, that is in effect for this tax year? See Form 8893 formore details

Form 1065 (2008)

If the partnership is required to file Form 8858, Information Return of U.S. Persons With Respect To ForeignDisregarded Entities, enter the number of Forms 8858 attached. See instructions �

6 Does the partnership satisfy all four of the following conditions?The partnership’s total receipts for the tax year were less than $250,000.aThe partnership’s total assets at the end of the tax year were less than $1 million.bSchedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return.

c

The partnership is not filing and is not required to file Schedule M-3dIf “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065; or Item L on Schedule K-1.

Does the partnership have any foreign partners? If “Yes,” enter the number of Forms 8805, Foreign Partner’sInformation Statement of Section 1446 Withholding Tax, filed for this partnership. �

7 Is this partnership a publicly traded partnership as defined in section 469(k)(2)?8 During the tax year, did the partnership have any debt that was cancelled, was forgiven, or had the terms

modified so as to reduce the principal amount of the debt?

Has this partnership filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provideinformation on any reportable transaction?

10 At any time during calendar year 2008, did the partnership have an interest in or a signature or otherauthority over a financial account in a foreign country (such as a bank account, securities account, orother financial account)? See the instructions for exceptions and filing requirements for Form TD F90-22.1, Report of Foreign Bank and Financial Accounts. If “Yes,” enter the name of the foreigncountry. �

11 At any time during the tax year, did the partnership receive a distribution from, or was it the grantor of, ortransferor to, a foreign trust? If “Yes,” the partnership may have to file Form 3520, Annual Return To ReportTransactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See instructions

12a Is the partnership making, or had it previously made (and not revoked), a section 754 election?See instructions for details regarding a section 754 election.Did the partnership make for this tax year an optional basis adjustment under section 743(b) or 734(b)? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions

b

Is the partnership required to adjust the basis of partnership assets under section 743(b) or 734(b) because of a substantial built-in loss (as defined under section 743(d)) or substantial basis reduction (as defined under section 734(d))? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions

c

NoYes


(iii) Type ofEntity


Number (if any)


15

16

9

Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return:

Identifying numberof TMP

Name of designatedTMPAddress of designatedTMP

�

� �

Designation of Tax Matters Partner (see instructions)

17 Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships,attached to this return. �

13 Check this box if, during the current or prior tax year, the partnership distributed any property received in alike-kind exchange or contributed such property to another entity (including a disregarded entity) �

14 At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or otherundivided interest in partnership property?

Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficialinterest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (v) below

b

9-15Study Questions

Form 1065 (2008) Page 4

Form 1065 (2008)

Partners’ Distributive Share ItemsOrdinary business income (loss) (page 1, line 22)1 1

Net rental real estate income (loss) (attach Form 8825)2 23aOther gross rental income (loss) 3a

Expenses from other rental activities (attach statement)b 3b

Other net rental income (loss). Subtract line 3b from line 3ac 3c

Guaranteed payments4Interest income

4

Royalties

Inco

me

(Lo

ss)

556

7

Other income (loss) (see instructions) Type

788

9a

Section 179 deduction (attach Form 4562)

9a

1010

Ded

ucti

ons

11

12

Low-income housing credit (section 42(j)(5))

Cre

dit

s

13b

Qualified rehabilitation expenditures (rental real estate) (attach Form 3468)cOther rental real estate credits (see instructions)dOther rental credits (see instructions)eOther credits (see instructions)

13a

12

14aNet earnings (loss) from self-employment14a14bGross farming or fishing incomeb

Self-

Empl

oy-

men

t

c Gross nonfarm income 14c

17a

16b

b

16c

Post-1986 depreciation adjustment

cd

Depletion (other than oil and gas)

f

Alt

erna

tive

Min

imum

Tax

(AM

T)

Item

s

Other AMT items (attach statement)

Name of country or U.S. possession �16a

Foreign gross income sourced at partnership levelc

Deductions allocated and apportioned at partner leveld e

Deductions allocated and apportioned at partnership level to foreign source income

f

Fore

ign

Tra

nsac

tio

ns

18a18a

Oth

er I

nfo

rmat

ion

Schedule K

Adjusted gain or loss

19a

20a

Other tax-exempt incomeNondeductible expenses

b Gross income from all sources

g

Passive category �

Total amount

16hh

Gross income sourced at partner level

Net short-term capital gain (loss) (attach Schedule D (Form 1065))

Dividends: a Ordinary dividends

Net long-term capital gain (loss) (attach Schedule D (Form 1065))

6a

b

Net section 1231 gain (loss) (attach Form 4797)

b Qualified dividends

cCollectibles (28%) gain (loss) Unrecaptured section 1250 gain (attach statement)

6b

9c9b

bcd

Contributions Investment interest expense Section 59(e)(2) expenditures: (1) Type �

Other deductions (see instructions)(2) Amount �

13a

15ab Low-income housing credit (other)

f

15b15c15d15e

15a

15f

General category � Other �

Interest expense � Other �

16f

i j kPassive category � General category � Other � 16k

Oil, gas, and geothermal properties—gross incomeOil, gas, and geothermal properties—deductionse

17a17b17c17d17e17f

l

m

Total foreign taxes (check one): Paid Accrued

Reduction in taxes available for credit (attach statement) 16m

bc

Tax-exempt interest income

Distributions of other property bDistributions of cash and marketable securities

Investment expenses bInvestment income

c Other items and amounts (attach statement)

18b18c19a19b20a20b

11�

13c(2)13d

�

n Other foreign tax information (attach statement)

16l

Type �

Type �

Type �

Type �


Form 1065 (2008)

Balance Sheets per Books Beginning of tax year End of tax year

Assets (d)(c)(b)(a)

1 Cash2a Trade notes and accounts receivable

b Less allowance for bad debts3 Inventories4 U.S. government obligations

Tax-exempt securities5Other current assets (attach statement)6Mortgage and real estate loans7Other investments (attach statement)8Buildings and other depreciable assets9aLess accumulated depreciationbDepletable assets10aLess accumulated depletionbLand (net of any amortization)11Intangible assets (amortizable only)12aLess accumulated amortizationbOther assets (attach statement)13Total assets14

Liabilities and Capital15 Accounts payable16 Mortgages, notes, bonds payable in less than 1 year17 Other current liabilities (attach statement)18 All nonrecourse loans 19 Mortgages, notes, bonds payable in 1 year or more20 Other liabilities (attach statement)21 Partners’ capital accounts22 Total liabilities and capital

Reconciliation of Income (Loss) per Books With Income (Loss) per ReturnNote. Schedule M-3 may be required instead of Schedule M-1 (see instructions).

1 Net income (loss) per books 2 Income included on Schedule K, lines 1, 2, 3c,

5, 6a, 7, 8, 9a, 10, and 11, not recorded onbooks this year (itemize):

4 Expenses recorded on books this year not included on Schedule K, lines 1 through13d, and 16l (itemize):

a Depreciation $ b Travel and entertainment $

5 Add lines 1 through 4

6 Income recorded on books this year not included on Schedule K, lines 1 through 11 (itemize):

a Tax-exempt interest $

7 Deductions included on Schedule K, lines 1through 13d, and 16l, not charged againstbook income this year (itemize):

a Depreciation $

8 Add lines 6 and 7 9 Income (loss) (Analysis of Net Income (Loss),

line 1). Subtract line 8 from line 5Analysis of Partners’ Capital Accounts

1 Balance at beginning of year 2 Capital contributed: a Cash

3 Net income (loss) per books 4 Other increases (itemize):


6 Distributions: a Cash b Property

7 Other decreases (itemize):

8 Add lines 6 and 7 9 Balance at end of year. Subtract line 8 from line 5

Schedule L

Schedule M-1

Schedule M-2

3 Guaranteed payments (other than health insurance)

Net income (loss). Combine Schedule K, lines 1 through 11. From the result, subtract the sum ofSchedule K, lines 12 through 13d, and 16l 1

(ii) Individual(active)

Analysis bypartner type:

(v) Exemptorganization

(i) Corporate (iv) Partnership (vi) Nominee/Other

General partners

Analysis of Net Income (Loss)

Limited partners

1

2

ba

(iii) Individual(passive)

Form 1065 (2008)

b Property

9-17Study Questions

OMB No. 1545-0099

year beginning , 2008

, 20

Schedule K-1(Form 1065)

Information About the Partnership

Partner’s Share of Income, Deductions,Credits, etc.

Department of the TreasuryInternal Revenue Service

ending

Part III

Part I

Part II

A Partnership’s employer identification number

B Partnership’s name, address, city, state, and ZIP code

C IRS Center where partnership filed return

D Check if this is a publicly traded partnership (PTP)

Information About the PartnerE Partner’s identifying number

F Partner’s name, address, city, state, and ZIP code

G General partner or LLCmember-manager

Limited partner or other LLC member

H Domestic partner Foreign partner

I What type of entity is this partner?

J Partner’s share of profit, loss, and capital

K Partner’s share of liabilities at year end:

Nonrecourse $

Qualified nonrecourse financing

Recourse

L Partner’s capital account analysis:

Beginning capital account

Capital contributed during the year

Current year increase (decrease)

Withdrawals & distributions

Ending capital account

Tax basis GAAP Section 704(b) book

Other (explain)

$

$

$

$

$

$

$

( )

Final K-1 Amended K-1

Partner’s Share of Current Year Income,Deductions, Credits, and Other Items

1 Ordinary business income (loss)

2 Net rental real estate income (loss)

15 Credits

4 Guaranteed payments

5

16 Foreign transactions

12 Section 179 deduction

18 Tax-exempt income andnondeductible expenses

13 Other deductions

Cat. No. 11394R Schedule K-1 (Form 1065) 2008

� See back of form and separate instructions.

651108

Interest income

6a Ordinary dividends

6b Qualified dividends

7 Royalties

8 Net short-term capital gain (loss)

9a Net long-term capital gain (loss)

9b Collectibles (28%) gain (loss)

10 Net section 1231 gain (loss)

11 Other income (loss)

14 Self-employment earnings (loss)

9c Unrecaptured section 1250 gain

17 Alternative minimum tax (AMT) items

19 Distributions

20 Other information

For Paperwork Reduction Act Notice, see Instructions for Form 1065.

3 Other net rental income (loss)

*See attached statement for additional information.

For

IRS

Use

Onl

y

For calendar year 2008, or tax

08

Beginning EndingProfit %

Loss

Capital

%

% %

% %


OMB No. 1545-0172Depreciation and Amortization4562Form(Including Information on Listed Property)

Department of the TreasuryInternal Revenue Service Attachment

Sequence No. 67� See separate instructions.Identifying numberName(s) shown on return Business or activity to which this form relates

Election To Expense Certain Property Under Section 179Note: If you have any listed property, complete Part V before you complete Part I.

$250,0001Maximum amount. See the instructions for a higher limit for certain businesses 12Total cost of section 179 property placed in service (see instructions)2

$800,0003Threshold cost of section 179 property before reduction in limitation (see instructions) 34Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0-4

Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions

55

(a) Description of property (b) Cost (business use only) (c) Elected cost

6

7Listed property. Enter the amount from line 29788 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 79Tentative deduction. Enter the smaller of line 5 or line 89

10Carryover of disallowed deduction from line 13 of your 2007 Form 45621011Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions)1112Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 1112

13 Carryover of disallowed deduction to 2009. Add lines 9 and 10, less line 12 � 13Note: Do not use Part II or Part III below for listed property. Instead, use Part V.

MACRS Depreciation (Do not include listed property.) (See instructions.)

(b) Month andyear placed in

service

(c) Basis for depreciation(business/investment use

only—see instructions)

(d) Recoveryperiod(a) (e) Convention (f) Method (g) Depreciation deduction

Section B—Assets Placed in Service During 2008 Tax Year Using the General Depreciation System

3-year property19a5-year propertyb7-year propertyc

10-year propertyd15-year propertye20-year propertyf

S/LMM27.5 yrs.Residential rentalproperty

hS/LMM27.5 yrs.S/LMMNonresidential real

propertyi

S/LMMSection C—Assets Placed in Service During 2008 Tax Year Using the Alternative Depreciation System

S/L20a Class life12 yrs. S/Lb 12-year40 yrs. MM S/Lc 40-year

Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)

MACRS deductions for assets placed in service in tax years beginning before 200817 17

15Property subject to section 168(f)(1) election 15Other depreciation (including ACRS) 16 16

Summary (See instructions.)2121 Listed property. Enter amount from line 28

Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr.

2222

23 For assets shown above and placed in service during the current year,enter the portion of the basis attributable to section 263A costs 23

Form 4562 (2008)For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N

Part IV

Part I

Part II

Part III

� Attach to your tax return.

39 yrs.

Section A

18 If you are electing to group any assets placed in service during the tax year into one or moregeneral asset accounts, check here �

Classification of property

25-year propertyg 25 yrs. S/L

Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions)

1414

2008(99)

9-19Solutions to Study Questions

SOLUTIONS TO STUDY QUESTIONS

True or False

1. False. It is a conduit under the aggregate theory.

2. False. Recapture carries over to the partnership.

3. True.

4. False. The percentage only characterizes the gain or disallows the loss.

5. True.

6. True.

7. True.

8. True.

9. True.

10. False. Five percent or more.

11. False. Indefinite carryforward.

12. True.

13. True.

Multiple Choice

1. b.

2. a. None under § 721.

3. d. Ten percent of $100,000.

4. b. $10,000 + 7,500 � 10,000 ¼ $7,500.

5. c. $500 + 500 + 500 + 300 ¼ $1,800.

6. a.

7. b. $156,000 + 12,000 ¼ $168,000.

8. e.

9. a.

10. d.

11. e. $1,000 + 1,500 + 5,000 ¼ $7,500.


12. a.

13. c.

14. c. T retains debt to the extent it exceeds basis. Therefore, he is only treated as if he transfers $40,000 ofdebt.

15. e.

16. c.

17. e.

Fill In the Blanks

1. Entity; aggregate.

2. Property.

3. Increase; decrease.

4. 60; elected.

5. 5.

6. Guaranteed payment.

7. 1065, fourth.

8. Increase; decrease.

Code Section Recognition

1. c.

2. f.

3. e.

4. d.

5. a.

6. b.


OMB No. 1545-0099U.S. Return of Partnership Income1065FormDepartment of the TreasuryInternal Revenue Service � See separate instructions.

Name of partnershipA Principal business activity D Employer identification numberUse theIRSlabel.Other-wise,printor type.

Number, street, and room or suite no. If a P.O. box, see the instructions.Principal product or serviceB E Date business started

City or town, state, and ZIP codeBusiness code numberC F Total assets (see theinstructions)

$

Final return(2)Initial return(1)Check applicable boxes:G (3) Name change

Accrual(2)Cash(1)Check accounting method:H (3) Other (specify) �

Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year �I

Caution. Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information.

1aa1 Gross receipts or sales1c1bb Less returns and allowances22 Cost of goods sold (Schedule A, line 8)33 Gross profit. Subtract line 2 from line 1c4Ordinary income (loss) from other partnerships, estates, and trusts (attach statement)4

Inco

me

55 Net farm profit (loss) (attach Schedule F (Form 1040))66 Net gain (loss) from Form 4797, Part II, line 17 (attach Form 4797)77 Other income (loss) (attach statement)

8 Total income (loss). Combine lines 3 through 7 8

9 Salaries and wages (other than to partners) (less employment credits)10Guaranteed payments to partners1011

Rent13

12

Interest15

13

Taxes and licenses14 14

Bad debts12

15

Repairs and maintenance11

16aDepreciation (if required, attach Form 4562)16a16c16bLess depreciation reported on Schedule A and elsewhere on returnb17Depletion (Do not deduct oil and gas depletion.)17

1918 Retirement plans, etc.

Employee benefit programs

21

19Other deductions (attach statement)

Ded

ucti

ons

(see

the

inst

ruct

ions

for l

imita

tions

)

Total deductions. Add the amounts shown in the far right column for lines 9 through 2020 20

Ordinary business income (loss). Subtract line 21 from line 821

22Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member manager) is basedon all information of which preparer has any knowledge.Sign

HereDateSignature of general partner or limited liability company member manager

Preparer’s SSN or PTINDatePreparer’ssignature Check if

self-employed �PaidPreparer’sUse Only Firm’s name (or yours

if self-employed),address, and ZIP code

Form 1065 (2008)For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z

18

22

�

� EIN �

Phone no. ( )

For calendar year 2008, or tax year beginning , 2008, ending , 20 .

9

(4) Address change

May the IRS discuss this returnwith the preparer shown below (seeinstructions)? Yes No�

Check if Schedule M-3 attachedJ

(5) Amended return(6) Technical termination - also check (1) or (2)

2008TOPS AND BOTTOMS

1915 IMITATION

FAKE, TEXAS 77700

RETAIL SALES

COSTUME JEWELRY

558490

3456789

1-3-2003

513,000

74

421,000 0 421,000

195,000226,000

226,00090,00010,000

15,0008,000

25,00025,000

0

81,000229,000(3,000)(LOSS)

- SEE SCHEDULE OF OTHER DEDUCTIONS -

4-1-09Rusty Top

Kym T. Pratt 3/30/09 454-83-7263KYM T. PRATT2702 WHOKNOWS WHERE, TEXAS 713 399-0777


Form 1065 (2008) Page 2

NoYes1

At any time during the tax year, was any partner in the partnership a disregarded entity, a partnership (including an entity treated as a partnership), a trust, an S corporation, an estate (other than an estate of a deceased partner), or a nominee or similar person?

2

At the end of the tax year:3

What type of entity is filing this return? Check the applicable box:Domestic general partnership Domestic limited partnershipDomestic limited liability company

a b

Other �

c d Domestic limited liability partnershipf

Form 1065 (2008)

Foreign partnershipe

Other InformationSchedule B

Cost of Goods Sold (see the instructions)Schedule AInventory at beginning of year1 1

Purchases less cost of items withdrawn for personal use2 2

Cost of laborAdditional section 263A costs (attach statement)4Other costs (attach statement)

4

Inventory at end of year

556

7788

9aCost of goods sold. Subtract line 7 from line 6. Enter here and on page 1, line 2Check all methods used for valuing closing inventory:

b

Cost as described in Regulations section 1.471-3

cCheck this box if there was a writedown of “subnormal” goods as described in Regulations section 1.471-2(c) �

Check this box if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) �

de

If “Yes,” attach explanation.

Do the rules of section 263A (for property produced or acquired for resale) apply to the partnership?Was there any change in determining quantities, cost, or valuations between opening and closing inventory?

3 3

6Total. Add lines 1 through 5

(i)(ii)(iii)

Lower of cost or market as described in Regulations section 1.471-4Other (specify method used and attach explanation) �

Yes

Yes

No

No

a Did any foreign or domestic corporation, partnership (including any entity treated as a partnership), or trust own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of the partnership? For rules of constructiveownership, see instructions. If “Yes,” complete (i) through (v) below


(iii) Type ofEntity


Number (if any)


b Did any individual or estate own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital of thepartnership? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below

(iv) MaximumPercentage Owned inProfit, Loss, or Capital

(ii) Social Security Number orEmployer Identification Number

(if any)

(i) Name of Individual or Estate (iii) Country ofCitizenship (see instructions)

At the end of the tax year, did the partnership:4a Own directly 20% or more, or own, directly or indirectly, 50% or more of the total voting power of all classes of stock

entitled to vote of any foreign or domestic corporation? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (iv) below

(iv) PercentageOwned in Voting

Stock

(ii) Employer IdentificationNumber (if any)

(i) Name of Corporation (iii) Country ofIncorporation

0225,000

___

PLUG #

225,00030,000

195,000


Form 1065 (2008) Page 3

5 Did the partnership file Form 8893, Election of Partnership Level Tax Treatment, or an election statement undersection 6231(a)(1)(B)(ii) for partnership-level tax treatment, that is in effect for this tax year? See Form 8893 formore details

Form 1065 (2008)

If the partnership is required to file Form 8858, Information Return of U.S. Persons With Respect To ForeignDisregarded Entities, enter the number of Forms 8858 attached. See instructions �

6 Does the partnership satisfy all four of the following conditions?The partnership’s total receipts for the tax year were less than $250,000.aThe partnership’s total assets at the end of the tax year were less than $1 million.bSchedules K-1 are filed with the return and furnished to the partners on or before the due date (including extensions) for the partnership return.

c

The partnership is not filing and is not required to file Schedule M-3dIf “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065; or Item L on Schedule K-1.

Does the partnership have any foreign partners? If “Yes,” enter the number of Forms 8805, Foreign Partner’sInformation Statement of Section 1446 Withholding Tax, filed for this partnership. �

7 Is this partnership a publicly traded partnership as defined in section 469(k)(2)?8 During the tax year, did the partnership have any debt that was cancelled, was forgiven, or had the terms

modified so as to reduce the principal amount of the debt?

Has this partnership filed, or is it required to file, Form 8918, Material Advisor Disclosure Statement, to provideinformation on any reportable transaction?

10 At any time during calendar year 2008, did the partnership have an interest in or a signature or otherauthority over a financial account in a foreign country (such as a bank account, securities account, orother financial account)? See the instructions for exceptions and filing requirements for Form TD F90-22.1, Report of Foreign Bank and Financial Accounts. If “Yes,” enter the name of the foreigncountry. �

11 At any time during the tax year, did the partnership receive a distribution from, or was it the grantor of, ortransferor to, a foreign trust? If “Yes,” the partnership may have to file Form 3520, Annual Return To ReportTransactions With Foreign Trusts and Receipt of Certain Foreign Gifts. See instructions

12a Is the partnership making, or had it previously made (and not revoked), a section 754 election?See instructions for details regarding a section 754 election.Did the partnership make for this tax year an optional basis adjustment under section 743(b) or 734(b)? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions

b

Is the partnership required to adjust the basis of partnership assets under section 743(b) or 734(b) because of a substantial built-in loss (as defined under section 743(d)) or substantial basis reduction (as defined under section 734(d))? If “Yes,” attach a statement showing the computation and allocation of the basis adjustment. See instructions

c

NoYes


(iii) Type ofEntity


Number (if any)


15

16

9

Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return:

Identifying numberof TMP

Name of designatedTMPAddress of designatedTMP

�

� �

Designation of Tax Matters Partner (see instructions)

17 Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships,attached to this return. �

13 Check this box if, during the current or prior tax year, the partnership distributed any property received in alike-kind exchange or contributed such property to another entity (including a disregarded entity) �

14 At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or otherundivided interest in partnership property?

Own directly an interest of 20% or more, or own, directly or indirectly, an interest of 50% or more in the profit, loss, or capital in any foreign or domestic partnership (including an entity treated as a partnership) or in the beneficialinterest of a trust? For rules of constructive ownership, see instructions. If “Yes,” complete (i) through (v) below

b

461-98-4858RUSTY TOP1046 EASY STREETFAKE, TEXAS 77700


Form 1065 (2008) Page 4

Form 1065 (2008)

Partners’ Distributive Share ItemsOrdinary business income (loss) (page 1, line 22)1 1

Net rental real estate income (loss) (attach Form 8825)2 23aOther gross rental income (loss) 3a

Expenses from other rental activities (attach statement)b 3b

Other net rental income (loss). Subtract line 3b from line 3ac 3c

Guaranteed payments4Interest income

4

Royalties

Inco

me

(Lo

ss)

556

7

Other income (loss) (see instructions) Type

788

9a

Section 179 deduction (attach Form 4562)

9a

1010

Ded

ucti

ons

11

12

Low-income housing credit (section 42(j)(5))

Cre

dit

s

13b

Qualified rehabilitation expenditures (rental real estate) (attach Form 3468)cOther rental real estate credits (see instructions)dOther rental credits (see instructions)eOther credits (see instructions)

13a

12

14aNet earnings (loss) from self-employment14a14bGross farming or fishing incomeb

Self-

Empl

oy-

men

t

c Gross nonfarm income 14c

17a

16b

b

16c

Post-1986 depreciation adjustment

cd

Depletion (other than oil and gas)

f

Alt

erna

tive

Min

imum

Tax

(AM

T)

Item

s

Other AMT items (attach statement)

Name of country or U.S. possession �16a

Foreign gross income sourced at partnership levelc

Deductions allocated and apportioned at partner leveld e

Deductions allocated and apportioned at partnership level to foreign source income

f

Fore

ign

Tra

nsac

tio

ns

18a18a

Oth

er I

nfo

rmat

ion

Schedule K

Adjusted gain or loss

19a

20a

Other tax-exempt incomeNondeductible expenses

b Gross income from all sources

g

Passive category �

Total amount

16hh

Gross income sourced at partner level

Net short-term capital gain (loss) (attach Schedule D (Form 1065))

Dividends: a Ordinary dividends

Net long-term capital gain (loss) (attach Schedule D (Form 1065))

6a

b

Net section 1231 gain (loss) (attach Form 4797)

b Qualified dividends

cCollectibles (28%) gain (loss) Unrecaptured section 1250 gain (attach statement)

6b

9c9b

bcd

Contributions Investment interest expense Section 59(e)(2) expenditures: (1) Type �

Other deductions (see instructions)(2) Amount �

13a

15ab Low-income housing credit (other)

f

15b15c15d15e

15a

15f

General category � Other �

Interest expense � Other �

16f

i j kPassive category � General category � Other � 16k

Oil, gas, and geothermal properties—gross incomeOil, gas, and geothermal properties—deductionse

17a17b17c17d17e17f

l

m

Total foreign taxes (check one): Paid Accrued

Reduction in taxes available for credit (attach statement) 16m

bc

Tax-exempt interest income

Distributions of other property bDistributions of cash and marketable securities

Investment expenses bInvestment income

c Other items and amounts (attach statement)

18b18c19a19b20a20b

11�

13c(2)13d

�

n Other foreign tax information (attach statement)

16l

Type �

Type �

Type �

Type �

(3,000)

10,000

(LOSS)


Form 1065 (2008)

Balance Sheets per Books Beginning of tax year End of tax year

Assets (d)(c)(b)(a)

1 Cash2a Trade notes and accounts receivable

b Less allowance for bad debts3 Inventories4 U.S. government obligations

Tax-exempt securities5Other current assets (attach statement)6Mortgage and real estate loans7Other investments (attach statement)8Buildings and other depreciable assets9aLess accumulated depreciationbDepletable assets10aLess accumulated depletionbLand (net of any amortization)11Intangible assets (amortizable only)12aLess accumulated amortizationbOther assets (attach statement)13Total assets14

Liabilities and Capital15 Accounts payable16 Mortgages, notes, bonds payable in less than 1 year17 Other current liabilities (attach statement)18 All nonrecourse loans 19 Mortgages, notes, bonds payable in 1 year or more20 Other liabilities (attach statement)21 Partners’ capital accounts22 Total liabilities and capital

Reconciliation of Income (Loss) per Books With Income (Loss) per ReturnNote. Schedule M-3 may be required instead of Schedule M-1 (see instructions).

1 Net income (loss) per books 2 Income included on Schedule K, lines 1, 2, 3c,

5, 6a, 7, 8, 9a, 10, and 11, not recorded onbooks this year (itemize):

4 Expenses recorded on books this year not included on Schedule K, lines 1 through13d, and 16l (itemize):

a Depreciation $ b Travel and entertainment $


6 Income recorded on books this year not included on Schedule K, lines 1 through 11 (itemize):

a Tax-exempt interest $

7 Deductions included on Schedule K, lines 1through 13d, and 16l, not charged againstbook income this year (itemize):

a Depreciation $

8 Add lines 6 and 7 9 Income (loss) (Analysis of Net Income (Loss),

line 1). Subtract line 8 from line 5Analysis of Partners’ Capital Accounts

1 Balance at beginning of year 2 Capital contributed: a Cash

3 Net income (loss) per books 4 Other increases (itemize):


6 Distributions: a Cash b Property

7 Other decreases (itemize):

8 Add lines 6 and 7 9 Balance at end of year. Subtract line 8 from line 5

Schedule L

Schedule M-1

Schedule M-2

3 Guaranteed payments (other than health insurance)

Net income (loss). Combine Schedule K, lines 1 through 11. From the result, subtract the sum ofSchedule K, lines 12 through 13d, and 16l 1

(ii) Individual(active)

Analysis bypartner type:

(v) Exemptorganization

(i) Corporate (iv) Partnership (vi) Nominee/Other

General partners

Analysis of Net Income (Loss)

Limited partners

1

2

ba

(iii) Individual(passive)

Form 1065 (2008)

b Property

7,000

7,000

FIRST YEARPARTNERSHIP

25,000450,000

8,000

30,000

425,000

513,000

26,000

487,000

50,000

513,000

10,000

(3,000)(LOSS)

7,000

497,000

400,000100,000

(3,000)

- 0 -

7,000

487,000

10,000

10,000-

- 0 --

-


OMB No. 1545-0099

year beginning , 2008

, 20

Schedule K-1(Form 1065)

Information About the Partnership

Partner’s Share of Income, Deductions,Credits, etc.

Department of the TreasuryInternal Revenue Service

ending

Part III

Part I

Part II

A Partnership’s employer identification number

B Partnership’s name, address, city, state, and ZIP code

C IRS Center where partnership filed return

D Check if this is a publicly traded partnership (PTP)

Information About the PartnerE Partner’s identifying number

F Partner’s name, address, city, state, and ZIP code

G General partner or LLCmember-manager

Limited partner or other LLC member

H Domestic partner Foreign partner

I What type of entity is this partner?

J Partner’s share of profit, loss, and capital

K Partner’s share of liabilities at year end:

Nonrecourse $

Qualified nonrecourse financing

Recourse

L Partner’s capital account analysis:

Beginning capital account

Capital contributed during the year

Current year increase (decrease)

Withdrawals & distributions

Ending capital account

Tax basis GAAP Section 704(b) book

Other (explain)

$

$

$

$

$

$

$

( )

Final K-1 Amended K-1

Partner’s Share of Current Year Income,Deductions, Credits, and Other Items

1 Ordinary business income (loss)

2 Net rental real estate income (loss)

15 Credits

4 Guaranteed payments

5

16 Foreign transactions

12 Section 179 deduction

18 Tax-exempt income andnondeductible expenses

13 Other deductions

Cat. No. 11394R Schedule K-1 (Form 1065) 2008

� See back of form and separate instructions.

Interest income

6a Ordinary dividends

6b Qualified dividends

7 Royalties

8 Net short-term capital gain (loss)

9a Net long-term capital gain (loss)

9b Collectibles (28%) gain (loss)

10 Net section 1231 gain (loss)

11 Other income (loss)

14 Self-employment earnings (loss)

9c Unrecaptured section 1250 gain

17 Alternative minimum tax (AMT) items

19 Distributions

20 Other information

For Paperwork Reduction Act Notice, see Instructions for Form 1065.

3 Other net rental income (loss)

*See attached statement for additional information.

For

IRS

Use

Onl

y

For calendar year 2008, or tax

08

Beginning EndingProfit %

Loss

Capital

%

% %

% %

TOPS AND BOTTOMS

1915 IMITATION LANE

FAKE, TEXAS 77700

34567897410,000

RUSTY TOP1046 EASY STREETFAKE, TEXAS 77700

461-98-4858

INDIVIDUAL

808080

- 0 -- 0 -

- 0 -

20,800

400,000

387,60010,000(2,400)


TOPS AND BOTTOMS

74—3456789

SCHEDULE OF OTHER EXPENSESAccounting $40,000Insurance 5,000Maintenance 12,000Travel and entertainment 18,000Utilities 6,000

Total Other Expenses $81,000

Required attachments for Form 1065, page 1, line 20.


OMB No. 1545-0172Depreciation and Amortization4562Form(Including Information on Listed Property)

Department of the TreasuryInternal Revenue Service Attachment

Sequence No. 67� See separate instructions.Identifying numberName(s) shown on return Business or activity to which this form relates

Election To Expense Certain Property Under Section 179Note: If you have any listed property, complete Part V before you complete Part I.

$250,0001Maximum amount. See the instructions for a higher limit for certain businesses 12Total cost of section 179 property placed in service (see instructions)2

$800,0003Threshold cost of section 179 property before reduction in limitation (see instructions) 34Reduction in limitation. Subtract line 3 from line 2. If zero or less, enter -0-4

Dollar limitation for tax year. Subtract line 4 from line 1. If zero or less, enter -0-. If married filing separately, see instructions

55

(a) Description of property (b) Cost (business use only) (c) Elected cost

6

7Listed property. Enter the amount from line 29788 Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 79Tentative deduction. Enter the smaller of line 5 or line 89

10Carryover of disallowed deduction from line 13 of your 2007 Form 45621011Business income limitation. Enter the smaller of business income (not less than zero) or line 5 (see instructions)1112Section 179 expense deduction. Add lines 9 and 10, but do not enter more than line 1112

13 Carryover of disallowed deduction to 2009. Add lines 9 and 10, less line 12 � 13Note: Do not use Part II or Part III below for listed property. Instead, use Part V.

MACRS Depreciation (Do not include listed property.) (See instructions.)

(b) Month andyear placed in

service

(c) Basis for depreciation(business/investment use

only—see instructions)

(d) Recoveryperiod(a) (e) Convention (f) Method (g) Depreciation deduction

Section B—Assets Placed in Service During 2008 Tax Year Using the General Depreciation System

3-year property19a5-year propertyb7-year propertyc

10-year propertyd15-year propertye20-year propertyf

S/LMM27.5 yrs.Residential rentalproperty

hS/LMM27.5 yrs.S/LMMNonresidential real

propertyi

S/LMMSection C—Assets Placed in Service During 2008 Tax Year Using the Alternative Depreciation System

S/L20a Class life12 yrs. S/Lb 12-year40 yrs. MM S/Lc 40-year

Special Depreciation Allowance and Other Depreciation (Do not include listed property.) (See instructions.)

MACRS deductions for assets placed in service in tax years beginning before 200817 17

15Property subject to section 168(f)(1) election 15Other depreciation (including ACRS) 16 16

Summary (See instructions.)2121 Listed property. Enter amount from line 28

Total. Add amounts from line 12, lines 14 through 17, lines 19 and 20 in column (g), and line 21.Enter here and on the appropriate lines of your return. Partnerships and S corporations—see instr.

2222

23 For assets shown above and placed in service during the current year,enter the portion of the basis attributable to section 263A costs 23

Form 4562 (2008)For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 12906N

Part IV

Part I

Part II

Part III

� Attach to your tax return.

39 yrs.

Section A

18 If you are electing to group any assets placed in service during the tax year into one or moregeneral asset accounts, check here �

Classification of property

25-year propertyg 25 yrs. S/L

Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year (see instructions)

1414

2008(99)

TOPS AND BOTTOMS COSTUME JEWELRY - PAGE 1, FORM 1065 74 3456789

$ 350,000 @ 35YRS SL 10,000

100,000 5 YRS HY MACRS 15,000

25,000

9-29Study Questions

taxation of partnerships and partners - …€¦ · 5. a limited partnership limits the liability...

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