Contents

What’s New .................. 1

Reminder .................... 1

Introduction .................. 2

Forming a Partnership ............ 2

Terminating a Partnership ......... 4

Exclusion From Partnership Rules .... 4

Partnership Return (Form 1065) ...... 4

Partnership Distributions .......... 5

Transactions Between Partnership 

and Partners ............... 7

Basis of Partner's Interest ......... 9

Disposition of Partner's Interest ..... 11

Section 1061 Reporting 

Instructions .............. 13

Tax Equity and Fiscal 

Responsibility Act of 1982 

(TEFRA) ................ 15

Bipartisan Budget Act of 2015 

(BBA) .................. 15

Index ..................... 23

What’s New

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.

Reminder

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Publication 541

(Rev. March 2022)

Cat. No. 15071D

Partnerships

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Mar 24, 2022
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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.

Withholding on foreign partner or firm. A 

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

obligations.

Fixed or determinable annual or periodical (FDAP) income. 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.

Withholding under the Foreign Investment in Real Property Tax Act (FIRPTA). 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.

Withholding on foreign partner’s effectively connected taxable income (ECTI). 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.

Withholding on foreign partner’s sale of 

a partnership interest. 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.

Withholding under the Foreign Account 

Tax Compliance Act (FATCA). 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.

Comments and suggestions. We welcome 

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You can send us comments through 

IRS.gov/FormComments. Or, you can write to 

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each comment received, we do appreciate your 

feedback and will consider your comments and 

suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. 

If you have a tax question not answered by this 

publication or the How To Get Tax Help section 

at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the 

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Useful Items

You may want to see:

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

 334

 505

 515

 535

 537

 538

Sales and Other Dispositions of 

Assets

Basis of Assets

Passive Activity and At-Risk Rules

How To Depreciate Property

See How To Get Tax Help at the end of this 

publication for information about getting publications and forms.

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.

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.

For more information, see the instructions for 

Form 8832. 

Limited liability company (LLC). 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 

 544

 551

 925

 946

Page 2 Publication 541 (March 2022)
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.

A domestic LLC with at least two members that doesn't file Form 8832 is classified as a partnership for federal income tax purposes.

Organizations formed before 1997. 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.

Community property. 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

Gift of capital interest. 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.

TIP

Purchase considered gift. 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.

Applicable partnership interest (API). 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:

1. Capital gains recognized by a partner from 

the sale or exchange of an applicable partnership interest under sections 741(a) and 

731(a); and

2. Capital gains recognized by a partnership, 

allocated to a partner with respect to an 

API.

Applicable trade or business. 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. 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.

Security. 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.

Business Owned and Operated by 

Spouses

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.

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 

Publication 541 (March 2022) Page 3
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.

Partnership Agreement

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).

Date of termination. 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.

Short period return. 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 15th day of the 3rd 

month following the date of termination. See 

Partnership Return (Form 1065), later, for information about filing Form 1065.

Conversion of partnership into LLC. 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.

Electronic Filing

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.

Investing partnership. 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.

Operating agreement partnership. 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.

However, this exclusion doesn't apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of 

the organization.

Electing the exclusion. 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.

Partnership Return 

(Form 1065)

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.

Page 4 Publication 541 (March 2022)
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.

Effect on partner's basis. 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.

Effect on partnership. 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.

Certain distributions treated as a sale or 

exchange. 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.

Substantially appreciated inventory 

items. 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.

Example. 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)].

Qualified opportunity investment. 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.

Marketable securities treated as money.

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:

1. 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

2. 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).

Loss on distribution. 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.

Distribution of partner's debt. 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.

Net precontribution gain. 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.

1. The excess of:

a. The FMV of the property received in 

the distribution; over

b. 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.

2. 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.

Publication 541 (March 2022) Page 5
Effect on basis. 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.

Exceptions. 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.

Example 1. 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.

Example 2. 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).

Complete liquidation of partner's interest.

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.

Partner's holding period. 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.

Basis divided among properties. 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.

1. 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.

2. 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.

Allocating a basis increase. 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.

Example. 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).

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

1. 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.

2. Allocate any remaining basis decrease 

among all the items in proportion to their 

respective assigned basis amounts (as 

decreased in (1)).

Example. 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).

Distributions before August 6, 1997. For 

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

1. 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.

2. Allocate any remaining basis to other distributed properties in proportion to their 

adjusted bases to the partnership.

Partner's interest more than partnership 

basis. 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.

Special adjustment to basis. 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 

Page 6 Publication 541 (March 2022)
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.

Example. 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.

Mandatory adjustment. 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.

Required statement. 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.

Marketable securities. 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.

1. Performing services for, or transferring 

property to, a partnership if:

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

b. 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.

2. Transferring money or other property to a 

partnership if:

a. There is a related transfer of money or 

other property by the partnership to 

the contributing partner or another 

partner, and

b. The transfers together are properly 

characterized as a sale or exchange 

of property.

Payments by accrual basis partnership to 

cash basis partner. 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.

Minimum payment. 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.

Example. 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.

Self-employed health insurance premiums.

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 

Publication 541 (March 2022) Page 7
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.

Including payments in partner's income. 

Guaranteed payments are included in income in 

the partner's tax year in which the partnership's 

tax year ends.

Example 1. 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.

Example 2. 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.

Payments resulting in loss. 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. 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. 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.

More than 50% ownership. To determine if 

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

1. 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.

2. 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.

3. 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.

Example. 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.

More information. 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.

Disguised sales. 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.

Form 8275 required. 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.

Contribution to partnership treated as investment company. 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 

Page 8 Publication 541 (March 2022)
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.

Contribution to foreign partnership. 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.

1. Immediately after the contribution, the 

partnership owned, directly, indirectly, or 

by attribution, at least a 10% interest in the 

foreign partnership.

2. 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.

Basis of contributed property. 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.

Allocations to account for built-in gain or 

loss. 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.

Example. 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.

Distribution of contributed property to another partner. 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.

Disposition of certain contributed property. 

The following rules determine the character of 

the partnership's gain or loss on a disposition of 

certain types of contributed property.

1. 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.”

2. 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.

3. 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.

4. 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.

Capital interest. 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.

Profits interest. 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.

Publication 541 (March 2022) Page 9
Interest acquired by gift, etc. 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

There is a worksheet for adjusting the 

basis of a partner's interest in the partnership in the Partner's Instructions for 

Schedule K-1 (Form 1065).

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

Increases. 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.

Decreases. 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.

Note. 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.

Partner's liabilities assumed by partnership. 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 

TIP

of the liability is treated as a contribution by 

them of money to the partnership. See Effect of 

Partnership Liabilities, later.

Example 1. 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:

Adjusted basis of contributed property ...... $8,000

Minus: Part of mortgage assumed by other 

partners (80% (0.80) × $4,000) ...........

3,200

Basis of Ivan's partnership interest ........ $4,800

Example 2. 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.

Book value of partner's 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.

Example. 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.

When determined. 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.

Alternative rule for figuring adjusted basis.

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:

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

2. Gives rise to a current deduction to the 

partnership; or

3. Is a nondeductible, noncapital expense of 

the partnership.

The term “assets” in (1) includes capitalized 

items allocable to future periods, such as organization expenses.

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.

Partner's basis increased. 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.

Partner's basis decreased. 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.

Assumption of liability. Generally, a partner 

or related person is considered to assume a 

partnership liability only to the extent that:

1. They’re personally liable for it,

2. The creditor knows that the liability was 

assumed by the partner or related person,

3. The creditor can demand payment from 

the partner or related person, and

4. No other partner or person related to another partner will bear the economic risk of 

loss on that liability immediately after the 

assumption.

Related person. 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.

Page 10 Publication 541 (March 2022)
• 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.

Property subject to a liability. 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.

Partner's share of recourse liabilities. 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.

Constructive liquidation. 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.

Example. 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.

Limited partner. 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.

Partner's share of nonrecourse 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.

More information. 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.

Abandoned or worthless partnership interest. 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.

If the partner receives even a de minimis actual 

or deemed distribution, the entire loss is generally a capital loss. However, see Payments for 

Unrealized Receivables and Inventory Items, 

later.

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.

Partnership election to adjust basis of partnership property. 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.

Example 1. 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.

Example 2. 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.

Installment reporting for sale of partnership 

interest. 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 

Publication 541 (March 2022) Page 11
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. 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.

Other items treated as unrealized receivables. 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.

Determining gain or loss. 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.

Example. 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. 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.

Notification required of partner. 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.

Information return required of partnership.

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.

Statement required of partner. 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.

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

Example. 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.

Exception for inventory items held more 

than 5 years. 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.

Example. 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.

Substituted basis property. 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.

Foreign partner's transfer of an interest in a 

partnership engaged in the conduct of a 

U.S. trade or business. 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 

Page 12 Publication 541 (March 2022)
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.

Liquidating payments. 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.

Unrealized receivables and goodwill. 

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.

However, this rule doesn't apply to payments 

for goodwill to the extent that the partnership 

agreement provides for a reasonable payment 

to a retiring partner for goodwill.

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.

Partners' valuation. 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.

Gain or loss on distribution. 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.

Other payments. 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 

Publication 541 (March 2022) Page 13
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.

Calculation and reporting for the 

API 1-year distributive share 

amount and 3-year distributive 

share amount by a pass-through 

entity

• 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.

Calculation and reporting of 

recharacterization amount by the 

owner taxpayer

• Section 1061 Worksheet B.

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

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

The Owner Taxpayer 

Reporting of the 

Recharacterization Amount 

on Schedule D (Form 1040) 

or Schedule D (Form 1041) 

and on Form 8949

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.

Reporting example for Worksheets A and B. 

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."

Page 14 Publication 541 (March 2022)
Tax Equity and Fiscal 

Responsibility Act of 

1982 (TEFRA)

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.

The TEFRA partnership audit procedures were repealed and do not apply 

to tax years beginning after 2017. The 

Bipartisan Budget Act of 2015 (BBA) is effective 

for partnership tax years beginning after 2017.

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.

Role of Partnership 

Representative

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.

Electing Out of the 

Centralized Partnership 

Audit Regime

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 

CAUTION

!

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 trust.

• 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).

AARs filed under the centralized partnership audit regime. 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.

Partner amended return filed as part of 

modification of the imputed underpayment 

during a BBA examination. 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 Sign Documents on 

Behalf of the Partnership

How To Sign Documents on Behalf of the 

Partnership

The following are examples of how a partnership 

representative (PR) should sign documents on behalf of 

the partnership. The manner in which the PR signs 

depends on whether the PR is an entity or an individual. 

If the PR is an entity, the designated individual (DI) signs 

in their capacity to act on behalf of that entity PR.

Designated 

Partnership 

Representative 

(PR)

Signature as 

Partnership 

Representative 

(PR)

Example

Individual Individual's 

signature

John Smith, PR

Entity Designated 

individual’s (DI) 

signature

Entity Name, PR, 

by John Smith, DI

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.

Preparing and filing your tax return. 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 

Publication 541 (March 2022) Page 15
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.

For 2021, if you received an Economic 

Impact Payment (EIP), refer to your 

Notice 1444-C, Your 2021 Economic 

Impact Payment. If you received Advance Child 

Tax Credit payments, refer to your Letter 6419.

Free options for tax preparation. 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.

Using online tools to help prepare your return. 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 

CAUTION

!

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).

Getting answers to your tax questions. On IRS.gov, you can get 

up-to-date information on current 

events and changes in tax law.

• 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.

Need someone to prepare your tax return? 

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.

Advance child tax credit payments. 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.

Coronavirus. 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.

Employers can register to use Business 

Services Online. 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.

IRS social media. 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.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations for individuals, small businesses, 

and tax professionals.

Online tax information in other languages. 

You can find information on IRS.gov/

MyLanguage if English isn’t your native language.

Free Over-the-Phone Interpreter (OPI) Service. 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.

Accessibility Helpline available for taxpayers with disabilities. 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.).

Getting tax forms and publications. 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.

Getting tax publications and instructions in 

eBook format. You can also download and 

view popular tax publications and instructions 

Page 16 Publication 541 (March 2022)
(including the Instructions for Form 1040) on 

mobile devices as eBooks at IRS.gov/eBooks.

Note. 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.

Access your online account (individual taxpayers only). 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.

Tax Pro Account. 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.

Using direct deposit. 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.

Getting a transcript of your return. 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.

Reporting and resolving your tax-related 

identity theft issues. 

• 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.

Ways to check on the status of your refund. 

• 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.

Note. 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.

Making a tax payment. 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.

Note. 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.

What if I can’t pay now? 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.

Filing an amended return. 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.

Checking the status of your amended return. Go to IRS.gov/WMAR to track the status 

of Form 1040-X amended returns.

Note. 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.

Understanding an IRS notice or letter 

you’ve received. 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.

Contacting your local IRS office. 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

What Is TAS?

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.

How Can You Learn About Your 

Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic 

rights that all taxpayers have when dealing with 

Publication 541 (March 2022) Page 17
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.

What Can TAS Do for You?

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.

How Can You Reach TAS?

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.

How Else Does TAS Help 

Taxpayers?

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 for Tax Professionals

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.

Low Income Taxpayer 

Clinics (LITCs)

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/LowIncome-Taxpayer-Clinics-LITC or see IRS Pub. 

4134, Low Income Taxpayer Clinic List.

Section 1061 

Worksheets and Tables

Page 18 Publication 541 (March 2022)
Section 1061 Worksheet A: API 1-Year Distributive Share Amount and API 3-Year Distributive Share Amount

(Completed by a pass-through entity that has issued an API and attached to the Schedule K-1.)

Pass-Through Entity Name EIN 

API Holder SSN or TIN

Line Description API Gains and (Losses)*

1 Net long-term capital gain (loss) from Schedule K-1 (Form 

1065), box 9a; Schedule K-1 (Form 1120-S), box 8a; or 

Schedule K-1 (Form 1041), box 4a(a)

$

2 Capital gains or (losses) included in line 1 that are not 

subject to section 1061 under Regulations section 

1.1061-4(b)(7)

$

3 Capital interest gains or (losses) under Regulations section 

1.1061-3(c)(2) included in line 1(b)

$

4 API 1-Year Distributive Share Amount

Subtract the sum of lines 2 and 3 from line 1.

$

5 Amounts included in line 4 that would not be treated as 

long-term gain or (loss) if 3 years is substituted for 1 year 

under paragraphs (3) and (4) of section 1222

$

6 Any Lookthrough Rule adjustment applicable to the 

disposition of an API by the pass-through entity under 

Regulations section 1.1061-4(b)(9)(c)

$

7 API 3-Year Distributive Share Amount Gain or (Loss)

Subtract the sum of lines 5 and 6 from line 4.

$

* Gains are entered as positive and losses are entered as negative.

(a) Calculation for collectibles gains or unrecaptured section 1250 gains. If a partnership, S corporation, estate, or trust has 

collectibles gain or loss or unrecaptured section 1250 gain that is treated as API gain or loss, the pass-through entity must provide 

the API holder with information to determine whether collectibles gain or unrecaptured section 1250 gain is recharacterized under 

section 1061. The pass-through entity must provide the API holder with information that enables the API holder to separately 

determine its API 1-Year Distributive Share Amount and its API 3-Year Distributive Share Amount for its collectibles gain or loss 

and/or its unrecaptured section 1250 gain. This information should be attached to Worksheet A.

(b) Capital interest gains and losses. See Regulations section 1.1061-3(c)(2) for computation of capital interest gains and losses.

(c) Lookthrough Rule information. See Regulations section 1.1061-4(b)(9) for computation of Lookthrough Rule amount 

adjustment.

Publication 541 (March 2022) Page 19
Section 1061 Worksheet B: Owner Taxpayer Reporting of Recharacterization Amount

(The owner taxpayer must complete and attach to their return.)

Taxpayer Name SSN or TIN 

Line Description Gains and (Losses)*

1 API 1-Year Distributive Share Amount from Worksheet A, 

line 4, which is attached to Schedule K-1.

Combined net amount from all APIs and increased by the API 

1-Year Distributive Share Amount of collectibles gain or loss 

and/or unrecaptured section 1250 gain, if applicable.

$

2 API 1-Year Disposition Amount from Table 1, line 4.

Combined net amount from all APIs.

$

3 1-Year Gain Amount

Add lines 1 and 2. If the sum of line 1 plus line 2 is zero or 

less, enter zero on line 3 and skip to line 8.

$

4 API 3-Year Distributive Share Amount from Worksheet A, 

line 7, which is attached to the Schedule K-1.

Combined net amount from all APIs, increased by the 

amount of API 3-Year Distributive Share Amount of 

collectibles gain or loss and/or recaptured section 1250 gain, 

if applicable.

$

5 API 3-Year Disposition Amount from Table 2, line 4.

Combined net amount for all APIs. 

$

6 3-Year Gain Amount

Add lines 4 and 5. If the sum of line 4 plus line 5 is zero or 

less, enter zero. 

$

7 Recharacterization Amount (treat as short-term capital 

gain) 

Subtract line 6 from line 3. If zero or less, enter zero.

$

8 Section 1061(d) Recharacterization Amount (as 

determined in Regulations section 1.1061-5(c)).

$

9 Section 1061 Adjustment to Form 8949

Add lines 7 and 8. (This amount is an adjustment to increase 

short-term capital gain and decrease long-term capital gain 

amounts on Form 8949, Parts I and II. See The Owner 

Taxpayer Reporting of the Recharacterization Amount on 

Schedule D for instructions on how to report adjustments on 

tax return.)

$

10** (a) Total collectibles gain with respect to any interest in 

a pass-through entity (per Schedule K-1 (Form 1065), 

box 9b; Schedule K-1 (Form 1120-S), box 8b; Schedule K-1 

(Form 1041), box 4b)

$

(b) Amount of collectibles gain included in the 

recharacterization amount

$

(c) Amount of collectibles gain entered in the 28% Rate 

Gain Worksheet (see line 18 of the Schedule D (Form 

1040), or line 28c of the Schedule D (Form 1041))

$

11*** (a) Total unrecaptured section 1250 gain with respect 

to any interest in a pass-through entity (per Schedule K-1 

(Form 1065), box 9c; Schedule K-1 (Form 1120-S), box 8c; 

Schedule K-1 (Form 1041), box 4c)

$

(b) Amount of unrecaptured section 1250 gain included 

in the recharacterization amount

$

(c) Amount of unrecaptured section 1250 gain entered 

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))

$

* Gains are entered as positive and losses are entered as negative.

** The sum of the amount entered on line 10(b) plus the amount entered on line 10(c) must equal the amount entered on line 10(a) 

(see The Owner Taxpayer Reporting of Collectibles Gain and Unrecaptured Section 1250 for instructions on how to report 

adjustments on tax return).

*** The sum of the amount entered on line 11(b) plus the amount entered on line 11(c) must equal the amount entered on line 11(a) 

(see The Owner Taxpayer Reporting of Collectibles Gain and Unrecaptured Section 1250 for instructions on how to report 

adjustments on tax return).

Page 20 Publication 541 (March 2022)
Section 1061 Table 1: API 1-Year Disposition Amount

(Separately computed for each API. Required to be attached to the owner taxpayer’s tax return.)

Name of Owner Taxpayer SSN/TIN 

Name of Pass-Through Entity Pass-Through EIN 

Line Description Gains and (Losses)*

1 Long-term capital gains and losses recognized on the 

disposition by the owner taxpayer, including long-term capital 

gain computed under the installment method that is taken into 

account during the tax year of all or a portion of any API held 

for more than 1 year including a disposition to which the 

Lookthrough Rule in Regulations section 1.1061-4(b)(9) 

applies. 

$

2 Long-term capital gain and loss recognized by the owner 

taxpayer on a disposition with respect to an API during the tax 

year that is treated under section 731(a) as gain or loss from 

the sale or exchange of a partnership interest held for more 

than 1 year. 

$

3 Long-term capital gains and losses recognized by the owner 

taxpayer on the disposition of distributed API property (taking 

into account deemed exchanges under section 751(b)) during 

the tax year that has a holding period of more than 1 year but 

not more than 3 years to the distributee owner taxpayer on 

the date of disposition, excluding items described in 

Regulations section 1.1061-4(b)(7). 

$

4 API 1-Year Distributive Share Amount

Combine lines 1 through 3. Enter amount on line 2 of 

Worksheet B.

$

* Gains are entered as positive and losses are entered as negative.

Publication 541 (March 2022) Page 21
Section 1061 Table 2: API 3-Year Disposition Amount

(Separately computed for each API. Required to be attached to the owner taxpayer’s tax return.)

Name of Owner Taxpayer SSN/TIN 

Name of Pass-Through Entity Pass-Through EIN 

Line Description Gains and (Losses)*

1 Long-term capital gains and losses recognized on the 

disposition by the owner taxpayer, including long-term capital 

gain computed under the installment method that is taken into 

account for the tax year of all or a portion of any API held for 

more than 3 years and to which the Lookthrough Rule in 

Regulations section 1.1061-4(b)(9) does not apply.

$

2 Long-term capital gains and losses recognized by an owner 

taxpayer on the disposition during the tax year of all or a 

portion of an API that has been held for more than 3 years in 

a transaction to which the Lookthrough Rule in Regulations 

section 1.1061-4(b)(9) applies, less any adjustments required 

under the Lookthrough Rule in Regulations section 

1.1061-4(b)(9)(ii). 

$

3 Long-term capital gains and losses recognized on a 

distribution with respect to an API during the tax year that is 

treated under section 731(a) as gain or loss from the sale or 

exchange of a partnership interest held for more than 3 years.

$

4 API 3-Year Distributive Share Amount

Combine lines 1 through 3. Enter amount on line 5 of 

Worksheet B.

$

* Gains are entered as positive and losses are entered as negative.

Page 22 Publication 541 (March 2022)
To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us. Index

A

Allocations:

Built-in gain or loss 9

Installment sale 11

Assistance (See Tax help)

B

Bipartisan Budget Act of 2015 

(BBA) 15

Built-in gain or loss 9

C

Capital interest 9

Contribution:

Basis of property 9

Built-in gain or loss 9

Distribution of property 9

Net precontribution gain 5

Property 8

Services 9

D

Definition, partnership 2

Determining ownership 8

Distributions:

Gain or loss 5

Partner's debt 5

Partnership 5

Distributive share:

Adjusted basis 10

Guaranteed payments 7

E

Electronic filing 4

F

Form:

8275 8

8308 12

8832 2

8865 9

G

Guaranteed payments 7

H

How to sign documents on 

behalf of the partnership 15

I

Insurance, self-employed 

health 7

Inventory items, substantially 

appreciated 5

L

Liability:

Assumption of 10

Partner's assumed by 

partnership 10

Partnership's 10

Limited liability company 2

Liquidation:

Constructive 11

Partner's interest 6

Partner's retirement or death 13

Losses:

Sales or exchanges 8

M

Marketable securities 5

P

Partner's:

Basis:

Distributed property 6

Partnership interest 9

Interest:

Alternative rule, adjusted 

basis 10

Basis 9

Basis adjustments 10

Book value 10

Gift 3, 10

Liquidation of 6, 13

Mandatory basis 

adjustment 7

Performance of services 3

Sale, exchange, transfer 11

Special basis adjustment 6

Transactions with partnership 7

Partnership:

Abandoned or worthless 

interest 11

Agreement 4

Basis, contributed property 9

Defined 2

Exclusion from rules 4

Forming 2

Liabilities 10

Terminating 4

Transactions with partner 7

Precontribution gain 5

Profits interest 9

Publications (See Tax help)

S

Section 1061 3, 13

Section 1061 Worksheets and 

Tables 18

Self-employed health 

insurance 7

Short period return 4

Substantially appreciated 

inventory items 5

T

Tax help 15

Tax withholding, foreign partner 

of firm 2

TEFRA 15

Terminating a partnership 4

U

Unrealized receivables 12

Publication 541 (March 2022) Page 23