Department of the Treasury 2007 Internal Revenue Service

Partner’s Instructions for

Schedule K-1 (Form

1065-B)

Partner’s Share of Income (Loss) From an Electing Large Partnership

(For Partner’s Use Only)

Section references are to the Internal partnership’s treatment, you may be Electing Large Revenue Code unless otherwise noted. subject to the accuracy-related penalty.

Partnerships (ELPs) This penalty is in addition to any tax that

results from making your amount or This partnership has elected simplified What’s New treatment of the item consistent with that reporting requirements intended to make shown on the partnership’s return. Any it simpler for you to report your share of deficiency that results from making the 1. Investors are no longer required to partnership income, credits, deductions, amounts consistent may be assessed file Form 8271, Investor Reporting Tax etc. Generally, income, capital gains, Shelter Registration Number, if due after immediately. credits, and deductions are combined at

August 2, 2007. The box on the Schedule the partnership level so that the number

K-1 used to report the tax shelter Sale or Exchange of of partnership items separately reported

registration number has been deleted. to partners is reduced. Most limitations Partnership Interest Information you need to complete a and elections affecting partnership Generally, a partner who sells or disclosure statement related to a income are made by the electing large exchanges a partnership interest in a reportable transaction in which the partnership. section 751(a) exchange must notify the partnership participates will be reported in For limited partners, income and other partnership, in writing, within 30 days of box 9 under code U. See the instructions items from the partnership’s trade or the exchange (or, if earlier, by January 15 for code U, on page 11, for more business and rental activities are treated of the calendar year following the information. as being from a trade or business that is a calendar year in which the exchange 2. The categories of foreign gross single passive activity. These items are occurred). A “section 751(a) exchange” is income sourced at the partnership level reported in boxes 1, 4a, and 5, with most any sale or exchange of a partnership have been renamed and reordered. credits being reported in boxes 7 and 8. interest in which any money or other These changes are reflected in the box 9 General partners must make their own property received by the partner in code descriptions for codes K4(a) through determinations as to whether the activities exchange for that partner’s interest is K4(c) and K7(a) through K7(c), and are passive for them. Therefore, attributable to unrealized receivables (as correspond to changes made to Form partnership items from trade or business, defined in section 751(c)) or inventory 1116, Foreign Tax Credit. items (as defined in section 751(d)). rental real estate, and other rental

activities are separately reported for each The written notice to the partnership

General Instructions activity in box 9. must include the names and addresses of

Income, etc., from other activities both parties to the exchange, the

(investment and portfolio income and identifying numbers of the transferor and Purpose of Schedule K-1 deductions) are reported in boxes 2, 3, (if known) of the transferee, and the

The partnership uses Schedule K-1 to 4b, and 6 for both limited and general exchange date.

report your share of the partnership’s partners. An exception to this rule is made for income, deductions, credits, etc. Keep it sales or exchanges of publicly traded for your records. Do not file it with your Errors partnership interests for which a broker is tax return. The partnership has filed a You must report partnership items shown required to file Form 1099-B, Proceeds copy with the IRS. From Broker and Barter Exchange on your Schedule K-1 (and any attached Transactions. schedules) the same way that the You are liable for tax on your share of partnership treated the items on its return. If a partner is required to notify the the partnership income, whether or not If you believe the partnership has made partnership of a section 751(a) exchange distributed. Include your share on your tax an error on your Schedule K-1, notify the but fails to do so, a $50 penalty may be return if a return is required. Use these partnership. Do not change any items on imposed for each such failure. However, instructions to help you report the items your copy of Schedule K-1. Generally, an no penalty will be imposed if the partner shown on Schedule K-1 on your tax adjustment to correct an error will take can show that the failure was due to return. effect for the tax year in which the reasonable cause and not willful neglect.

partnership actually makes the The amount of loss and deduction that

you can claim on your tax return may be adjustment. However, if the error involves Nominee Reporting a change to your distributive share of a less than the amount reported on Any person who holds, directly or

Schedule K-1. It is the partner’s indirectly, an interest in a partnership as a partnership item, the partnership should

file an amended partnership return and responsibility to consider and apply any nominee for another person must furnish send you a corrected Schedule K-1. applicable limitations. See Limitations on a written statement to the partnership by

Losses, Deductions, and Credits If the treatment on your original or the last day of the month following the

beginning on page 2 for more information. amended return is inconsistent with the end of the partnership’s tax year. This

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statement must include the name, passive activity limitations. Each of these Disqualified Person address, and identifying number of the limitations is discussed separately below. If you are a partner in a partnership nominee and such other person, holding oil and gas properties, you are a Basis Rules description of the partnership interest held “disqualified person” if: as nominee for that person, and other Generally, you cannot claim your share of • You are an oil or natural gas retailer a partnership loss (including a capital information required by Temporary

Regulations section 1.6031(c)-1T. A described in section 613A(d)(2) or crude loss) to the extent that it is greater than

nominee who fails to furnish this oil refiner described in section 613A(d)(4) the adjusted basis of your partnership

statement must furnish to the person for or interest at the end of the partnership’s tax

whom the nominee holds the partnership • Your average daily production of year. Any losses and deductions not

interest a copy of Schedule K-1 and domestic crude oil and natural gas allowed this year because of the basis

related information within 30 days of exceeds 500 barrels for your tax year in limit can be carried forward indefinitely

receiving it from the partnership. which the partnership’s tax year ends. and deducted in a later year subject to the

See section 776(b) for more details. basis limit for that year. A nominee who fails to furnish when Note. Disqualified persons must report The partnership is not responsible for due all the information required by items of income, gain, loss, deduction, keeping the information needed to figure Temporary Regulations section and credit attributable to partnership oil the basis of your partnership interest. You 1.6031(c)-1T, or who furnishes incorrect and gas properties as if the special rules can figure the adjusted basis of your information, is subject to a $50 penalty for for ELPs did not apply. partnership interest by adding items that each statement for which a failure occurs. increase your basis and then subtracting The maximum penalty is $100,000 for all Nonrecourse Loans items that decrease your basis. such failures during a calendar year. If the

nominee intentionally disregards the Nonrecourse loans are those liabilities of Use the worksheet on page 3 to figure the partnership for which no partner bears requirement to report correct information, the basis of your interest in the the economic risk of loss. each $50 penalty increases to $100 or, if partnership.

greater, 10% of the aggregate amount of Note. Additional basis adjustments may

items required to be reported, and the Elections apply to partners claiming deductions for

$100,000 maximum does not apply. Generally, the partnership decides how to depletion. See chapter 9 of Pub. 535 for figure taxable income from its operations. details.

However, two elections are made by you International Boycotts separately on your income tax return and At-Risk Limitations

Every partnership that had operations in, not by the partnership. These elections Generally, if you have (a) a loss or other

or related to, a boycotting country, are made under the following code deduction from any activity carried on as

company, or a national of a country must sections. a trade or business or for the production

file Form 5713, International Boycott • Section 108(b)(5) (income from the of income by the partnership and (b)

Report. discharge of indebtedness). amounts in the activity for which you are • Section 901 (foreign tax credit). not at risk, you will have to complete If the partnership cooperated with an Form 6198, At-Risk Limitations, to figure international boycott, it must provide you Change of Tax Year your allowable loss. with a copy of its Form 5713. As a If the partnership attaches a statement to The at-risk rules generally limit the general or limited partner, you must file Schedule K-1 indicating that it has amount of loss and other deductions that your own Form 5713 to report the changed its tax year and that you can you can claim to the amount you could partnership’s activities and any other elect to report your distributive share of actually lose in the activity. However, if boycott operations that you may have. the income attributable to that change You may lose certain tax benefits if the you acquired your partnership interest ratably over 4 tax years, see Rev. Proc. before 1987, the at-risk rules do not apply partnership participated in, or cooperated 2003-79, 2003-45 I.R.B. 1036, for details with, an international boycott. See Form to losses from an activity of holding real on making the election. To make the property placed in service before 1987 by 5713 and its instructions for more election, you must file Form 8082, Notice the partnership. The activity of holding information. of Inconsistent Treatment or mineral property does not qualify for this Administrative Adjustment Request, with exception. The partnership should identify Definitions your income tax return for each of the 4 on an attachment to Schedule K-1 the tax years. File Form 8082 for this purpose amount of any losses that are not subject General Partner in accordance with Rev. Proc. 2003-79 to the at-risk limitations. instead of the Form 8082 instructions. A general partner is a partner who is Generally, you are not at risk for personally liable for partnership debts. Additional Information amounts such as the following.

• Nonrecourse loans used to finance the Limited Partner For more information on the treatment of activity, to acquire property used in the partnership income, deductions, credits, A limited partner is a partner in a activity, or to acquire your interest in the etc., see the following: partnership formed under a state limited activity, that are not secured by your own • Pub. 541, Partnerships; partnership law, whose personal liability property (other than the property used in • Pub. 535, Business Expenses; and for partnership debts is limited to the the activity). See the instructions for • Pub. 925, Passive Activity and At-Risk amount of money or other property that Partner’s Share of Liabilities on page 6 for Rules. the partner contributed or is required to the exception for qualified nonrecourse

contribute to the partnership. Some financing secured by real property. To get forms and publications, see the

members of other entities, such as instructions for your tax return. • Cash, property, or borrowed amounts

domestic or foreign business trusts or used in the activity (or contributed to the

limited liability companies that are activity, or used to acquire your interest in Limitations on Losses, classified as partnerships, may be treated the activity) that are protected against

as limited partners for certain purposes. loss by a guarantee, stop-loss agreement, Deductions, and Credits

For example, see Temporary Regulations There are three separate potential or other similar arrangement (excluding

section 1.469-5T(e)(3), which treats all limitations on the amount of partnership casualty insurance and insurance against

members with limited liability as limited losses that you can deduct on your return. tort liability).

partners for purposes of section 469(h)(2) These limitations and the order in which • Amounts borrowed for use in the

(relating to the passive activity loss you must apply them are as follows: the activity from a person who has an interest

limitation rules). basis rules, the at-risk limitations, and the in the activity, other than as a creditor, or

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who is related, under section 465(b)(3), to Form 8582. See page 5 for the special separately reported to general partners

a person (other than you) having such an rules for PTPs. for each trade or business, rental real

interest. Corporations. Use Form 8810, estate, and other rental activity.

You should get a separate statement Corporate Passive Activity Loss and Except for the PTP discussion on of income, expenses, etc., for each Credit Limitations. See the instructions for page 5, the following information activity from the partnership. more information. CAUTION on passive activity limitations

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Passive Activity Limitations For limited partners of an ELP, all applies only to general partners.

income, loss, deductions, and credits Section 469 provides rules that limit the Generally, passive activities include: from trade or business and rental deduction of certain losses and credits. activities generally are reported as being 1. Trade or business activities in

These rules apply to partners who: from a trade or business that is a single which you did not materially participate • Are individuals, estates, trusts, closely passive activity. and

held corporations (other than S 2. Activities that meet the definition of However, the determination of corporations), or personal service rental activities under Temporary whether an activity is a passive activity corporations and Regulations section 1.469-1T(e)(3) and must be made by any partner who is • Have a passive activity loss or credit for Regulations section 1.469-1(e)(3). either a: the tax year. • General partner or Passive activities do not include the Individuals, estates, and trusts. If you • Limited partner who is a disqualified following. have a passive activity loss or credit, use person (as defined on page 2) with Form 8582, Passive Activity Loss 1. Trade or business activities in respect to items of income, gain, loss, Limitations, to figure your allowable which you materially participated. deduction, and credit attributable to passive losses and Form 8582-CR, 2. Rental real estate activities in which partnership oil and gas properties. Passive Activity Credit Limitations, to you materially participated if you were a In addition, the partnership is required figure your allowable passive credits. “real estate professional” for the tax year. to provide each general partner and You were a real estate professional only if If the publicly traded partnership disqualified person the information you met both of the following conditions. (PTP) box on Schedule K-1 is necessary to comply with the passive a. More than half of the personal CAUTION checked, do not report passive activity rules of section 469. Items of

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services you performed in trades or income (loss) from the partnership on income, gain, loss, credit, etc., must be businesses were performed in real

property trades or businesses in which

Worksheet for Adjusting the Basis of a Partner’s you materially participated and

Interest in the Partnership Keep for Your Records b. You performed more than 750

hours of services in real property trades

or businesses in which you materially 1. Your adjusted basis at the end of the prior year. Do not enter less participated. than zero. Enter -0- if this is your first tax year. .............. 1.

Note. For a closely held C corporation Increases:

(defined in section 465(a)(1)(B)), the 2. Money and your adjusted basis in property contributed to the above conditions are treated as met if

partnership less the associated liabilities (but not less than zero). 2. more than 50% of the corporation’s gross

receipts were from real property trades or 3. Your increased share of or assumption of partnership liabilities.

(Subtract your share of liabilities shown on your 2006 Schedule K-1 businesses in which the corporation

materially participated. from your share of liabilities shown on your 2007 Schedule K-1 and

add the amount of any partnership liabilities you assumed during For purposes of this rule, each interest the tax year.) .................................... 3. in rental real estate is a separate activity,

4. Your share of the partnership’s income or gain (including unless you elect to treat all interests in

tax-exempt income) ............................... 4. rental real estate as one activity. For

details on making this election, see the 5. Any gain recognized this year on contributions of property. Do not Instructions for Schedule E (Form 1040). include gain from transfer of liabilities .................... 5. If you are married filing jointly, either

Decreases: you or your spouse must separately meet

both of the above conditions, without 6. Withdrawals and distributions of money and the adjusted basis of taking into account services performed by property distributed to you from the partnership. Do not include the the other spouse. amount of property distributions included in the partner’s income

(taxable income) .................................. 6. A real property trade or business is

any real property development, Caution. A distribution may be taxable if the amount exceeds your redevelopment, construction, adjusted basis of your partnership interest immediately before the reconstruction, acquisition, conversion, distribution. rental, operation, management, leasing,

7. Your share of the partnership’s nondeductible expenses that are or brokerage trade or business. Services not capital expenditures ............................. 7. you performed as an employee are not

treated as performed in a real property 8. Your share of the partnership’s losses and deductions (including

capital losses) ................................... 8. trade or business unless you owned more

than 5% of the stock (or more than 5% of 9. Your adjusted basis in the partnership at end of this tax year. (Add the capital or profits interest) in the lines 1 through 5 and subtract lines 6 through 8 from the total. If employer. zero or less, enter -0-.) ............................. 9. 3. Working interests in oil or gas

Caution. The deduction for your share of the partnership’s losses wells.

and deductions is limited to your adjusted basis in your partnership 4. The rental of a dwelling unit any

interest. If you entered zero on line 9 and the amount computed for partner used for personal purposes during

line 9 was less than zero, a portion of your share of the partnership the year for more than the greater of 14

losses and deductions may not be deductible (see Basis Rules on days or 10% of the number of days that

page 2 for more information.) the residence was rented at fair rental

value.

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5. Activities of trading personal 7. Based on all the facts and are limited under the passive activity

property for the account of owners of circumstances, you participated in the rules.

interests in the activities. activity on a regular, continuous, and Special allowance for rental real estate substantial basis during the tax year. Material participation. You must activities. If you actively participated in

determine if you (a) materially participated Work counted toward material a rental real estate activity, you may be

in each trade or business activity held participation. Generally, any work that able to deduct up to $25,000 of the loss

through the partnership and (b) were a from the activity from nonpassive income. you or your spouse do in connection with real estate professional (defined above), an activity held through a partnership This “special allowance” is an exception

in each rental real estate activity held (where you own your partnership interest to the general rule disallowing losses in

through the partnership. All at the time the work is done) is counted excess of income from passive activities.

determinations of material participation The special allowance is not available if toward material participation. However, are made based on your participation work in connection with the activity is not you were married, filed a separate return

during the partnership’s tax year. counted toward material participation if for the year, and did not live apart from

either of the following applies. your spouse at all times during the year. Material participation standards for

partners who are individuals are listed 1. The work is not the sort of work that Only individuals and qualifying estates

below. Special rules apply to certain owners of the activity would usually do can actively participate in a rental real

retired or disabled farmers and to the and one of the principal purposes of the estate activity. Estates (other than

surviving spouses of farmers. See the work that you or your spouse does is to qualifying estates), trusts, and

corporations cannot actively participate. Instructions for Form 8582 for details. avoid the passive loss or credit

limitations. You are not considered to actively Corporations should refer to the 2. You do the work in your capacity as participate in a rental real estate activity if Instructions for Form 8810 for the material an investor and you are not directly at any time during the tax year your participation standards that apply to them. involved in the day-to-day operations of interest (including your spouse’s interest) Individuals (other than limited the activity. Examples of work done as an in the activity was less than 10% (by partners). If you are an individual (either investor that would not count toward value) of all interests in the activity. a general partner or a limited partner who material participation include: Active participation is a less stringent owned a general partnership interest at all a. Studying and reviewing financial requirement than material participation. times during the tax year), you materially statements or reports on operations of the You may be treated as actively participated in an activity only if one or activity. participating if you participated, for more of the following apply. b. Preparing or compiling summaries example, in making management 1. You participated in the activity for or analyses of the finances or operations decisions or arranging for others to more than 500 hours during the tax year. of the activity for your own use. provide services (such as repairs) in a 2. Your participation in the activity for c. Monitoring the finances or significant and bona fide sense. the tax year constituted substantially all operations of the activity in a Management decisions that can count as the participation in the activity of all nonmanagerial capacity. active participation include approving new individuals (including individuals who are tenants, deciding rental terms, approving not owners of interests in the activity for Effect of determination. Income capital or repair expenditures, and other the tax year). (loss), deductions, and credits from an similar decisions.

3. You participated in the activity for activity are nonpassive if you determine An estate is a qualifying estate if the more than 100 hours during the tax year, that: decedent would have satisfied the active and your participation in the activity for • You materially participated in a trade or participation requirement for the activity the tax year was not less than the business activity of the partnership or for the tax year the decedent died. A participation in the activity of any other • You were a real estate professional in a qualifying estate is treated as actively individual (including individuals who were rental real estate activity of the participating for tax years ending less not owners of interests in the activity) for partnership. than 2 years after the date of the the tax year. decedent’s death. 4. The activity was a significant If you determine that you did not

participation activity for the tax year, and materially participate in a trade or The maximum special allowance that

business activity of the partnership or if single individuals and married individuals you participated in all significant

participation activities (including activities you have income (loss), deductions, or filing a joint return can qualify for is

outside the partnership) during the year credits from a rental activity of the $25,000. The maximum is $12,500 for

for more than 500 hours. A significant partnership (other than a rental real married individuals who file separate

participation activity is any trade or estate activity in which you materially returns and who live apart all times during

business activity in which you participated participated as a real estate professional), the year. The maximum special allowance

for more than 100 hours during the tax the amounts from that activity are for which an estate can qualify is $25,000

passive. Report passive income (losses), reduced by the special allowance for year and in which you did not materially

participate under any of the material deductions, and credits as follows. which the surviving spouse qualifies.

participation tests (other than this test 4). 1. If you have an overall gain (the If your modified adjusted gross income

5. You materially participated in the excess of income over deductions and (defined below) is $100,000 or less

activity for any 5 tax years (whether or not losses, including any prior year unallowed ($50,000 or less if married filing

consecutive) during the 10 tax years that loss) from a passive activity, report the separately), your loss is deductible up to

immediately precede the tax year. income, deductions, and losses from the the amount of the maximum special

6. The activity was a personal service activity as indicated in the instructions for allowance referred to in the preceding

activity and you materially participated in the boxes in which those items were paragraph. If your modified adjusted

the activity for any 3 tax years (whether or reported. gross income is more than $100,000

not consecutive) preceding the tax year. 2. If you have an overall loss (the (more than $50,000 if married filing

A personal service activity involves the excess of deductions and losses, separately), the special allowance is

performance of personal services in the including any prior year unallowed loss, limited to 50% of the difference between

fields of health, law, engineering, over income) or credits from a passive $150,000 ($75,000 if married filing

architecture, accounting, actuarial activity, report the income, deductions, separately) and your modified adjusted

science, performing arts, consulting, or losses, and credits from all passive gross income. When modified adjusted

any other trade or business in which activities using the Instructions for Form gross income is $150,000 or more

capital is not a material income-producing 8582 or Form 8582-CR (or Form 8810), to ($75,000 or more if married filing

factor. see if your deductions, losses, and credits separately), there is no special allowance.

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Modified adjusted gross income is your apply to your partnership interest if the of $3,500. Be sure to enter “From PTP” to

adjusted gross income figured without partnership made an election under the left of each entry space.

taking into account the following. Regulations section 1.469-7(g) to avoid 3. If you have an overall loss (but did

• Any passive activity loss. the application of these rules. See the not dispose of your entire interest in the

• Any rental real estate loss allowed Instructions for Form 8582 for more PTP to an unrelated person in a fully

under section 469(c)(7) to real estate information. taxable transaction during the year), the

professionals (as defined previously). losses are allowed to the extent of the Publicly traded partnerships. The • Any overall loss from a publicly traded income, and the excess loss is carried passive activity limitations are applied partnership. forward to use in a future year when you separately for items (other than the • Any taxable social security or have income to offset it. Report as a low-income housing credit and the equivalent railroad retirement benefits. passive loss on the schedule or form you rehabilitation credit) from each publicly • Any deductible contributions to an IRA normally use the portion of the loss equal traded partnership (PTP). Thus, a net or certain other qualified retirement plans to the income. Report the income as passive loss from a PTP may not be under section 219. passive income on the form or schedule deducted from other passive income. • The domestic production activities you normally use. Instead, a passive loss from a PTP is deduction. Example. You have a Schedule E loss suspended and carried forward to be • The student loan interest deduction. of $12,000 (current year losses plus prior applied against passive income from the • The tuition and fees deduction. same PTP in later years. If the partner’s year unallowed losses) and a Schedule D • The deduction for one-half of gain of $7,200. Report the $7,200 gain on entire interest in the PTP is completely self-employment taxes. the appropriate line of Schedule D. On disposed of, any unused losses are • The exclusion from income of interest Schedule E (Form 1040), line 28, report allowed in full in the year of disposition. from Series EE and I U.S. Savings Bonds $7,200 of the losses as a passive loss in used to pay higher education expenses. If you have an overall gain from a PTP, column (f). Carry forward to 2008 the • The exclusion of amounts received the net gain is nonpassive income. In unallowed loss of $4,800 ($12,000 − under an employer’s adoption assistance addition, the nonpassive income is $7,200).

program. included in investment income to figure If you have unallowed losses from Commercial revitalization your investment interest expense more than one activity of the PTP or from deduction. The special $25,000 deduction. the same activity of the PTP that must be allowance for the commercial Do not report passive income, gains, reported on different forms, you must revitalization deduction from rental real or losses from a PTP on Form 8582. allocate the unallowed losses on a pro estate activities is not subject to the active Instead, use the following rules to figure rata basis to figure the amount allowed participation rules or modified adjusted and report on the proper form or schedule from each activity or on each form. gross income limits discussed above. See your income, gains, and losses from Code Q. Commercial Revitalization To allocate and keep a record of passive activities that you held through Deduction on page 11. the unallowed losses, use each PTP you owned during the tax year. Special rules for certain other Worksheets 5, 6, and 7 of Form

TIP

1. Combine any current year income, activities. If you have net income (loss), 8582. List each activity of the PTP in

deductions, or credits from any activity to gains (losses), and any prior year Worksheet 5. Enter the overall loss from unallowed losses to see if you have an which special rules apply, the partnership each activity in column (a). Complete overall gain (loss) from the PTP. Include will identify the activity and all amounts column (b) of Worksheet 5 according to only the same types of income and losses its instructions. Multiply the total relating to it on Schedule K-1 or on an you would include in your net income or attachment. unallowed loss from the PTP by each loss from a non-PTP passive activity. See ratio in column (b) and enter the result in If you have net income subject to Pub. 925 for more details. column (c) of Worksheet 5. Then, recharacterization under Temporary 2. If you have an overall gain, the net complete Worksheet 6 if all the loss from Regulations section 1.469-2T(f) and gain portion (total gain minus total losses) the same activity is to be reported on one Regulations section 1.469-2(f), report is nonpassive income. On the form or form or schedule. Use Worksheet 7 such amounts according to the schedule you normally use, report the net instead of Worksheet 6 if you have more Instructions for Form 8582 (or Form gain portion as nonpassive income and than one loss to be reported on different 8810). the remaining income and the total losses forms or schedules for the same activity. If you have net income (loss), as passive income and loss. To the left of Enter the net loss plus any prior year deductions, or credits from any of the the entry space, enter “From PTP.” It is unallowed losses in column (a) of following activities, treat such amounts as important to identify the nonpassive Worksheet 6 (or Worksheet 7 if nonpassive and report them as instructed income because the nonpassive portion is applicable). The losses in column (c) of in these instructions. included in modified adjusted gross Worksheet 6 (column (e) of Worksheet 7) • Working interests in oil and gas wells. income for purposes of figuring on Form are the allowed losses to report on the • The rental of a dwelling unit any partner 8582 the “special allowance” for active forms or schedules. Report both these used for personal purposes during the participation in a non-PTP rental real losses and any income from the PTP on year for more than the greater of 14 days estate activity. In addition, the nonpassive the forms and schedules you normally or 10% of the number of days that the income is included in investment income use.

residence was rented at fair rental value. when figuring your investment interest 4. If you have an overall loss and you • Trading personal property for the expense deduction on Form 4952, disposed of your entire interest in the PTP account of owners of interests in the Investment Interest Expense Deduction. to an unrelated person in a fully taxable activity. Example. If you have Schedule E transaction during the year, your losses

Self-charged interest. The partnership income of $8,000, and a Form 4797 prior (including prior year unallowed losses) must report any “self-charged” interest year unallowed loss of $3,500 from the allocable to the activity for the year are

income or expense that resulted from passive activities of a particular PTP, you not limited by the passive loss rules. A

loans between you and the partnership have a $4,500 overall gain ($8,000 − fully taxable transaction is one in which

(or between the partnership and another $3,500). On Schedule E (Form 1040), line you recognize all your realized gain partnership in which you have an 28, report the $4,500 net gain as (loss). Report the income and losses on

interest). If there was more than one nonpassive income in column (j). In the forms and schedules you normally

activity, the partnership will provide a column (g), report the remaining use.

statement allocating the interest income Schedule E gain of $3,500 ($8,000 −

or expense with respect to each activity. $4,500). On the appropriate line of Form Note. For rules on the disposition of an

The self-charged interest rules do not 4797, report the prior year unallowed loss entire interest reported using the

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installment method, see the Instructions fee for the partnership’s investment in the passive activity. Report this amount as

for Form 8582. real property. follows.

• If income is reported in box 1, report See Pub. 925 for more information on the income on Schedule E (Form 1040), qualified nonrecourse financing. line 28, column (g). However, if the PTP Specific Instructions Both the partnership and you must box is checked, report the income meet the qualified nonrecourse rules on following the rules for Publicly traded this debt before you can include the Publicly Traded partnerships on page 5. amount shown next to “Qualified • If a loss is reported in box 1, follow the Partnership (PTP) nonrecourse financing” in your at-risk Instructions for Form 8582 to figure how

If the “publicly traded partnership” box is computation. much of the loss can be reported on

checked, you are a partner in a publicly See Limitations on Losses, Schedule E (Form 1040), line 28, column

traded partnership (PTP) and must follow Deductions, and Credits beginning on (f). However, if the PTP box is checked,

the rules under Publicly traded page 2 for more information on the at-risk report the loss following the rules for

partnerships discussed above. limitations. Publicly traded partnerships.

Boxes 1 Through 9 Box 2. Taxable Income (Loss) Partner’s Share of From Other Activities The amounts shown in boxes 1 through 9 Liabilities This amount is not subject to the passive reflect your share of income, loss, The partnership will show your share of activity limitations. Report the amount as deductions, credits, etc., from the

the partnership’s nonrecourse liabilities, follows. partnership. These amounts do not take partnership-level qualified nonrecourse • If the amount is income, report it on into consideration the following financing, and other liabilities as of the Schedule E (Form 1040), line 28, column limitations.

end of the partnership’s tax year. If you (j). • The adjusted basis of your partnership terminated your interest in the partnership • If the amount is a loss, report it on interest.

during the tax year, the amounts should Schedule A (Form 1040), line 28. • The amount for which you are at risk. reflect the share that existed immediately • The passive activity limitations. Box 3. Qualified Dividends before the total disposition. A partner’s For information on these provisions, Report this amount on lines 9a and 9b of “other liability” is any partnership liability see Limitations on Losses, Deductions, Form 1040. for which a partner is personally liable. and Credits beginning on page 2. Note. Qualified dividends are excluded Use the total of the three amounts for For individuals, the following from investment income, but you can computing the adjusted basis of your instructions explain how to report the elect to include part or all of these partnership interest. amounts shown in the boxes. For all other amounts in investment income. See the

Generally, you can use only the entities, report the amounts in the boxes instructions for line 4g of Form 4952, amounts shown next to “Qualified as instructed on your income tax return. Investment Interest Expense Deduction, nonrecourse financing” and “Other” to The line numbers in these instructions for important information on making this figure your amount at risk. Do not include are references to forms in use for election.

any amounts that are not at risk if such calendar year 2007. If you file your tax amounts are included in either of these Box 4a. Net Capital Gain or return on a calendar year basis, but your categories. partnership files a return for a fiscal year, (Loss) From Passive Activities

If your partnership is engaged in two or enter the amounts shown in the boxes on Limited partners only. The net capital more different types of activities subject to your tax return for the year in which the gain (loss) reported in box 4a, is treated the at-risk provisions, or a combination of partnership’s fiscal year ends. For as being from a trade or business that is a at-risk activities and any other activity, the example, if the partnership’s tax year single passive activity. If a net capital gain partnership should give you a statement ends on June 30, 2008, report the is reported in box 4a, report the gain on showing your share of nonrecourse amounts in the boxes on your 2008 Schedule D (Form 1040), line 12, column income tax return. liabilities, partnership-level qualified (f). nonrecourse financing, and other If you have losses, deductions, or If a loss is reported in box 4a, report it liabilities for each activity. credits from a prior year that were not following the Form 8582 instructions to Qualified nonrecourse financing. deductible or usable because of certain figure how much of the loss can be Qualified nonrecourse financing generally limitations, such as the basis rules or the reported on Schedule D (Form 1040), line at-risk limitations, take them into account includes financing for which no one is 12, column (f). However, if the PTP box is

personally liable for repayment that is in determining your net income, loss, or checked, report the loss following the borrowed for use in an activity of holding credits for this year. However, except for rules for Publicly traded partnerships. passive activity losses and credits, do not real property and that is loaned or combine the prior-year amounts with any Box 4b. Net Capital Gain or guaranteed by a federal, state, or local

government or borrowed from a amounts shown on this Schedule K-1 to (Loss) From Other Activities

“qualified” person. Qualified nonrecourse get a net figure to report on any Net capital gain or (loss) from other supporting schedules, statements, or financing secured by real property used in activities is not subject to the passive an activity of holding real property that is forms attached to your return. Instead, activity limitations. Report the gain or subject to the at-risk rules is treated as an report the amounts separately on the (loss) on Schedule D (Form 1040), line

amount at risk. attached schedule, statement, or form on 12, column (f). a year-by-year basis. Qualified persons. Qualified persons Box 5. Net Passive AMT include any persons actively and regularly For amounts other than those shown

on Schedule K-1, enter each item on a Adjustment engaged in the business of lending

money, such as a bank or savings and separate line of Part II of Schedule E Limited partners only. Use this amount

(Form 1040). loan association. Qualified persons (as well as your adjustments and tax

generally do not include related parties preference items from other sources) to Box 1. Taxable Income (Loss) (unless the nonrecourse financing is prepare your Form 6251, Alternative From Passive Activities commercially reasonable and on Minimum Tax— Individuals; Form 4626,

substantially the same terms as loans Limited partners only. Any amount Alternative Minimum Tax—Corporations;

involving unrelated persons), the seller of reported in box 1 is treated as being from or Schedule I of Form 1041, U.S. Income

the property, or a person who receives a a trade or business that is a single Tax Return for Estates and Trusts. The

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adjustment is treated as being from a activities. If you did not materially b. Rental real estate activities with

trade or business that is a single passive participate in the trade or business active participation were your only

activity. activity, the net capital gain or (loss) is a passive activities.

passive activity amount. If the amount is c. You have no prior year unallowed Individuals should enter the amount on

either (a) a loss that is not from a passive losses from these activities. line 18 of Form 6251, where it is taken activity or (b) a gain, report it on Schedule d. Your total loss from the rental real into account with adjustments and D (Form 1040), line 12, column (f). estate activities was not more than preferences from other passive activities. $25,000 (not more than $12,500 if If the amount is a loss from a passive Box 6. Net Other AMT activity, report it following the Instructions married filing separately and you lived

Adjustment apart from your spouse all year). for Form 8582 to figure how much of the

Individual general and limited partners loss can be reported on Schedule D e. If you are a married person filing

should enter this amount on line 15 of separately, you lived apart from your (Form 1040), line 12, column (f).

Form 6251. However, if the PTP box is checked, spouse all year.

f. You have no current or prior year report the loss following the rules for Box 7. General Credits Publicly traded partnerships unallowed credits from a passive activity. . Limited partners only. Enter this amount g. Your modified adjusted gross Code A3. General partner’s 28% rate from box 7 on line 1x of Form 3800, income was not more than $100,000 (not gain (loss) from trade or business General Business Credit. Because more than $50,000 if married filing activities. If you did not materially general credits are treated as being from separately and you lived apart from your participate in the trade or business a trade or business that is a single spouse all year). activity, the 28% rate gain or (loss) is a passive activity, you must also include the 2. If you have a (loss) from a passive passive activity amount. If the amount is box 7 amount on line 3 of Form 3800. activity in box 9 and you do not meet all either (a) a loss that is not from a passive the conditions in 1 above, report the loss Box 8. Low-Income Housing activity or (b) a gain, include it on line 4 of following the Instructions for Form 8582 to Credit the 28% Rate Gain Worksheet on page figure how much of the loss you can D-8 of the Instructions for Schedule D Limited partners only. Enter this amount report on Schedule E (Form 1040), line (Form 1040). on line 4 of Form 8586, Low-Income 28, column (f). However, if the PTP box is

Housing Credit. This credit is treated as If the amount is a loss from a passive checked, report the loss following the

being from a single passive activity. activity, report it following the Instructions rules for Publicly traded partnerships. for Form 8582 to figure how much of the 3. If you were a real estate Box 9. Other loss can be included on line 4 of the 28% professional and you materially Rate Gain Worksheet on page D-8 of the participated in the activity, report box 9 Codes A Through C Instructions for Schedule D (Form 1040). income or (loss) on Schedule E (Form General partners in an ELP must However, if the PTP box is checked, 1040), line 28, column (h) or (j). separately account for any items report the loss following the rules for 4. If you have income from a passive attributable to passive loss limitation Publicly traded partnerships. activity in box 9, Code B1, enter the activities to the extent necessary to Code A4. General partner’s general income on Schedule E (Form 1040), line comply with the section 469 passive loss credits from trade or business 28, column (g). However, if the PTP box rules. Therefore, the partnership is activities. Report the general credits on is checked, report the income following required to report income or (loss), capital line 1x of Form 3800. If you did not the rules for Publicly traded partnerships. gain or (loss), 28% rate gain or (loss), materially participate in the trade or credits, and the alternative minimum tax business activity, you must also include Code B2. General partner’s net capital adjustment separately for all trade or the general credits on line 3 of Form gain or (loss) from rental real estate business activities, rental real estate 3800. activities (for the entire year). The net

activities, and rental activities other than Code A5. General partner’s alternative capital gain or (loss) from a rental real rental real estate. minimum tax adjustment from trade or estate activity is a passive activity amount

Code A1. General partner’s taxable unless you were a real estate business activities. Generally, an AMT income (loss) from trade or business professional and you materially adjustment must be reported on line 15 of activities. Report Code A1 income participated in the activity. If the amount is Form 6251. However, if the AMT (loss) from partnership trade or business either (a) a loss that is not from a passive adjustment is from a passive activity, it activities in which you materially must be taken into account on line 18 with activity or (b) a gain, report it on Schedule

participated on Schedule E (Form 1040), D (Form 1040), line 12, column (f). adjustments and preferences from other line 28, column (h) or (j). See the passive activities. If the amount is a loss from a passive instructions to determine whether you Code B1. General partner’s taxable activity, report it following the Instructions materially participated in a trade or income (loss) from rental real estate for Form 8582 to figure how much of the business activity. activities. Generally, the income or loss can be reported on Schedule D, line Report Code A1 income or (loss) from (loss) reported in box 9, Code B1, is a 12, column (f). However, if the PTP box is partnership trade or business activities in passive activity amount for all general checked, report the loss following the which you did not materially participate as partners. However, the income or (loss) in rules for Publicly traded partnerships. follows. box 9 is not from a passive activity if you Code B3. General partner’s 28% rate 1. Report any income on Schedule E were a real estate professional and you gain or (loss) from rental real estate (Form 1040), line 28, column (g). materially participated in the activity. activities. The 28% rate gain or (loss) However, if the PTP box on Schedule K-1 Use the following instructions to from a rental real estate activity is a is checked, report the income following determine where to enter the Code B1 passive activity amount unless you were the rules for Publicly traded partnerships. amount. a real estate professional and you 2. Report a loss following the 1. If you have a loss from a passive materially participated in the activity. If the Instructions for Form 8582 to figure how activity in box 9, Code B1, and you meet amount is either (a) a loss that is not from

much of the loss can be reported on all of the following conditions, enter the a passive activity or (b) a gain, include it Schedule E (Form 1040), line 28, column loss on Schedule E (Form 1040), line 28, on line 4 of the 28% Rate Gain

(f). However, if the PTP box is checked, column (f). Worksheet on page D-8 of the report the loss following the rules for Instructions for Schedule D (Form 1040). Publicly traded partnerships a. You actively participated in the . partnership rental real estate activities. If the amount is a loss from a passive

Code A2. General partner’s net capital See Special allowance for rental real activity, report it following the Instructions

gain or (loss) from trade or business estate activities on page 4. for Form 8582 to figure how much of the

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loss can be included on line 4 of the 28% (Form 1040). Report a loss following the • Involved qualified farm indebtedness,

Rate Gain Worksheet on page D-8 of the Instructions for Form 8582 to figure how as defined in section 108(g), or

Instructions for Schedule D (Form 1040). much of the loss can be included on line 4 • Involved qualified real property

However, if the PTP box is checked, of the 28% Rate Gain Worksheet on page business indebtedness, as defined in

report the loss following the rules for D-8 of the Instructions for Schedule D section 108(c)(3), unless the partner is a

Publicly traded partnerships. (Form 1040). However, if the PTP box is C corporation.

Code B4. General partner’s general checked, report the loss following the This amount is applied, instead, to rules for Publicly traded partnerships. credits from rental real estate reduce certain tax attributes. File Form

activities. Report the general credits on Code C4. General partner’s general 982, Reduction of Tax Attributes Due to

line 1x of Form 3800. Unless you were a credits from other rental activities. Discharge of Indebtedness, to explain

real estate professional and materially Report the general credits on line 1x of why any amount received from the

participated in the rental real estate Form 3800. Because general credits from discharge of indebtedness should be

activity, you must also include the general other rental activities are passive activity excluded and to report your reduction of

credits on line 3 of Form 3800. credits for all general partners, you must tax attributes.

Code B5. General partner’s also include the general credits on line 3 For a discharge of indebtedness not of Form 3800. low-income housing credit from rental described above, you must include this real estate activities. Report the Code C5. General partner’s alternative amount in income on Schedule E (Form low-income housing credit on line 4 of minimum tax adjustment from other 1040), line 28, column (g) or (j). Form 8586. Unless you were a real estate rental activities. An AMT adjustment professional Code H. Tax-Exempt Interest and materially participated in must be reported on line 15 of Form the rental real estate activity, the Income 6251. However, if the AMT adjustment is low-income housing credit is a passive from a passive activity, it must be taken Report on your income tax return, as an

activity credit. into account on line 18 with adjustments item of information, your share of the

Code B6. General partner’s and preferences from other passive tax-exempt interest received or accrued

by the partnership during the year. rehabilitation credit from rental real activities instead of being reported on line

estate activities. Report the 15. Individual partners must include this

rehabilitation credit on line 1k of Form amount on Form 1040, line 8b. Increase

3468, Investment Credit. Unless you were Code D. Limited Partner’s 28% the adjusted basis of your interest in the

a Rate Gain or (Loss) From Passive partnership by this amount. real estate professional and materially

participated in the rental real estate Activities Code I. Limited Partner’s activity, the credit is a passive activity Limited partners only. The 28% rate Rehabilitation Credit From Rental credit, and you must also file Form 3800. gain or (loss) is treated as being from a Real Estate Activities Code B7. General partner’s alternative trade or business that is a single passive Limited partners only. Report this minimum tax adjustment from rental activity. If a gain is reported, include it on amount on line 1k of Form 3468. Because real estate activities. An AMT line 4 of the 28% Rate Gain Worksheet the credit is treated as being from a single adjustment must be reported on line 15 of on page D-8 of the Instructions for passive activity, you must also file Form Form 6251. However, if the AMT Schedule D (Form 1040). 3800. adjustment is from a passive activity, it

must be taken into account on line 18 with If a loss is reported, report the loss Codes J1 and J2. Self-Employment following the Instructions for Form 8582 to other passive activities instead of being

reported on line 15. figure how much of the loss can be Code J1. Net earnings or (loss) from

included on line 4 of the 28% Rate Gain self-employment. Enter this amount on Code C1. General partner’s taxable Worksheet on page D-8 of the Schedule SE (Form 1040), line 2, Section income or (loss) from other rental Instructions for Schedule D (Form 1040). A or B, whichever is applicable. General activities. Income (loss) reported in box However, if the PTP box is checked, partners should reduce this amount by 9, Code C1, is a passive activity amount report the loss following the rules for unreimbursed partnership expenses for all general partners. Report a loss Publicly traded partnerships. claimed. General partners who are following the Instructions for Form 8582. disqualified persons also should reduce Report income on Schedule E (Form Code E. Limited Partner’s 28% this amount by depletion claimed on oil 1040), line 28, column (g). However, if the Rate Gain or (Loss) From Other and gas properties. If this amount is a PTP box is checked, report the income Activities loss, enter only the deductible amount on (loss) following the rules for Publicly The 28% gain or (loss) from other Schedule SE. For purposes of traded partnerships. activities is not subject to the passive self-employment tax, no income from an

Code C2. General partner’s net capital activity limitations. Include it on line 4 of ELP is treated as farming or fishing

gain or (loss) from other rental income. the 28% Rate Gain Worksheet on page activities. The net capital gain (loss) D-8 of the Instructions for Schedule D Code J2. Gross nonfarm income. from other rental activities is a passive (Form 1040). Individual partners use this amount to activity amount for all general partners. figure net earnings from self-employment Report the gain on Schedule D (Form Code F. Guaranteed Payments under the nonfarm optional method on 1040), line 12, column (f). Report a loss Generally, these amounts are not passive Schedule SE (Form 1040), Section B, following the Instructions for Form 8582 to income. Report them on Schedule E Part II. figure how much of the loss can be (Form 1040), line 28, column (j) (for reported on Schedule D (Form 1040), line example, guaranteed payments for Codes K1 Through K9. Foreign Tax

12, column (f). However, if the PTP box is personal services). Credit Information

checked, report the loss following the Use the information reported under rules for Publicly traded partnerships. Code G. Income From Discharge of Codes K1 through K9 to figure your

Code C3. General partner’s 28% rate Indebtedness foreign tax credit. For more information,

gain or (loss) from other rental The amount reported under Code G is see Form 1116, Foreign Tax Credit

activities. The 28% rate gain or (loss) excluded from your gross income to the (Individual, Estate, or Trust) and its

from other rental activities is a passive extent provided in section 108 if the instructions; Form 1118, Foreign Tax

activity amount for all general partners. If discharge: Credit—Corporations, and its

the amount is a gain, include it on line 4 • Occurred in a title 11 case relating to instructions; and Pub. 514, Foreign Tax

of the 28% Rate Gain Worksheet on page bankruptcy, Credit for Individuals. See page 5 of the

D-8 of the Instructions for Schedule D • Occurred when you were insolvent, Instructions for Form 1116 for detailed

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instructions for reporting foreign tax passive category foreign source partnership made to you of cash and

information from partnerships. income. certain marketable securities. The

Note. • Code K7(b). Deductions allocated marketable securities are included at their The line references in this section and apportioned at partnership level to fair market value (FMV) on the date of of the Form 1116 instructions do not general category foreign source distribution (minus your share of the apply to the Schedule K-1 of Form income. partnership’s gain on the securities 1065-B. • Code K7(c). Deductions allocated distributed to you). If this amount exceeds Code K1. Name of foreign country or and apportioned at partnership level to the adjusted basis of your partnership U.S. possession. Include on Form other foreign source income. interest immediately before the 1116, Part I, item g. For each country Code K8(a). Total foreign taxes paid. distribution, the excess is treated as gain reported, the partnership must give you from the sale or exchange of your Include this amount in Part II of Form the amount and a description of your 1116. partnership interest. Generally, this gain share of the following items for Codes K2 is treated as gain from the sale of a Code K8(b). Total foreign taxes through K9. For each country or capital asset and should be reported on accrued. Include this amount in Part II of possession being reported, a separate the Schedule D for your return. However, Form 1116. column in Part I and a separate line in the gain may be ordinary income. For Part II is needed on Form 1116. Code K9. Reduction in taxes available details, see Pub. 541. for credit. Enter this amount on line 12 Code K2. Gross income from all of Form 1116. The partnership must separately

sources. Enter this amount on line 3e of identify both of the following. Form 1116. Code L. Oil and Gas Activities • The FMV of the marketable securities

Code K3. Gross income sourced at Generally, oil and gas income, when distributed (minus your share of the

partner level. Although all this income deductions, credits, and other items are gain on the securities distributed to you).

reported has been apportioned to foreign included in your distributive share of • The partnership’s adjusted basis of

source categories of income, you must income or loss from passive loss those securities immediately before the

nevertheless determine whether the limitation activities, general credits, and distribution.

income being reported is U.S. source the alternative minimum tax adjustment. Decrease the adjusted basis of your income or foreign source income. See the However, distributive shares of all oil interest in the partnership (but not below Instructions for Form 1116 for the rules to and gas income, deductions, credits, and zero) by the amount of cash distributed to source the income reported to you. Enter other items are separately reported to you and the partnership’s adjusted basis only foreign source income on lines 1a partners who are disqualified persons in of the distributed securities. Advances or and 3d of Form 1116. A separate Form accordance with the regular partnership drawings of money or property against 1116 or 1118 is required for each foreign rules, here or on an attached schedule. your distributive share are treated as source category of income. Do not Note. A partner must notify the ELP of current distributions made on the last day include income that you determined to be its status as a “disqualified person”. of the partnership’s tax year. U.S. source income.

Codes M1 Through M9. Your basis in the distributed Codes K4(a) Through K4(c). Foreign Miscellaneous marketable securities (other than in gross income sourced at partnership liquidation of your interest) is the smaller level. The following types of income Code M1. Other tax-exempt income. of: have already been sourced for you by the Increase the adjusted basis of your • The partnership’s adjusted basis in the partnership. Include these amounts on interest in the partnership by this amount, securities immediately before the lines 1a and 3d of the applicable Form but do not include it in income on your distribution increased by any gain 1116 (that is, the Form 1116 for each income tax return. recognized on the distribution of the category of income provided to you). Code M2. Nondeductible expenses. securities or • Code K4(a). Passive category Decrease the adjusted basis of your • The adjusted basis of your partnership foreign source income. interest in the partnership by this amount. interest reduced by any cash distributed • Code K4(b). General category The nondeductible expenses paid or in the same transaction and increased by foreign source income. incurred by the partnership are not any gain recognized on the distribution of • Code K4(c). Other foreign source deductible on your income tax return, but the securities. income. they do affect your basis. If you received the securities in Code K5. Interest expense allocated Code M3. Unrelated business taxable liquidation of your partnership interest, and apportioned at the partner level. income. The partnership must give you your basis in the marketable securities is Include this amount on line 4b of the any information you need to figure equal to the adjusted basis of your applicable Forms 1116. unrelated business taxable income under partnership interest reduced by any cash

Code K6. Other expenses allocated section 512(a)(1) (but excluding any distributed in the same transaction and

and apportioned at the partner level. modifications required by paragraphs (8) increased by any gain recognized on the

Include this amount on line 2 of the through (15) of section 512(b)) for a distribution of the securities.

applicable Forms 1116. partner that is a tax-exempt organization. If, within 7 years of a distribution to you

Note. For Codes K5 and K6, do not Reminder. A partner is required to notify of marketable securities, you contributed

include any expenses allocated and the partnership of its tax-exempt status. appreciated property (other than those apportioned to U.S. source income on Code M4. Health insurance. Include securities) to the partnership and the FMV any line of Part I of Form 1116. any amounts paid during the tax year for of those securities exceeded the adjusted

Codes K7(a) Through Codes K7(c). insurance that constitutes medical care basis of your partnership interest

Deductions allocated and apportioned for you, your spouse, and your immediately before the distribution

dependents on line 29 of your 2007 Form (reduced by any cash received in the at partnership level to foreign source 1040. You may be allowed to deduct such distribution), you may have to recognize income. The following codes report the amounts, even if you do not itemize gain on the appreciated property. See expenses allocated and apportioned by deductions. If you do itemize deductions, section 737 for details. the partnership to foreign source

categories of income. Include these enter on line 1 of Schedule A (Form 1040) Code M6. Distributions of property

amounts on line 2 of the applicable Forms any amounts not deducted on line 29 of other than money. Box 9, Code M6,

1116 (that is, the Forms 1116 for each shows the partnership’s adjusted basis of Form 1040.

category of income provided to you). Code M5. Distributions of money (cash property other than money immediately

• Code K7(a). Deductions allocated and marketable securities). This before the property was distributed to

and apportioned at partnership level to amount includes the distributions the you. In addition, the partnership should

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attach a statement showing the cost basis • Your share of the partnership’s interest in the partnership at the time the

and FMV of each property distributed. adjusted basis of the QSB stock, stock was acquired, and

Decrease the adjusted basis of your • Your share of the partnership’s sales • You must purchase other QSB stock

interest in the partnership by the amount price of the QSB stock, (as defined in the Instructions for

of your basis in the distributed property. • The dates the QSB stock was bought Schedule D (Form 1040)) during the

Your basis in the distributed property and sold, 60-day period that began on the date the

(other than in liquidation of your interest) • Your distributive share of gain from the QSB stock was sold by the partnership.

is the smaller of: sale of the QSB stock, and

• The partnership’s adjusted basis • Your distributive share of the gain that See the Instructions for Schedule D

(Form 1040) for details on how to report immediately before the distribution or was deferred by the partnership under

• The adjusted basis of your partnership section 1045. the gain and the amount of the allowable

postponed gain. interest reduced by any cash distributed Corporate partners are not eligible for in the same transaction. the section 1045 rollover. To qualify for Making the section 1045 election.

 If you received the property in the section 1045 rollover: You make a section 1045 election on a

liquidation of your interest, your basis in • You must have held an interest in the timely filed return for the tax year during partnership during the entire period in which the partnership’s tax year ends. the distributed property is equal to the

adjusted basis of your partnership interest which the partnership held the QSB stock Attach to your Schedule D (Form 1040) a

reduced by any cash distributed in the (more than 6 months prior to the sale) statement that includes the following

same transaction. and information for each amount of gain that • Your distributive share of the gain you do not recognize under section 1045: If you contributed appreciated property eligible for the section 1045 rollover • The name of the corporation that to the partnership within 7 years of a cannot exceed the amount that would issued the QSB stock. distribution of other property to you, and have been allocated to you based on your • The name and EIN of the selling the FMV of the other property exceeded interest in the partnership at the time the partnership. the adjusted basis of your partnership QSB stock was acquired. • The dates the QSB stock was interest immediately before the See the Instructions for Schedule D purchased and sold. distribution (reduced by any cash (Form 1040) for details on how to report • The amount of gain that is not received in the distribution), you may the gain and the amount of the allowable recognized under section 1045. have to recognize gain on the appreciated postponed gain. • If a partner purchases QSB stock, the property. See section 737 for details. Opting out of partnership election. name of the corporation that issued the Code M7. Gain eligible for section 1202 You can opt out of the partnership’s replacement QSB stock, the date the exclusion. This gain from the sale or section 1045 election and either (1) stock was purchased, and the cost of the exchange of qualified small business recognize the gain or (2) elect to stock.

(QSB) stock (as defined in the purchase different replacement QSB • If a partner treats the partner’s interest Instructions for Schedule D) is eligible for stock, either directly or through ownership in QSB stock that is purchased by a the partial section 1202 exclusion. The of a partnership that acquired purchasing partnership as the partner’s partnership must also provide you with: replacement QSB stock. You satisfy the replacement QSB stock, the name and • The name of the corporation that requirement to purchase replacement EIN of the purchasing partnership, the issued the QSB stock, QSB stock if you own an interest in a name of the corporation that issued the • Your share of the partnership’s partnership that purchases QSB stock QSB stock, the partner’s share of the cost adjusted basis of the QSB stock, during the 60-day period. You also must of the QSB stock that was purchased by • Your share of the partnership’s sales notify the partnership, in writing, if you opt the partnership, the computation of the price of the QSB stock, and out of the partnership’s section 1045 partner’s adjustment to basis with respect • The dates the QSB stock was bought election. If you recognize gain, you must to that QSB stock, and the date the stock and sold. notify the partnership, in writing, of the was purchased by the partnership. amount of gain that you are recognizing. Corporate partners are not eligible for Distribution of replacement QSB stock the section 1202 exclusion. The following Code M9. Gain eligible for section 1045 to a partner that reduces another additional limitations apply at the partner rollover–stock not replaced. This gain partner’s interest in replacement QSB is eligible for the section 1045 rollover. level. stock. You must recognize gain upon a • You must have held an interest in the Replacement stock has not been distribution of replacement QSB stock to partnership when the partnership purchased by the partnership. The another partner that reduces your share acquired the QSB stock and at all times partnership must also provide you with: of the replacement QSB stock held by a • The name of the corporation that thereafter until the partnership disposed partnership. The amount of gain that you of the QSB stock. issued the qualified small business (QSB) must recognize is based on the amount of • Your distributive share of the eligible stock, gain that you would recognize upon the section 1202 gain cannot exceed the • Your share of the partnership’s sale of the distributed replacement QSB amount that would have been allocated to adjusted basis of the QSB stock, stock for its fair market value on the date you based on your interest in the • Your share of the partnership’s sales of the distribution, but not to exceed the partnership at the time the QSB stock price of the QSB stock, amount you previously deferred under was acquired. • The dates the QSB stock was bought section 1045 with respect to the and sold, and See the Instructions for Schedule D distributed replacement QSB stock. If the • Your distributive share of the gain from partnership distributed your share of (Form 1040) for details on how to report the sale of the QSB stock. replacement QSB stock to another the gain and the amount of the allowable Corporate partners are not eligible for exclusion. partner, the partnership should give you the section 1045 rollover. To qualify for (a) the name of the corporation that Code M8. Gain eligible for section 1045 the section 1045 rollover: issued the replacement QSB stock, (b) rollover–stock replaced. This gain is • You must have held an interest in the the date the replacement QSB stock was eligible for the section 1045 rollover. partnership during the entire period in distributed to another partner or partners, Replacement stock has been purchased which the partnership held the QSB stock and (c) your share of the partnership’s by the partnership. The partnership must (more than 6 months prior to the sale), adjusted basis and fair market value of also provide you with: • Your distributive share of the gain the replacement QSB stock on such date. • The name of the corporation that eligible for the section 1045 rollover

issued the qualified small business (QSB) cannot exceed the amount that would For more information, see Regulations

stock, have been allocated to you based on your section 1.1045-1.

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Code N. Unrecaptured Section Code S3. Employer’s W-2 Wages income or gain that is included in

1250 Gain inversion gain. The partnership has Report the portion of W-2 wages reported included inversion gain in income Report this gain on line 11 of the to you by the partnership (in box 9 using elsewhere on Schedule K-1. Inversion Unrecaptured Section 1250 Gain code S3) on line 15 of Form 8903.

Worksheet gain is also reported under Code P on page D-9 of the because your taxable income and Code T. Section 409A Income Instructions for Schedule D (Form 1040). alternative minimum taxable income This is compensation to partners deferred Do not report the gain on line 5 as stated cannot be less than the inversion gain. under a section 409A nonqualified on the worksheet. Also, your inversion gain (a) is not taken deferred compensation plan that does not Codes O1 and O2. Extraterritorial into account in figuring the amount of net meet the requirements of section 409A.

Income Exclusion operating loss (NOL) for the tax year or This amount is also reported in box 9

the amount of NOL that can be carried using Code F. This amount is subject to Partnership did not claim the over to each tax year, (b) may limit the interest and additional tax to be reported exclusion. If the partnership reports amount of your credits, and (c) is treated on line 63 of Form 1040. See the your distributive share of foreign trading as income from sources within the U.S. instructions for line 63 of Form 1040 for gross receipts (Code O1) and the for the foreign tax credit. See section details. extraterritorial income exclusion (Code 7874 for details. O2), the partnership was not entitled to Code U. Other Information

claim the exclusion because it did not Code Q. Commercial Revitalization The partnership will use Code U to report meet the foreign economic process Deduction the following to partners. requirements. You may still qualify for Follow the Instructions for Form 8582 for • The recapture of any credit (other than your distributive share of this exclusion if commercial revitalization deductions from the low-income housing credit or the partnership’s foreign trading gross rental real estate activities to figure how investment credit) is reported to you as a receipts for the tax year were $5 million or much of the deduction can be reported on separately stated item. See the less. Schedule E (Form 1040), line 28, column instructions for the specific form identified

To qualify for this exclusion, your (f). with the credit for more information on

foreign trading gross receipts from all reporting the recapture. Codes R1 and R2. Interest sources for the tax year also must have • Any information a partner that is a Deduction Limitation for Corporate been $5 million or less. publicly traded partnership may need to

Limited partners who qualify for the Partners determine if it meets the 90% qualifying

exclusion. Report the extraterritorial A corporate partner is required to treat its income test of section 7704(c)(2).

exclusion amount (Code O2) as a distributive share of interest income, Partners are required to notify the

deduction reducing the amount reported interest expense, and partnership partnership of their status as a publicly

liabilities as income, expense, and traded partnership. in box 1 (see the box 1 instructions on

page 6). liabilities of the corporation for purposes • The partnership will report any

of the interest deduction limitation under information you need to complete a General partners who qualify for the section 163(j). The corporation’s disclosure statement for reportable exclusion. Report the Code O2 amount distributive share of interest income is transactions in which the partnership in accordance with the instructions for box reported in box 9 using code R1. Its participates. If the partnership participates 9, Code A1, B1, or C1, whichever applies. distributive share of interest expense is in a transaction that must be disclosed on See Form 8873, Extraterritorial Income reported using code R2. The amounts Form 8886, Reportable Transaction Exclusion, for more information. reported using code R1 and R2 are for Disclosure Statement, both you and the Partnership claimed the exclusion. If information only, and are included in partnership may be required to file Form the partnership reports your distributive amounts reported elsewhere on Schedule 8886 for the transaction. The share of foreign trading gross receipts K-1. The corporation’s distributive share determination of whether you are required (Code O1) but not the amount of the of partnership liabilities is shown in the to disclose a transaction of the extraterritorial income exclusion, the first column of Schedule K-1. partnership is based on the category(s) partnership met the foreign economic under which the transaction qualifies for process requirements and claimed the Code S1. Domestic Production disclosure and is determined by the exclusion when figuring your distributive Activities Information partnership. See the Instructions for Form share of partnership income. You also The partnership must attach a statement 8886 for details. may need to know the amount of your to Schedule K-1 that provides the • Any other information you may need to distributive share of foreign trading gross information you need to figure the file with your return not shown elsewhere receipts from this partnership to domestic production activities deduction. on Schedule K-1. The partnership must determine if you met the $5 million or less Use Form 8903, Domestic Production give you a description and the amount of exception discussed above for purposes Activities Deduction, to figure this your share for each of these items. of qualifying for an extraterritorial income deduction. See the Instructions for Form

exclusion from other sources. 8903 for details.

Note. Upon request, the partnership Code S2. Qualified Production should furnish you a copy of the Activities Income (QPAI) partnership’s Form 8873 if there is a

reduction for international boycott Report the QPAI reported to you by the

operations, illegal bribes, kickbacks, etc. partnership (in box 9 using code S2) on

line 7 of Form 8903. Code P. Inversion Gain

The partnership must provide a statement

showing the amounts of each type of

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