Department of the Treasury 2004 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 Revenue Code unless otherwise noted.

What’s New the activities are passive for them. defined in section 751(c)) or inventory

Therefore, partnership items from trade or items (as defined in section 751(d)).

business, rental real estate, and other There is a new worksheet on page 3 of The written notice to the partnership rental activities are separately reported these instructions that you can use to must include the names and addresses of for each activity in box 9. Income, etc., keep track of your adjusted basis in your both parties to the exchange, the from other activities (investment and partnership interest. identifying numbers of the transferor and portfolio income and deductions) are (if known) of the transferee, and the reported in boxes 2a, 2b, 4, and 6 for both General Instructions exchange date. limited and general partners.

An exception to this rule is made for Purpose of Schedule K-1 Errors sales or exchanges of publicly traded

The partnership uses Schedule K-1 to partnership interests for which a broker is You must report partnership items shown report your share of the partnership’s required to file Form 1099-B, Proceeds on your Schedule K-1 (and any attached income, deductions, credits, etc. Keep it From Broker and Barter Exchange schedules) the same way that the Transactions. for your records. Do not file it with your partnership treated the items on its return. tax return. The partnership has filed a If you believe the partnership has made If a partner is required to notify the copy with the IRS. an error on your Schedule K-1, notify the partnership of a section 751(a) exchange

You are liable for tax on your share of partnership. Do not change any items on but fails to do so, a $50 penalty may be

the partnership income, whether or not your copy of Schedule K-1. Generally, an imposed for each such failure. However,

distributed. Include your share on your tax adjustment to correct an error will take no penalty will be imposed if the partner

return if a return is required. Use these effect for the tax year in which the can show that the failure was due to

instructions to help you report the items partnership actually makes the reasonable cause and not willful neglect.

shown on Schedule K-1 on your tax adjustment. However, if the error involves return. a change to your distributive share of a Nominee Reporting The amount of loss and deduction that partnership item, the partnership should Any person who holds, directly or file an amended partnership return and you can claim on your tax return may be indirectly, an interest in a partnership as a send you a corrected Schedule K-1. less than the amount reported on nominee for another person must furnish Schedule K-1. It is the partner’s If the treatment on your original or a written statement to the partnership by responsibility to consider and apply any amended return is inconsistent with the the last day of the month following the applicable limitations. See Limitations on partnership’s treatment, you may be end of the partnership’s tax year. This Losses, Deductions, and Credits subject to the accuracy-related penalty. statement must include the name, beginning on page 2 for more information. This penalty is in addition to any tax that address, and identifying number of the

nominee and such other person, results from making your amount or Electing Large treatment of the item consistent with that description of the partnership interest held

Partnerships shown on the partnership’s return. Any as nominee for that person, and other

deficiency that results from making the information required by Temporary This partnership has elected simplified amounts consistent may be assessed Regulations section 1.6031(c)-1T. A reporting requirements intended to make immediately. nominee that fails to furnish this it simpler for you to report your share of statement must furnish to the person for partnership income, credits, deductions, whom the nominee holds the partnership etc. Generally, income, capital gains, Sale or Exchange of interest a copy of Schedule K-1 and credits, and deductions are combined at Partnership Interest related information within 30 days of the partnership level so that the number receiving it from the partnership. of partnership items separately reported Generally, a partner who sells or

to partners is reduced. Most limitations A nominee who fails to furnish when exchanges a partnership interest in a

and elections affecting partnership due all the information required by section 751(a) exchange must notify the

income are made by the electing large Temporary Regulations section partnership, in writing, within 30 days of

partnership. For limited partners, income 1.6031(c)-1T, or who furnishes incorrect the exchange (or, if earlier, by January 15

and other items from the partnership’s information, is subject to a $50 penalty for of the calendar year following the

trade or business and rental activities are each statement for which a failure occurs. calendar year in which the exchange

treated as being from a trade or business The maximum penalty is $100,000 for all occurred). A “section 751(a) exchange” is

that is a single passive activity. These such failures during a calendar year. If the any sale or exchange of a partnership

items are reported in boxes 1, 3, and 5, nominee intentionally disregards the interest in which any money or other

with most credits being reported in boxes requirement to report correct information, property received by the partner in

7 and 8. General partners must make each $50 penalty increases to $100 or, if exchange for that partner’s interest is

their own determinations as to whether greater, 10% of the aggregate amount of attributable to unrealized receivables (as

Cat. No. 26141W
items required to be reported, and the are made under the following code The at-risk rules generally limit the

$100,000 maximum does not apply. sections. amount of loss and other deductions that

• Section 108(b)(5) (income from the you can claim to the amount you could

discharge of indebtedness). actually lose in the activity. However, if International Boycotts • Section 901 (foreign tax credit). you acquired your partnership interest Every partnership that had operations in, before 1987, the at-risk rules do not apply or related to, a boycotting country, If the partnership attaches a statement to losses from an activity of holding real company, or a national of a country must to Schedule K-1 indicating that it has property placed in service before 1987 by file Form 5713, International Boycott changed its tax year and that you can the partnership. The activity of holding Report. elect to report your distributive share of mineral property does not qualify for this the income attributable to that change If the partnership cooperated with an exception. The partnership should identify ratably over 4 tax years, see Rev. Proc. international boycott, it must give you a on an attachment to Schedule K-1 the 2003-79, 2003-45 I.R.B. 1036, for details copy of its Form 5713. You must file your amount of any losses that are not subject on making the election. To make the own Form 5713 to report the partnership’s to the at-risk limitations. election, you must file Form 8082, Notice activities and any other boycott of Inconsistent Treatment or Generally, you are not at risk for operations that you may have. You may Administrative Adjustment Request, with amounts such as the following. lose certain tax benefits if the partnership your income tax return for each of the 4 • Nonrecourse loans used to finance the

participated in, or cooperated with, an tax years. File Form 8082 for this purpose activity, to acquire property used in the international boycott. See Form 5713 and in accordance with Rev. Proc. 2003-79 activity, or to acquire your interest in the its instructions for more information. instead of the Form 8082 instructions. activity, that are not secured by your own

property (other than the property used in Definitions Additional Information the activity). See the instructions for

Partner’s Share of Liabilities on page 5 for General Partner For more information on the treatment of the exception for qualified nonrecourse partnership income, deductions, credits, A general partner is a partner who is financing secured by real property. etc., see Pub. 541, Partnerships; Pub. personally liable for partnership debts. • Cash, property, or borrowed amounts 535, Business Expenses; and Pub. 925, used in the activity (or contributed to the Limited Partner Passive Activity and At-Risk Rules. activity, or used to acquire your interest in

A limited partner is a partner in a To get forms and publications, see the the activity) that are protected against

partnership formed under a state limited instructions for your tax return. loss by a guarantee, stop-loss agreement,

partnership law, whose personal liability or other similar arrangement (excluding

casualty insurance and insurance against for partnership debts is limited to the Limitations on Losses, amount of money or other property that tort liability).

the partner contributed or is required to Deductions, and Credits • Amounts borrowed for use in the

contribute to the partnership. Some There are three separate potential activity from a person who has an interest

members of other entities, such as limitations on the amount of partnership in the activity, other than as a creditor, or

domestic or foreign business trusts or losses that you can deduct on your return. who is related, under section 465(b)(3), to

limited liability companies that are These limitations and the order in which a person (other than you) having such an

classified as partnerships, may be treated you must apply them are as follows: the interest.

as limited partners for certain purposes. basis rules, the at-risk limitations, and the You should get a separate statement For example, see Temporary Regulations passive activity limitations. Each of these of income, expenses, etc., for each section 1.469-5T(e)(3), which treats all limitations is discussed separately below. activity from the partnership. members with limited liability as limited

partners for purposes of section 469(h)(2) Basis Rules Passive Activity Limitations

(concerning the passive loss limitation Generally, you cannot claim your share of Section 469 provides rules that limit the

rules). a partnership loss (including a capital deduction of certain losses and credits.

loss) to the extent that it is greater than These rules apply to partners who: Disqualified Person the adjusted basis of your partnership • Are individuals, estates, trusts, closely

If you are a partner in a partnership interest at the end of the partnership’s tax held corporations, or personal service

holding oil and gas properties, you are a year. Any losses and deductions not corporations and

disqualified person if: allowed this year because of the basis • Have a passive activity loss or credit for

• You are an oil or natural gas retailer limit can be carried forward indefinitely the tax year.

described in section 613A(d)(2) or crude and deducted in a later year subject to the If you have a passive activity loss or oil refiner described in section 613A(d)(4) basis limit for that year. credit, use Form 8582, Passive Activity

or The partnership is not responsible for Loss Limitations, to figure your allowable • Your average daily production of keeping the information needed to figure passive losses and Form 8582-CR, domestic crude oil and natural gas the basis of your partnership interest. You Passive Activity Credit Limitations, to exceeds 500 barrels for your tax year in can figure the adjusted basis of your figure your allowable passive credits. For which the partnership’s tax year ends. partnership interest by adding items that a corporation, use Form 8810, Corporate See section 776(b) for more details. increase your basis and then subtracting Passive Activity Loss and Credit

Disqualified persons must report items items that decrease your basis. Limitations. See the instructions for these

forms for more information. of income, gain, loss, deduction, and Use the worksheet on page 3 to figure credit attributable to partnership oil and the basis of your interest in the If the publicly traded partnership gas properties as if the special rules for partnership. box on Schedule K-1 is checked, electing large partnerships did not apply. CAUTION do not report passive income

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Additional basis adjustments may (loss) from the partnership on Form 8582. Nonrecourse Loans apply to partners claiming deductions for See page 5 for the special rules for depletion. See Pub. 541 for more details. Nonrecourse loans are those liabilities of publicly traded partnerships. the partnership for which no partner bears At-Risk Limitations For limited partners of an electing the economic risk of loss. Generally, if you have (a) a loss or other large partnership, all income, loss,

deduction from any activity carried on as deductions, and credits from trade or Elections a trade or business or for the production business and rental activities generally

Generally, the partnership decides how to of income by the partnership and (b) are reported as being from a trade or

figure taxable income from its operations. amounts in the activity for which you are business that is a single passive activity.

However, two elections are made by you not at risk, you will have to complete However, the determination of whether an

separately on your income tax return and Form 6198, At-Risk Limitations, to figure activity is a passive activity must be made

not by the partnership. These elections your allowable loss. by any partner who is either a:

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• General partner or Regulations section 1.469-1T(e)(3) and unless you elect to treat all interests in

• Limited partner who is a disqualified Regulations section 1.469-1(e)(3). rental real estate as one activity. For

person (as defined on page 2) with details on making this election, see the

respect to items of income, gain, loss, Instructions for Schedule E (Form 1040). Passive activities do not include:

deduction, and credit attributable to 1. Trade or business activities in If you are married filing jointly, either partnership oil and gas properties. which you materially participated. you or your spouse must separately meet

2. Rental real estate activities in which both of the above conditions, without In addition, the partnership is required you materially participated if you were a taking into account services performed by to provide each general partner and the other spouse. disqualified person the information real estate professional for the tax year.

necessary to comply with the passive You were a real estate professional only if A real property trade or business is

activity rules of section 469. Items of you met both of the following conditions. any real property development,

income, gain, loss, credit, etc., must be a. More than half of the personal redevelopment, construction,

separately reported to general partners services you performed in trades or reconstruction, acquisition, conversion,

for each trade or business, rental real businesses were performed in real rental, operation, management, leasing,

estate, and other rental activity. property trades or businesses in which or brokerage trade or business. Services

you materially participated and you performed as an employee are not Note. Except for the publicly traded b. You performed more than 750 treated as performed in a real property partnership discussion on page 5, the hours of services in real property trades trade or business unless you owned more following information on passive activity or businesses in which you materially than 5% of the stock (or more than 5% of limitations applies only to general participated. the capital or profits interest) in the partners. Limited partners who are employer. disqualified persons should see Pub. 925 Note. For a closely held C corporation 3. Working interests in oil or gas for a complete discussion of the passive (defined in section 465(a)(1)(B)), the wells. activity rules. above conditions are treated as met if 4. The rental of a dwelling unit any Generally, passive activities include: more than 50% of the corporation’s gross partner used for personal purposes during receipts were from real property trades or 1. Trade or business activities in the year for more than the greater of 14

which you did not materially participate businesses in which the corporation days or 10% of the number of days that materially participated. and the residence was rented at fair rental

2. Activities that meet the definition of For purposes of this rule, each interest value.

rental activities under Temporary in rental real estate is a separate activity, 5. Activities of trading personal

property for the account of owners of

interests in the activities.

Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership

(Keep for your records.) Material participation. You must

determine if you materially participated (a)

in each trade or business activity held 1. Your adjusted basis at the end of the prior year. Do not enter less through the partnership and (b) if you than zero. Enter -0- if this is your first tax year. ............. 1. were a real estate professional (defined

Increases: above), in each rental real estate activity

held through the partnership. All 2. Money and your adjusted basis in property contributed to the determinations of material participation partnership less the associated liabilities (but not less than zero). 2. are made based on your participation

3. Your increased share of or assumption of partnership liabilities. during the partnership’s tax year.

(Subtract your share of liabilities shown on your 2003 Schedule Material participation standards for K-1 from your share of liabilities shown on your 2004 Schedule K-1 partners who are individuals are listed and add the amount of any partnership liabilities you assumed below. Special rules apply to certain during the tax year.) ............................... 3. retired or disabled farmers and to the

surviving spouses of farmers. See the 4. Your share of the partnership’s income or gain (including Instructions for Form 8582 for details. tax-exempt income) ............................... 4.

Corporations should refer to the 5. Any gain recognized this year on contributions of property. Do not Instructions for Form 8810 for the material include gain from transfer of liabilities .................... 5. participation standards that apply to them.

Decreases: Individuals (other than limited

partners). If you are an individual (either 6. Withdrawals and distributions of money and the adjusted basis of a general partner or a limited partner who property distributed to you from the partnership. Do not include the owned a general partnership interest at all amount of property distributions included in the partner’s income times during the tax year), you materially (taxable income) ................................. 6. participated in an activity only if one or

Caution. A distribution may be taxable if the amount exceeds your more of the following apply.

adjusted basis of your partnership interest immediately before the 1. You participated in the activity for distribution. more than 500 hours during the tax year.

7. Your share of the partnership’s nondeductible expenses that are 2. Your participation in the activity for

not capital expenditures the tax year constituted substantially all ............................. 7.

the participation in the activity of all 8. Your share of the partnership’s losses and deductions (including individuals (including individuals who are capital losses) ................................... 8. not owners of interests in the activity for

the tax year). 9. Your adjusted basis in the partnership at end of this tax year. (Add 3. You participated in the activity for lines 1 through 5 and subtract lines 6 through 8 from the total. If more than 100 hours during the tax year, zero or less, enter -0-.) ............................. 9. and your participation in the activity for

Caution. The deduction for your share of the partnership’s losses the tax year was not less than the

and deductions is limited to your adjusted basis in your partnership participation in the activity of any other

interest. If you entered zero on line 9 and the amount computed for individual (including individuals who were

line 9 was less than zero, a portion of your share of the partnership not owners of interests in the activity) for losses and deductions may not be deductible (See Basis Rules on the tax year. page 2 for more information.) 4. The activity was a significant

participation activity for the tax year, and

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you participated in all significant estate activity in which you materially is $25,000 reduced by the special

participation activities (including activities participated as a real estate professional), allowance for which the surviving spouse

outside the partnership) during the year the amounts from that activity are qualifies.

for more than 500 hours. A significant passive. Report passive income (losses), If your modified adjusted gross income participation activity is any trade or deductions, and credits as follows. (defined below) is $100,000 or less business activity in which you participated 1. If you have an overall gain (the ($50,000 or less if married filing for more than 100 hours during the tax excess of income over deductions and separately), your loss is deductible up to year and in which you did not materially losses, including any prior year unallowed the amount of the maximum special participate under any of the material loss) from a passive activity, report the allowance referred to in the preceding participation tests (other than this test 4). income, deductions, and losses from the paragraph. If your modified adjusted 5. You materially participated in the activity as indicated in the instructions for gross income is more than $100,000 activity for any 5 tax years (whether or not the boxes in which those items were (more than $50,000 if married filing consecutive) during the 10 tax years that reported. separately), the special allowance is immediately precede the tax year. 2. If you have an overall loss (the limited to 50% of the difference between 6. The activity was a personal service excess of deductions and losses, $150,000 ($75,000 if married filing activity and you materially participated in including any prior year unallowed loss, separately) and your modified adjusted the activity for any 3 tax years (whether or over income) or credits from a passive gross income. When modified adjusted not consecutive) preceding the tax year. activity, report the income, deductions, gross income is $150,000 or more A personal service activity involves the losses, and credits from all passive ($75,000 or more if married filing performance of personal services in the activities using the Instructions for Form separately), there is no special allowance. fields of health, law, engineering, 8582 or Form 8582-CR (or Form 8810), to architecture, accounting, actuarial Modified adjusted gross income is your see if your deductions, losses, and credits science, performing arts, consulting, or adjusted gross income figured without are limited under the passive activity any other trade or business in which taking into account: rules.

capital is not a material income-producing • Any passive activity loss.

factor. Special allowance for rental real estate • Any rental real estate loss allowed

7. Based on all the facts and activities. If you actively participated in a under section 469(c)(7) to real estate

professionals (as defined on page 3). circumstances, you participated in the rental real estate activity, you may be

activity on a regular, continuous, and able to deduct up to $25,000 of the loss • Any taxable social security or

equivalent railroad retirement benefits. substantial basis during the tax year. from the activity from nonpassive income.

This “special allowance” is an exception • Any deductible contributions to an IRA

Work counted toward material to the general rule disallowing losses in or certain other qualified retirement plans

participation. Generally, any work that excess of income from passive activities. under section 219.

you or your spouse do in connection with The special allowance is not available if • The student loan interest deduction.

an activity held through a partnership you were married, file a separate return • The tuition and fees deduction.

(where you own your partnership interest • The deduction for one-half of for the year, and did not live apart from at the time the work is done) is counted your spouse at all times during the year. self-employment taxes.

toward material participation. However, • The exclusion from income of interest Only individuals and qualifying estates work in connection with the activity is not from Series EE and I U.S. Savings Bonds can actively participate in a rental real counted toward material participation if used to pay higher education expenses. estate activity. Estates (other than either of the following applies. • The exclusion of amounts received qualifying estates), trusts, and under an employer’s adoption assistance 1. The work is not the sort of work that corporations cannot actively participate. program. owners of the activity would usually do You are not considered to actively and one of the principal purposes of the Commercial revitalization participate in a rental real estate activity if work that you or your spouse does is to deduction. The special $25,000 at any time during the tax year your avoid the passive loss or credit allowance for the commercial interest (including your spouse’s interest) limitations. revitalization deduction from rental real in the activity was less than 10% (by 2. You do the work in your capacity as estate activities is not subject to the active value) of all interests in the activity. an investor and you are not directly participation rules or modified adjusted Active participation is a less stringent involved in the day-to-day operations of gross income limits discussed above. See requirement than material participation. the activity. Examples of work done as an Code R—Commercial Revitalization

investor that would not count toward You may be treated as actively Deduction on page 10.

material participation include: participating if you participated, for Special rules for certain other example, in making management a. Studying and reviewing financial activities. If you have net income (loss), decisions or arranging for others to statements or reports on operations of the deductions, or credits from any activity to provide services (such as repairs) in a activity. which special rules apply, the partnership significant and bona fide sense. b. Preparing or compiling summaries will identify the activity and all amounts Management decisions that can count as or analyses of the finances or operations relating to it on Schedule K-1 or on an active participation include approving new of the activity for your own use. attachment. tenants, deciding rental terms, approving c. Monitoring the finances or capital or repair expenditures, and other If you have net income subject to operations of the activity in a similar decisions. recharacterization under Temporary nonmanagerial capacity. Regulations section 1.469-2T(f) and An estate is a qualifying estate if the Effect of determination. Regulations section 1.469-2(f), report Income decedent would have satisfied the active

(loss), deductions, and credits from an such amounts according to the participation requirement for the activity

activity are nonpassive if you determine for the tax year the decedent died. A Instructions for Form 8582 (or Form

8810). that: qualifying estate is treated as actively • You materially participated in a trade or participating for tax years ending less If you have net income (loss), business activity of the partnership or than 2 years after the date of the deductions, or credits from any of the • You were a real estate professional decedent’s death. following activities, treat such amounts as (defined on page 3) in a rental real estate The maximum special allowance that nonpassive and report them as instructed activity of the partnership. single individuals and married individuals in these instructions.

If you determine that you did not filing a joint return can qualify for is 1. Working interests in oil and gas

materially participate in a trade or $25,000. The maximum is $12,500 for wells.

business activity of the partnership or if married individuals who file separate 2. The rental of a dwelling unit any

you have income (loss), deductions, or returns and who lived apart all times partner used for personal purposes during

credits from a rental activity of the during the year. The maximum special the year for more than the greater of 14

partnership (other than a rental real allowance for which an estate can qualify days or 10% of the number of days that

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the residence was rented at fair rental expense deduction on Form 4952, (including prior year unallowed losses)

value. Investment Interest Expense Deduction. allocable to the activity for the year are

3. Trading personal property for the Example. If you have Schedule E not limited by the passive loss rules. A

account of owners of interests in the income of $8,000, and a Form 4797 prior fully taxable transaction is one in which

activity. year unallowed loss of $3,500 from the you recognize all your realized gain

passive activities of a particular PTP, you (loss). Report the income and losses on

Self-charged interest. The partnership have a $4,500 overall gain ($8,000 − the forms and schedules you normally

will report any “self-charged” interest $3,500). On Schedule E (Form 1040), line use.

income or expense that resulted from 28, report the $4,500 net gain as Note. For rules on the disposition of an loans between you and the partnership nonpassive income in column (j). In entire interest reported using the (or between the partnership and another column (g), report the remaining installment method, see the Instructions partnership in which you have an Schedule E gain of $3,500 ($8,000 − for Form 8582. interest). If there was more than one $4,500). On the appropriate line of Form

activity, the partnership will provide a 4797, report the prior year unallowed loss

statement allocating the interest income of $3,500. Be sure to enter “From PTP” to

or expense with respect to each activity. the left of each entry space. Specific Instructions The self-charged interest rules do not 3. If you have an overall loss (but did

apply to your partnership interest if the not dispose of your entire interest in the

partnership made an election under PTP to an unrelated person in a fully Publicly Traded

Regulations section 1.469-7(g) to avoid taxable transaction during the year), the Partnership the application of these rules. See the losses are allowed to the extent of the If the “publicly traded partnership” box is Instructions for Form 8582 for more income, and the excess loss is carried checked, you are a partner in a publicly information. forward to use in a future year when you traded partnership and must follow the have income to offset it. Report as a Publicly traded partnerships. The rules under Publicly traded partnerships passive loss on the schedule or form you passive activity limitations are applied shown above. normally use the portion of the loss equal separately for items (other than the to the income. Report the income as low-income housing credit and the Partner’s Share of passive income on the form or schedule rehabilitation credit) from each publicly

traded partnership (PTP). Thus, a net you normally use. Liabilities

passive loss from a PTP may not be Example. You have a Schedule E loss The partnership will show your share of of $12,000 (current year losses plus prior deducted from other passive income. the partnership’s nonrecourse liabilities,

Instead, a passive loss from a PTP is year unallowed losses) and a Schedule D partnership-level qualified nonrecourse

suspended and carried forward to be gain of $7,200. Report the $7,200 gain on financing, and other liabilities as of the

applied against passive income from the the appropriate line of Schedule D. On end of the partnership’s tax year. If you Schedule E (Form 1040), line 28, report same PTP in later years. If the partner’s terminated your interest in the partnership

entire interest in the PTP is completely $7,200 of the losses as a passive loss in during the tax year, the amounts should

disposed of, any unused losses are column (f). Carry forward to 2005 the reflect the share that existed immediately

allowed in full in the year of disposition. unallowed loss of $4,800 ($12,000 − before the total disposition. A partner’s $7,200). “other liability” is any partnership liability If you have an overall gain from a PTP, If you have unallowed losses from for which a partner is personally liable. the net gain is nonpassive income. In more than one activity of the PTP or from Use the total of the three amounts for addition, the nonpassive income is the same activity of the PTP that must be computing the adjusted basis of your included in investment income to figure reported on different forms, you must partnership interest. your investment interest expense allocate the unallowed losses on a pro deduction. Generally, you can use only the rata basis to figure the amount allowed amounts shown next to “Qualified from each activity or on each form. Do not report passive income, gains, nonrecourse financing” and “Other” to or losses from a PTP on Form 8582. To allocate and keep a record of compute your amount at risk. Do not Instead, use the following rules to figure the unallowed losses, use include any amounts that are not at risk if and report on the proper form or schedule Worksheets 5, 6, and 7 of Form such amounts are included in either of

TIP

your income, gains, and losses from 8582. List each activity of the PTP in these categories. passive activities that you held through Worksheet 5. Enter the overall loss from If your partnership is engaged in two or each PTP you owned during the tax year. each activity in column (a). Complete more different types of activities subject to 1. Combine any current year income, column (b) of Worksheet 5 according to the at-risk provisions, or a combination of gains (losses), and any prior year its instructions. Multiply the total at-risk activities and any other activity, the unallowed losses to see if you have an unallowed loss from the PTP by each partnership should give you a statement overall gain (loss) from the PTP. Include ratio in column (b) and enter the result in showing your share of nonrecourse only the same types of income and losses column (c) of Worksheet 5. Then, liabilities, partnership-level qualified you would include in your net income or complete Worksheet 6 if all the loss from nonrecourse financing, and other loss from a non-PTP passive activity. See the same activity is to be reported on one liabilities for each activity. Pub. 925 for more details. form or schedule. Use Worksheet 7 Qualified nonrecourse financing 2. If you have an overall gain, the net instead of Worksheet 6 if you have more secured by real property used in an gain portion (total gain minus total losses) than one loss to be reported on different activity of holding real property that is is nonpassive income. On the form or forms or schedules for the same activity. subject to the at-risk rules is treated as an schedule you normally use, report the net Enter the net loss plus any prior year amount at risk. Qualified nonrecourse gain portion as nonpassive income and unallowed losses in column (a) of financing generally includes financing for the remaining income and the total losses Worksheet 6 (or Worksheet 7 if which no one is personally liable for as passive income and loss. To the left of applicable). The losses in column (c) of repayment that is borrowed for use in an the entry space, enter “From PTP. ” It is Worksheet 6 (column (e) of Worksheet 7) activity of holding real property and that is important to identify the nonpassive are the allowed losses to report on the loaned or guaranteed by a federal, state, income because the nonpassive portion is forms or schedules. Report both these or local government or borrowed from a included in modified adjusted gross losses and any income from the PTP on “qualified” person. income for purposes of figuring on Form the forms and schedules you normally

8582 the “special allowance” for active use. Qualified persons include any persons

participation in a non-PTP rental real 4. If you have an overall loss and you actively and regularly engaged in the

estate activity. In addition, the nonpassive disposed of your entire interest in the PTP business of lending money, such as a

income is included in investment income to an unrelated person in a fully taxable bank or savings and loan association.

when figuring your investment interest transaction during the year, your losses Qualified persons generally do not include

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related parties (unless the nonrecourse amounts in the boxes on your 2005 tax single passive activity. If a net capital gain

financing is commercially reasonable and return. is reported in box 3, report the gain on

on substantially the same terms as loans Schedule D (Form 1040), line 12, column If you have losses, deductions, or involving unrelated persons), the seller of (f). If a loss is reported in box 3, report the credits from a prior year that were not the property, or a person who receives a loss following the Form 8582 instructions deductible or usable because of certain fee for the partnership’s investment in the to figure how much of the loss can be limitations, such as the basis rules or the real property. reported on Schedule D (Form 1040), line at-risk limitations, take them into account 12, column (f). However, if the publicly See Pub. 925 for more information on in determining your net income, loss, or traded partnership box is checked, report qualified nonrecourse financing. credits for this year. However, except for the loss following the rules for Publicly passive activity losses and credits, do not Both the partnership and you must traded partnerships on page 5. meet the qualified nonrecourse rules on combine the prior-year amounts with any

amounts shown on this Schedule K-1 to this debt before you can include the Box 4. Net Capital Gain (Loss) get a net figure to report on any amount shown next to “Qualified From Other Activities supporting schedules, statements, or nonrecourse financing” in your at-risk forms attached to your return. Instead, Net capital gain (loss) from other activities computation. report the amounts separately on the is not subject to the passive activity See Limitations on Losses, attached schedule, statement, or form on limitations. Report the gain (loss) on Deductions, and Credits beginning on a year-by-year basis. Schedule D (Form 1040), line 12, column page 2 for more information on the at-risk (f). If you have amounts other than those limitations. shown on Schedule K-1 to report on Box 5. Net Passive AMT

Tax Shelter Registration Schedule E (Form 1040), enter each item Adjustment on a separate line of Part II of Schedule

Number E. Limited partners only. Use the amount

reported in box 5 (as well as your If the partnership is a registration-required Box 1. Taxable Income (Loss) adjustments and tax preference items tax shelter or has invested in a

registration-required tax shelter, it should From Passive Activities from other sources) to prepare your Form

have entered a tax shelter registration Limited partners only. The amount 6251, Alternative Minimum Tax—

Individuals; Form 4626, Alternative number in this box. If you claim or report reported in box 1 is treated as being from Minimum Tax—Corporations; or any income, loss, deduction, or credit a trade or business that is a single Schedule I of Form 1041, U.S. Income from a tax shelter, you must attach Form passive activity. Report this amount as Tax Return for Estates and Trusts. The 8271, Investor Reporting of Tax Shelter follows. adjustment is treated as being from a Registration Number, to your tax return. If • If income is reported in box 1, report trade or business that is a single passive the partnership has invested in a tax the income on Schedule E (Form 1040), activity. shelter, it must give you a copy of its line 28, column (g). However, if the

Form 8271 with your Schedule K-1. Use publicly traded partnership box is Individuals should enter the amount on

the information on this Form 8271 to checked, report the income following the line 18 of Form 6251, where it is taken

complete your Form 8271. rules for Publicly traded partnerships on into account with adjustments and page 5. preferences from other passive activities. If the partnership itself is a • If a loss is reported in box 1, follow the registration-required tax shelter, use the Instructions for Form 8582 to figure how Box 6. Net Other AMT information on Schedule K-1 (name of the

partnership, partnership identifying much of the loss can be reported on Adjustment Schedule E (Form 1040), line 28, column number, and tax shelter registration Individual general and limited partners (f). However, if the publicly traded number) to complete your Form 8271. should enter the amount from box 6 on partnership box is checked, report the line 15 of Form 6251.

Boxes 1 Through 9 loss following the rules for Publicly traded

partnerships on page 5. Box 7. General Credits The amounts shown in boxes 1 through 9 Box 2a. Taxable Income (Loss) Limited partners only. Enter the amount reflect your share of income, loss, from box 7 on line 1t of Form 3800, deductions, credits, etc., from the From Other Activities General Business Credit. Because partnership. These amounts do not take The amount reported in box 2a is your into consideration the following general credits are treated as being from share of the income from other activities. a trade or business that is a single limitations. It is not subject to the passive activity passive activity, you must also include the 1. The adjusted basis of your limitations. Report the amount in box 2a box 7 amount on line 3 of Form 3800. partnership interest, as follows.

2. The amount for which you are at • If the amount in box 2a is income, Box 8. Low-Income Housing risk, or report it on Schedule E (Form 1040), line Credit 3. The passive activity limitations. 28, column (j). Limited partners only. Enter the amount • If the amount in box 2a is a loss, report For information on these provisions, from box 8 on line 5 of Form 8586, it on Schedule A (Form 1040), line 27. Low-Income Housing Credit. This credit is see Limitations on Losses, Deductions,

and Credits beginning on page 2. Box 2b. Qualified Dividends for property placed in service after 1989

Report this amount on lines 9a and 9b of and is treated as being from a single If you are an individual, the following passive activity. Form 1040. instructions will tell you how to report the

amounts shown in the boxes. If you are Note. Qualified dividends are excluded Box 9. Other

not an individual, report the amounts in from investment income, but you can

the boxes as instructed on your tax elect to include part or all of these Codes A Through C

return. amounts in investment income. See the General partners in an electing large

The line numbers in these instructions partnership must separately account for instructions for line 4g of Form 4952,

Investment Interest Expense Deduction, are references to forms in use for any items attributable to passive loss for important information on making this calendar year 2004. If you file your tax limitation activities to the extent election. return on a calendar year basis, but your necessary to comply with the section 469

partnership files a return for a fiscal year, passive loss rules. Therefore, the Box 3. Net Capital Gain (Loss) enter the amounts shown in the boxes on partnership is required to report income From Passive Activities your tax return for the year in which the (loss), capital gain (loss), 28% rate gain

partnership’s fiscal year ends. For Limited partners only. The net capital (loss), credits, and the alternative

example, if the partnership’s tax year gain (loss) reported in box 3, is treated as minimum tax adjustment separately for all

ends in February 2005, report the being from a trade or business that is a trade or business activities, rental real

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estate activities, and rental activities other the general credits on line 3 of Form 28, column (f). However, if the publicly

than rental real estate. 3800. traded partnership box is checked, report

Code A5. General partner’s the loss following the rules for Publicly Code A1. General partner’s taxable nonconventional source fuel credit traded partnerships on page 5. income (loss) from trade or business from trade or business activities. 3. If you were a real estate activities. Report Code A1 income (loss) Report the credit for producing fuel from a professional and you materially from partnership trade or business nonconventional source on line 54 of participated in the activity, report box 9 activities in which you materially Form 1040 or line 6c of Schedule J, Form income (loss) on Schedule E (Form participated on Schedule E (Form 1040), 1120. If you did not materially participate 1040), line 28, column (h) or (j). line 28, column (h) or (j). See the in the trade or business activity, the 4. If you have income from a passive instructions beginning on page 3 to nonconventional source fuel credit is a activity in box 9, Code B1, enter the determine whether you materially passive activity credit. If the credit is from income on Schedule E (Form 1040), line participated in a trade or business activity. a passive activity, complete Form 28, column (g). However, if the publicly

Report Code A1 income (loss) from 8582-CR (or Form 8810 for corporations) traded partnership box is checked, report

partnership trade or business activities in to figure how much of the credit is the income following the rules for Publicly

which you did not materially participate as allowable. Attach a schedule to your traded partnerships on page 5.

follows. return showing how you calculated the

amount of credit you are allowed to take Code B2. General partner’s net capital 1. Report income on Schedule E on your tax return. gain (loss) from rental real estate (Form 1040), line 28, column (g). activities (for the entire year). The net However, if the publicly traded Code A6. General partner’s alternative capital gain (loss) from a rental real estate partnership box on Schedule K-1 is minimum tax adjustment from trade or activity is a passive activity amount checked, report the income following the business activities. An AMT unless you were a real estate rules for Publicly traded partnerships on adjustment must be reported on line 15 of professional (defined on page 3) and you page 5. Form 6251. However, if the AMT materially participated in the activity. If the 2. Report a loss following the adjustment is from a passive activity, it Instructions for Form 8582 to figure how amount is either (a) a loss that is not from must be taken into account on line 18 with

much of the loss can be reported on a passive activity or (b) a gain, report it on adjustments and preferences from other Schedule D (Form 1040), line 12, column Schedule E (Form 1040), line 28, column passive activities instead of being (f). If the amount is a loss from a passive (f). However, if the publicly traded reported on line 15. activity, report it following the Instructions partnership box is checked, report the Code B1. General partner’s taxable for Form 8582 to figure how much of the loss following the rules for Publicly traded income (loss) from rental real estate loss can be reported on Schedule D, line partnerships on page 5. activities. Generally, the income (loss) 12, column (f). However, if the publicly reported in box 9, Code B1, is a passive traded partnership box is checked, report Code A2. General partner’s net capital activity amount for all general partners. the loss following the rules for Publicly gain (loss) from trade or business However, the income (loss) in box 9 is not traded partnerships on page 5. activities. If you did not materially from a passive activity if you were a real participate in the trade or business estate professional (defined on page 3) Code B3. General partner’s 28% rate activity, the net capital gain (loss) is a and you materially participated in the gain (loss) from rental real estate passive activity amount. If the amount is activity. activities. The 28% rate gain (loss) from either (a) a loss that is not from a passive a rental real estate activity is a passive Use the following instructions to activity or (b) a gain, report it on Schedule activity amount unless you were a real determine where to enter the Code B1 D (Form 1040), line 12, column (f). If the estate professional (defined on page 3) amount. amount is a loss from a passive activity, and you materially participated in the report it following the Instructions for 1. If you have a loss from a passive activity. If the amount is either (a) a loss Form 8582 to figure how much of the loss activity in box 9, Code B1, and you meet that is not from a passive activity or (b) a can be reported on Schedule D (Form all of the following conditions, enter the gain, include it on line 4 of the 28% Rate

1040), line 12, column (f). However, if the loss on Schedule E (Form 1040), line 28, Gain Worksheet on page D-7 of the publicly traded partnership box is column (f). Instructions for Schedule D (Form 1040). checked, report the loss following the a. You actively participated in the If the amount is a loss from a passive rules for Publicly traded partnerships on partnership rental real estate activities. activity, report it following the Instructions

page 5. See Special allowance for rental real for Form 8582 to figure how much of the

estate activities on page 4. loss can be included on line 4 of the 28% Code A3. General partner’s 28% rate b. Rental real estate activities with Rate Gain Worksheet on page D-7 of the gain (loss) from trade or business active participation were your only Instructions for Schedule D (Form 1040). activities. If you did not materially passive activities. However, if the publicly traded participate in the trade or business c. You have no prior year unallowed partnership box is checked, report the activity, the 28% rate gain (loss) is a losses from these activities. loss following the rules for Publicly traded passive activity amount. If the amount is d. Your total loss from the rental real partnerships on page 5. either (a) a loss that is not from a passive estate activities was not more than activity or (b) a gain, include it on line 4 of Code B4. General partner’s general $25,000 (not more than $12,500 if the 28% Rate Gain Worksheet on page credits from rental real estate married filing separately and you lived D-7 of the Instructions for Schedule D activities. Report the general credits on apart from your spouse all year). (Form 1040). If the amount is a loss from line 1t of Form 3800. Unless you were a e. If you are a married person filing a passive activity, report it following the real estate professional and materially separately, you lived apart from your Instructions for Form 8582 to figure how participated in the rental real estate spouse all year. much of the loss can be included on line 4 activity, you must also include the general f. You have no current or prior year of the 28% Rate Gain Worksheet on page credits on line 3 of Form 3800. unallowed credits from a passive activity. D-7 of the Instructions for Schedule D g. Your modified adjusted gross Code B5. General partner’s (Form 1040). However, if the publicly income was not more than $100,000 (not low-income housing credit (for traded partnership box is checked, report more than $50,000 if married filing property placed in service after 1989) the loss following the rules for Publicly separately and you lived apart from your from rental real estate activities. traded partnerships on page 5. spouse all year). Report the low-income housing credit for

Code A4. General partner’s general 2. If you have a loss from a passive property placed in service after 1989 on

credits from trade or business activity in box 9 and you do not meet all line 5 of Form 8586. Unless you were a

activities. Report the general credits on the conditions in 1 above, report the loss real estate professional and materially

line 1t of Form 3800. If you did not following the Instructions for Form 8582 to participated in the rental real estate

materially participate in the trade or figure how much of the loss you can activity, the low-income housing credit is

business activity, you must also include report on Schedule E (Form 1040), line a passive activity credit.

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Code B6. General partner’s activities instead of being reported on line the adjusted basis of your interest in the rehabilitation credit from rental real 15. partnership by this amount.

estate activities. Report the Code D. Limited Partner’s 28% Code I. Limited Partner’s rehabilitation credit on line 1e of Form

Rate Gain (Loss) From Passive Rehabilitation Credit From Rental 3468, Investment Credit. Unless you were

a real estate professional and materially Activities Real Estate Activities

participated in the rental real estate Limited partners only. Report the Limited partners only. The 28% rate activity, the credit is a passive activity rehabilitation credit on line 1e of Form gain (loss) is treated as being from a credit, and you must also file Form 3800. 3468. Because the credit is treated as trade or business that is a single passive Code B7. General partner’s alternative being from a single passive activity, you activity. If a gain is reported, include it on minimum tax adjustment from rental must also file Form 3800. line 4 of the 28% Rate Gain Worksheet

real estate activities. An AMT on page D-7 of the Instructions for Code J. Limited Partner’s

adjustment must be reported on line 15 of Schedule D (Form 1040). If a loss is Nonconventional Source Fuel Form 6251. However, if the AMT reported, report the loss following the Credit adjustment is from a passive activity, it Instructions for Form 8582 to figure how must be taken into account on line 18 with Limited partners only. The much of the loss can be included on line 4 nonconventional source fuel credit is other passive activities instead of being of the 28% Rate Gain Worksheet on page treated as being from a single passive reported on line 15. D-7 of the Instructions for Schedule D activity. Complete Form 8582-CR (or Code C1. General partner’s taxable (Form 1040). However, if the publicly Form 8810 for corporations) to figure how income (loss) from other rental traded partnership box is checked, report much of the credit is allowable. Enter the activities. Income (loss) reported in box the loss following the rules for Publicly allowable amount on line 54 of Form 1040 9, Code C1, is a passive activity amount traded partnerships on page 5. or line 6c of Schedule J, Form 1120. for all general partners. Report a loss Code E. Limited Partner’s 28% Attach a schedule to your return showing following the Instructions for Form 8582. how you calculated the amount of credit Report income on Schedule E (Form Rate Gain (Loss) From Other you are allowed to take on your tax 1040), line 28, column (g). However, if the Activities return. box for publicly traded partnerships is The 28% gain (loss) from other activities checked, report the income (loss) Codes K1 and K2. is not subject to the passive activity following the rules for Publicly traded limitations. Include it on line 4 of the 28% Self-Employment

partnerships on page 5. Rate Gain Worksheet on page D-7 of the Code K1. Net earnings (loss) from Code C2. General partner’s net capital Instructions for Schedule D (Form 1040). self-employment. Enter this amount on

gain (loss) from other rental activities. Schedule SE (Form 1040), line 2, Section Code F. Guaranteed Payments The net capital gain (loss) from other A or B, whichever is applicable. General rental activities is a passive activity Generally, these amounts are not passive partners should reduce this amount by amount for all general partners. Report income, and you should report them on unreimbursed partnership expenses the gain on Schedule D (Form 1040), line Schedule E (Form 1040), line 28, column claimed. General partners who are 12, column (f). Report a loss following the (j) (for example, guaranteed payments for disqualified persons also should reduce Instructions for Form 8582 to figure how personal services). this amount by depletion claimed on oil much of the loss can be reported on and gas properties. If this amount is a Code G. Income From Discharge of Schedule D (Form 1040), line 12, column loss, enter only the deductible amount on (f). However, if the publicly traded Indebtedness Schedule SE. For purposes of partnership box is checked, report the The amount reported under Code G is self-employment tax, no income from an loss following the rules for Publicly traded excluded from your gross income to the electing large partnership is treated as partnerships on page 5. extent provided in section 108 if the farming or fishing income.

Code C3. General partner’s 28% rate discharge: Code K2. Gross nonfarm income. If

gain (loss) from other rental activities. 1. Occurred in a title 11 case relating you are an individual partner, use this The 28% rate gain (loss) from other rental to bankruptcy, amount to figure net earnings from activities is a passive activity amount for 2. Occurred when you were insolvent, self-employment under the nonfarm all general partners. If the amount is a 3. Involved qualified farm optional method on Schedule SE (Form gain, include it on line 4 of the 28% Rate indebtedness, as defined in section 1040), Section B, Part II. Gain Worksheet on page D-7 of the 108(g), or

4. Involved qualified real property Codes L1 Through L9. Foreign Tax Instructions for Schedule D (Form 1040).

Report a loss following the Instructions for business indebtedness, as defined in Credit Information

Form 8582 to figure how much of the loss section 108(c)(3), unless the partner is a Use the information reported under

can be included on line 4 of the 28% Rate C corporation. Codes L1 through L9 to figure your

Gain Worksheet on page D-7 of the foreign tax credit. For more information,

Instructions for Schedule D (Form 1040). This amount is applied, instead, to see Form 1116, Foreign Tax Credit

However, if the publicly traded reduce certain tax attributes. File Form (Individual, Estate, Trust, or Nonresident

partnership box is checked, report the 982, Reduction of Tax Attributes Due to Alien Individual) and its instructions; Form

loss following the rules for Publicly traded Discharge of Indebtedness, to explain 1118, Foreign Tax Credit—Corporations,

partnerships on page 5. why any amount received from the and its instructions; and Pub. 514,

Code C4. General partner’s general discharge of indebtedness should be Foreign Tax Credit for Individuals. See

credits from other rental activities. excluded and to report your reduction of page 5 of the Instructions for Form 1116

Report the general credits on line 1t of tax attributes. for detailed instructions for reporting

Form 3800. Because general credits from foreign tax information from partnerships. For a discharge of indebtedness not other rental activities are passive activity described above, you must include this Note. The line references in this section

credits for all general partners, you must amount in income on Schedule E (Form of the Form 1116 instructions do not

also include the general credits on line 3 1040), line 28, column (g) or (j). apply to the Schedule K-1 of Form

of Form 3800. 1065-B.

Code C5. General partner’s alternative Code H. Tax-Exempt Interest Code L1. Name of foreign country or

minimum tax adjustment from other U.S. possession. Income Include on Form 1116,

rental activities. An AMT adjustment You must report on your return, as an Part I, item l. For each country reported,

must be reported on line 15 of Form item of information, your share of the the partnership must give you the amount

6251. However, if the AMT adjustment is tax-exempt interest received or accrued and a description of your share of the

from a passive activity, it must be taken by the partnership during the year. following items for Codes L2 through L9.

into account on line 18 with adjustments Individual partners must include this For each country or possession being

and preferences from other passive amount on Form 1040, line 8b. Increase reported, a separate column in Part I and

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a separate line in Part II is needed on share of the gain on the securities Code M. Oil and Gas Activities

Form 1116. Generally, oil and gas income, distributed to you).

Code L2. Gross income from all • The partnership’s adjusted basis of deductions, credits, and other items are those securities immediately before the sources. Enter this amount on line 3e of included in your distributive share of

Form 1116. distribution. income or loss from passive loss

Code L3. Gross income sourced at limitation activities, general credits, and Decrease the adjusted basis of your

partner level. Although all this income the alternative minimum tax adjustment. interest in the partnership (but not below

reported has been apportioned to foreign However, distributive shares of all oil and zero) by the amount of cash distributed to

source categories of income, you must gas income, deductions, credits, and you and the partnership’s adjusted basis

nevertheless determine whether the other items are separately reported to of the distributed securities. Advances or partners who are disqualified persons income being reported is U.S. source drawings of money or property against

income or foreign source income. See (defined on page 2) in accordance with your distributive share are treated as

page 5 of the Instructions for Form 1116 the regular partnership rules, here or on current distributions made on the last day an attached schedule. for the rules to source the income of the partnership’s tax year.

reported to you. Enter only foreign source A partner must notify the partnership of Your basis in the distributed income on lines 1 and 3d of Form(s) its status as a disqualified person. marketable securities (other than in 1116. A separate Form 1116 or 1118 is Codes N1 Through N9. liquidation of your interest) is the smaller required for each foreign source category Miscellaneous of: of income. Do not include income that you • The partnership’s adjusted basis in the determined to be U.S. source income. Code N1. Other tax-exempt income. securities immediately before the Codes L4(a) Through L4(c). Foreign Increase the adjusted basis of your distribution increased by any gain gross income sourced at partnership interest in the partnership by the amount recognized on the distribution of the level. The following types of income have shown in box 9, Code N1, but do not securities or already been sourced for you by the include it in income on your tax return. • The adjusted basis of your partnership partnership. Include these amounts on Code N2. Nondeductible expenses. interest reduced by any cash distributed lines 1 and 3d of the applicable Forms The nondeductible expenses paid or in the same transaction and increased by 1116 (that is, the Forms 1116 for each any gain recognized on the distribution of incurred by the partnership are not category of income provided to you). deductible on your tax return. Decrease the securities. • Code L4(a). Passive foreign source the adjusted basis of your interest in the income. If you received the securities in partnership by this amount. • Code L4(b). Listed foreign liquidation of your partnership interest,

categories of income. Code N3. Unrelated business taxable your basis in the marketable securities is

• Code L4(c). General limitation income. The partnership will give you equal to the adjusted basis of your

foreign source income. any information you need to figure partnership interest reduced by any cash

unrelated business taxable income under distributed in the same transaction and Code L5. Interest expense allocated section 512(a)(1) (but excluding any increased by any gain recognized on the and apportioned at the partner level. modifications required by paragraphs (8) distribution of the securities. Include this amount on line 4b of the

applicable Forms 1116. Do not include through (15) of section 512(b)) for a If, within 5 years of a distribution to you any interest expense allocated and partner that is a tax-exempt organization. of marketable securities, you contributed apportioned to U.S. source income. Reminder. A partner is required to notify appreciated property (other than those

Code L6. Other expenses allocated the partnership of its tax-exempt status. securities) to the partnership and the fair

and apportioned at the partner level. Code N4. Health insurance. Any market value of those securities

Include this amount on line 2 of the amounts paid during the tax year for exceeded the adjusted basis of your

applicable Forms 1116. Do not include insurance that constitutes medical care partnership interest immediately before

any expenses allocated and apportioned for you, your spouse, and your the distribution (reduced by any cash

to U.S. source income on any line of Part dependents. On line 31 of your 2004 received in the distribution), you may

I of Form 1116. Form 1040, you may be allowed to deduct have to recognize gain on the appreciated

property. For property contributed after Codes L7(a) Through Codes L7(c). such amounts, even if you do not itemize

Deductions allocated and apportioned deductions. If you do itemize deductions, June 8, 1997, the 5-year period is

enter on line 1 of Schedule A (Form 1040) generally extended to 7 years. See at partnership level to foreign source

any amounts not deducted on line 31 of section 737 for details. income. The following codes report the

expenses allocated and apportioned by Form 1040. Code N6. Distributions of property the partnership to foreign source Code N5. Distributions of money (cash other than money. Box 9, Code N6, categories of income. Include these and marketable securities). Box 9, shows the partnership’s adjusted basis of amounts on line 2 of the applicable Forms Code N5, shows the distributions the property other than money immediately 1116 (that is, the Forms 1116 for each partnership made to you of cash and before the property was distributed to category of income provided to you). certain marketable securities. The you. In addition, the partnership will • Code L7(a). Deductions allocated marketable securities are included at their attach a statement showing the cost basis and apportioned at partnership level to fair market value on the date of and fair market value of each property passive foreign source income. distribution (minus your share of the distributed. Decrease the adjusted basis • Code L7(b). Deductions allocated partnership’s gain on the securities of your interest in the partnership by the and apportioned at partnership level to distributed to you). If the amount shown amount of your basis in the distributed listed foreign categories of income. here exceeds the adjusted basis of your property. Your basis in the distributed • Code L7(c). Deductions allocated partnership interest immediately before property (other than in liquidation of your and apportioned at partnership level to the distribution, the excess is treated as interest) is the smaller of: general limitation foreign source gain from the sale or exchange of your • The partnership’s adjusted basis income. partnership interest. Generally, this gain immediately before the distribution or

Code L8(a). Total foreign taxes paid. is treated as gain from the sale of a • The adjusted basis of your partnership

Include this amount in Part II of Form capital asset and should be reported on interest reduced by any cash distributed

1116. the Schedule D for your return. However, in the same transaction.

Code L8(b). Total foreign taxes the gain may be ordinary income. For If you received the property in accrued. details, see Pub. 541. Include this amount in Part II of liquidation of your interest, your basis in Form 1116. The partnership will separately identify the distributed property is equal to the

Code L9. Reduction in taxes available both of the following. adjusted basis of your partnership interest

for credit. Enter this amount on line 12 • The fair market value of the marketable reduced by any cash distributed in the

of Form 1116. securities when distributed (minus your same transaction.

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If you contributed appreciated property Replacement stock has not been extraterritorial income exclusion, the

to the partnership within 5 years of a purchased by the partnership. The partnership met the foreign economic

distribution of other property to you, and partnership should also give you the process requirements and claimed the

the fair market value of the other property name of the corporation that issued the exclusion when figuring your distributive

exceeded the adjusted basis of your stock, your share of the partnership’s share of partnership income. You also

partnership interest immediately before adjusted basis and sales price of the may need to know the amount of your

the distribution (reduced by any cash stock, and the dates the stock was bought distributive share of foreign trading gross

received in the distribution), you may and sold. Corporate partners are not receipts from this partnership to

have to recognize gain on the appreciated eligible for the section 1045 rollover. To determine if you met the $5 million or less

property. For property contributed after qualify for the section 1045 rollover: exception discussed above for purposes

June 8, 1997, the 5-year period is of qualifying for an extraterritorial income 1. You must have held an interest in

generally extended to 7 years. See exclusion from other sources. the partnership during the entire period in section 737 for details. which the partnership held the qualified Note. Upon request, the partnership

Code N7. Gain eligible for section 1202 small business stock (more than 6 should furnish you a copy of the

exclusion. This gain from the sale or partnership’s Form 8873 if there is a months prior to the sale),

exchange of qualified small business reduction for international boycott 2. Your distributive share of the gain

stock (as defined in the Instructions for operations, illegal bribes, kickbacks, etc. eligible for the section 1045 rollover

Schedule D) is eligible for the partial cannot exceed the amount that would Code Q. Inversion Gain section 1202 exclusion. The partnership have been allocated to you based on your

should also give you the name of the The partnership will provide a statement interest in the partnership at the time the

corporation that issued the stock, your stock was acquired, and showing the amounts of each type of

share of the partnership’s adjusted basis 3. You must purchase other qualified income or gain that is included in

and sales price of the stock, and the small business stock (as defined in the inversion gain. The partnership has

dates the stock was bought and sold. Instructions for Schedule D (Form 1040)) included inversion gain in income

Corporate partners are not eligible for the during the 60-day period that began on elsewhere on Schedule K-1. Inversion

section 1202 exclusion. The following the date the stock was sold by the gain is also reported under Code Q

additional limitations apply at the partner partnership. because your taxable income and

level. alternative minimum taxable income

See the Instructions for Schedule D cannot be less than the inversion gain. 1. You must have held an interest in (Form 1040) for details on how to report Also, your inversion gain (a) is not taken the partnership when the partnership the gain and the amount of the allowable into account in figuring the amount of net acquired the qualified small business postponed gain. operating loss (NOL) for the tax year or stock and at all times thereafter until the the amount of NOL that can be carried partnership disposed of the qualified Code O. Unrecaptured Section over to each tax year, (b) may limit the small business stock. 1250 Gain amount of your credits, and (c) is treated 2. Your distributive share of the Report this gain on line 11 of the as income from sources within the U.S. eligible section 1202 gain cannot exceed Unrecaptured Section 1250 Gain for the foreign tax credit. See section the amount that would have been Worksheet on page D-8 of the 7874 for details. allocated to you based on your interest in Instructions for Schedule D (Form 1040). the partnership at the time the stock was Do not report the gain on line 5 as stated Code R. Commercial Revitalization

acquired. in the worksheet instructions. Deduction

Follow the instructions on Form 8582 for See the Instructions for Schedule D Codes P1 and P2. Extraterritorial

(Form 1040) for details on how to report commercial revitalization deductions from Income Exclusion

the gain and the amount of the allowable rental real estate activities to figure how

a. Partnership did not claim the much of the deduction can be reported on exclusion. exclusion. If the partnership reports your Schedule E (Form 1040), line 28, column Code N8. Gain eligible for section 1045 distributive share of foreign trading gross (f). rollover–stock replaced. This gain is receipts (Code P1) and the extraterritorial eligible for the section 1045 rollover. Disclosure of Reportable income exclusion (Code P2), the Replacement stock has been purchased Transactions partnership was not entitled to claim the by the partnership. The partnership exclusion because it did not meet the The partnership will report any should also give you the name of the foreign economic process requirements. information you need to complete a corporation that issued the stock, your You may still qualify for your distributive disclosure statement for reportable share of the partnership’s adjusted basis share of this exclusion if the partnership’s transactions in which the partnership and sales price of the stock, and the foreign trading gross receipts for the tax participates. If the partnership participates dates the stock was bought and sold. year were $5 million or less. To qualify for in a transaction that must be disclosed on Corporate partners are not eligible for the this exclusion, your foreign trading gross Form 8886, Reportable Transaction section 1045 rollover. To qualify for the receipts from all sources for the tax year Disclosure Statement, both you and the section 1045 rollover: also must have been $5 million or less. If partnership may be required to file Form

1. You must have held an interest in you qualify for the exclusion, limited 8886 for the transaction. The

the partnership during the entire period in partners must report the extraterritorial determination of whether you are required

which the partnership held the qualified exclusion amount (Code P2) as a to disclose a transaction of the

small business stock (more than 6 deduction reducing the amount reported partnership is based on the category(s)

months prior to the sale) and under which the transaction qualifies for in box 1 (see the box 1 instructions on 2. Your distributive share of the gain page 6). General partners who qualify for disclosure and is determined by the

eligible for the section 1045 rollover the exclusion must report the Code P2 partnership. See the Instructions for Form

cannot exceed the amount that would amount in accordance with the 8886 for details.

have been allocated to you based on your instructions for box 9, Code A1, B1, or Other interest in the partnership at the time the C1, whichever applies. See Form 8873, stock was acquired. Any other information you may need to Extraterritorial Income Exclusion, for more file with your return not shown elsewhere information. See the Instructions for Schedule D on Schedule K-1. The partnership should b. Partnership claimed the exclusion. If (Form 1040) for details on how to report give you a description and the amount of the partnership reports your distributive the gain and the amount of the allowable your share for each of these items. share of foreign trading gross receipts postponed gain. (Code P1) but not the amount of the Code N9. Gain eligible for section 1045

rollover–stock not replaced. This gain

is eligible for the section 1045 rollover.

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