Department of the Treasury 2006 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 rental real estate, and other rental defined in section 751(c)) or inventory

Revenue Code unless otherwise noted. activities are separately reported for each items (as defined in section 751(d)).

activity in box 9. General Instructions The written notice to the partnership

must include the names and addresses of Income, etc., from other activities

(investment and portfolio income and both parties to the exchange, the Purpose of Schedule K-1 deductions) are reported in boxes 2, 3, identifying numbers of the transferor and

The partnership uses Schedule K-1 to 4b, and 6 for both limited and general (if known) of the transferee, and the

exchange date. report your share of the partnership’s partners.

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

The amount of loss and deduction that effect for the tax year in which the can show that the failure was due to

you can claim on your tax return may be partnership actually makes the reasonable cause and not willful neglect.

less than the amount reported on adjustment. However, if the error involves

Schedule K-1. It is the partner’s a change to your distributive share of a Nominee Reporting

responsibility to consider and apply any partnership item, the partnership should Any person who holds, directly or applicable limitations. See Limitations on file an amended partnership return and indirectly, an interest in a partnership as a Losses, Deductions, and Credits send you a corrected Schedule K-1. nominee for another person must furnish beginning on page 2 for more information. If the treatment on your original or a written statement to the partnership by

amended return is inconsistent with the the last day of the month following the Electing Large partnership’s treatment, you may be end of the partnership’s tax year. This

Partnerships (ELPs) subject to the accuracy-related penalty. statement must include the name,

This penalty is in addition to any tax that address, and identifying number of the This partnership has elected simplified nominee and such other person, results from making your amount or reporting requirements intended to make treatment of the item consistent with that description of the partnership interest held it simpler for you to report your share of shown on the partnership’s return. Any as nominee for that person, and other partnership income, credits, deductions, deficiency that results from making the information required by Temporary etc. Generally, income, capital gains, amounts consistent may be assessed Regulations section 1.6031(c)-1T. A credits, and deductions are combined at immediately. nominee who fails to furnish this the partnership level so that the number statement must furnish to the person for of partnership items separately reported whom the nominee holds the partnership to partners is reduced. Most limitations Sale or Exchange of interest a copy of Schedule K-1 and and elections affecting partnership Partnership Interest related information within 30 days of income are made by the electing large receiving it from the partnership. partnership. Generally, a partner who sells or

exchanges a partnership interest in a A nominee who fails to furnish when For limited partners, income and other section 751(a) exchange must notify the due all the information required by items from the partnership’s trade or partnership, in writing, within 30 days of Temporary Regulations section business and rental activities are treated the exchange (or, if earlier, by January 15 1.6031(c)-1T, or who furnishes incorrect as being from a trade or business that is a of the calendar year following the information, is subject to a $50 penalty for single passive activity. These items are calendar year in which the exchange each statement for which a failure occurs. reported in boxes 1, 4a, and 5, with most occurred). A “section 751(a) exchange” is The maximum penalty is $100,000 for all credits being reported in boxes 7 and 8. any sale or exchange of a partnership such failures during a calendar year. If the

General partners must make their own interest in which any money or other nominee intentionally disregards the

determinations as to whether the activities property received by the partner in requirement to report correct information,

are passive for them. Therefore, exchange for that partner’s interest is each $50 penalty increases to $100 or, if

partnership items from trade or business, attributable to unrealized receivables (as greater, 10% of the aggregate amount of

Cat. No. 26141W
items required to be reported, and the Note. Additional basis adjustments may Elections $100,000 maximum does not apply. apply to partners claiming deductions for Generally, the partnership decides how to depletion. See chapter 9 of Pub. 535 for figure taxable income from its operations. details. International Boycotts However, two elections are made by you

Every partnership that had operations in, separately on your income tax return and At-Risk Limitations

or related to, a boycotting country, not by the partnership. These elections Generally, if you have (a) a loss or other company, or a national of a country must are made under the following code deduction from any activity carried on as file Form 5713, International Boycott sections. a trade or business or for the production Report. • Section 108(b)(5) (income from the of income by the partnership and (b) discharge of indebtedness). amounts in the activity for which you are If the partnership cooperated with an • Section 901 (foreign tax credit). not at risk, you will have to complete international boycott, it must provide you

with a copy of its Form 5713. As a Change of Tax Year Form 6198, At-Risk Limitations, to figure

your allowable loss. general or limited partner, you must file If the partnership attaches a statement to your own Form 5713 to report the Schedule K-1 indicating that it has The at-risk rules generally limit the partnership’s activities and any other changed its tax year and that you can amount of loss and other deductions that

boycott operations that you may have. elect to report your distributive share of you can claim to the amount you could You may lose certain tax benefits if the the income attributable to that change actually lose in the activity. However, if partnership participated in, or cooperated ratably over 4 tax years, see Rev. Proc. you acquired your partnership interest with, an international boycott. See Form 2003-79, 2003-45 I.R.B. 1036, for details before 1987, the at-risk rules do not apply 5713 and its instructions for more on making the election. To make the to losses from an activity of holding real information. election, you must file Form 8082, Notice property placed in service before 1987 by

of Inconsistent Treatment or the partnership. The activity of holding

Definitions Administrative Adjustment Request, with mineral property does not qualify for this

your income tax return for each of the 4 exception. The partnership should identify

General Partner tax years. File Form 8082 for this purpose on an attachment to Schedule K-1 the

in accordance with Rev. Proc. 2003-79 amount of any losses that are not subject A general partner is a partner who is instead of the Form 8082 instructions. to the at-risk limitations. personally liable for partnership debts.

 Generally, you are not at risk for Limited Partner Additional Information amounts such as the following.

A limited partner is a partner in a For more information on the treatment of • Nonrecourse loans used to finance the

partnership formed under a state limited partnership income, deductions, credits, activity, to acquire property used in the

partnership law, whose personal liability etc., see the following: activity, or to acquire your interest in the

for partnership debts is limited to the • Pub. 541, Partnerships; activity, that are not secured by your own

amount of money or other property that • Pub. 535, Business Expenses; and property (other than the property used in

the partner contributed or is required to • Pub. 925, Passive Activity and At-Risk the activity). See the instructions for

contribute to the partnership. Some Rules. Partner’s Share of Liabilities on page 5 for

members of other entities, such as the exception for qualified nonrecourse To get forms and publications, see the domestic or foreign business trusts or financing secured by real property. instructions for your tax return. limited liability companies that are • Cash, property, or borrowed amounts

classified as partnerships, may be treated used in the activity (or contributed to the Limitations on Losses, as limited partners for certain purposes. activity, or used to acquire your interest in

For example, see Temporary Regulations Deductions, and Credits the activity) that are protected against

section 1.469-5T(e)(3), which treats all loss by a guarantee, stop-loss agreement, There are three separate potential members with limited liability as limited or other similar arrangement (excluding limitations on the amount of partnership partners for purposes of section 469(h)(2) casualty insurance and insurance against losses that you can deduct on your return. (relating to the passive activity loss tort liability). These limitations and the order in which

limitation rules). • Amounts borrowed for use in the you must apply them are as follows: the activity from a person who has an interest basis rules, the at-risk limitations, and the Disqualified Person in the activity, other than as a creditor, or passive activity limitations. Each of these who is related, under section 465(b)(3), to If you are a partner in a partnership limitations is discussed separately below. a person (other than you) having such an holding oil and gas properties, you are a Basis Rules interest. “disqualified person” if:

Generally, you cannot claim your share of You should get a separate statement • You are an oil or natural gas retailer a partnership loss (including a capital of income, expenses, etc., for each described in section 613A(d)(2) or crude loss) to the extent that it is greater than activity from the partnership. oil refiner described in section 613A(d)(4) the adjusted basis of your partnership

or interest at the end of the partnership’s tax Passive Activity Limitations • Your average daily production of year. Any losses and deductions not Section 469 provides rules that limit the domestic crude oil and natural gas allowed this year because of the basis deduction of certain losses and credits. exceeds 500 barrels for your tax year in limit can be carried forward indefinitely These rules apply to partners who: which the partnership’s tax year ends. and deducted in a later year subject to the • Are individuals, estates, trusts, closely See section 776(b) for more details. basis limit for that year. held corporations, or personal service

Note. Disqualified persons must report The partnership is not responsible for corporations and

items of income, gain, loss, deduction, keeping the information needed to figure • Have a passive activity loss or credit for

and credit attributable to partnership oil the basis of your partnership interest. You the tax year.

and gas properties as if the special rules can figure the adjusted basis of your Individuals, estates, and trusts. If you for ELPs did not apply. partnership interest by adding items that have a passive activity loss or credit, use increase your basis and then subtracting Form 8582, Passive Activity Loss Nonrecourse Loans items that decrease your basis. Limitations, to figure your allowable

Nonrecourse loans are those liabilities of Use the worksheet on page 3 to figure passive losses and Form 8582-CR,

the partnership for which no partner bears the basis of your interest in the Passive Activity Credit Limitations, to

the economic risk of loss. partnership. figure your allowable passive credits.

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 If the publicly traded partnership disqualified person the information You were a real estate professional only if

(PTP) box on Schedule K-1 is necessary to comply with the passive you met both of the following conditions. CAUTION checked, do not report passive activity rules of section 469. Items of

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a. More than half of the personal income (loss) from the partnership on income, gain, loss, credit, etc., must be services you performed in trades or Form 8582. See page 5 for the special separately reported to general partners businesses were performed in real rules for PTPs. for each trade or business, rental real property trades or businesses in which estate, and other rental activity. Corporations. Use Form 8810, you materially participated and

Corporate Passive Activity Loss and b. You performed more than 750 Except for the PTP discussion on Credit Limitations. See the instructions for hours of services in real property trades page 5, the following information more information. or businesses in which you materially CAUTION on passive activity limitations

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participated. For limited partners of an ELP, all applies only to general partners. income, loss, deductions, and credits Note. For a closely held C corporation from trade or business and rental Generally, passive activities include: (defined in section 465(a)(1)(B)), the activities generally are reported as being 1. Trade or business activities in above conditions are treated as met if

from a trade or business that is a single which you did not materially participate more than 50% of the corporation’s gross passive activity. and receipts were from real property trades or

 However, the determination of 2. Activities that meet the definition of businesses in which the corporation

whether an activity is a passive activity rental activities under Temporary materially participated.

must be made by any partner who is Regulations section 1.469-1T(e)(3) and For purposes of this rule, each interest either a: Regulations section 1.469-1(e)(3). in rental real estate is a separate activity, • General partner or unless you elect to treat all interests in • Limited partner who is a disqualified Passive activities do not include the rental real estate as one activity. For person (as defined on page 2) with following. details on making this election, see the respect to items of income, gain, loss, 1. Trade or business activities in Instructions for Schedule E (Form 1040). deduction, and credit attributable to which you materially participated. If you are married filing jointly, either partnership oil and gas properties. 2. Rental real estate activities in which you or your spouse must separately meet In addition, the partnership is required you materially participated if you were a both of the above conditions, without

to provide each general partner and “real estate professional” for the tax year. taking into account services performed by

the other spouse.

Worksheet for Adjusting the Basis of a Partner’s A real property trade or business is

Interest in the Partnership Keep for Your Records any real property development,

redevelopment, construction,

reconstruction, acquisition, conversion, 1. Your adjusted basis at the end of the prior year. Do not enter less rental, operation, management, leasing, than zero. Enter -0- if this is your first tax year. .............. 1. or brokerage trade or business. Services

Increases: you performed as an employee are not

treated as performed in a real property 2. Money and your adjusted basis in property contributed to the trade or business unless you owned more partnership less the associated liabilities (but not less than zero). 2. than 5% of the stock (or more than 5% of

3. Your increased share of or assumption of partnership liabilities. the capital or profits interest) in the (Subtract your share of liabilities shown on your 2005 Schedule K-1 employer. from your share of liabilities shown on your 2006 Schedule K-1 and 3. Working interests in oil or gas add the amount of any partnership liabilities you assumed during wells.

the tax year.) .................................... 3. 4. The rental of a dwelling unit any

4. Your share of the partnership’s income or gain (including partner used for personal purposes during

tax-exempt income) ............................... 4. the year for more than the greater of 14

days or 10% of the number of days that 5. Any gain recognized this year on contributions of property. Do not the residence was rented at fair rental include gain from transfer of liabilities .................... 5. value.

Decreases: 5. Activities of trading personal

property for the account of owners of 6. Withdrawals and distributions of money and the adjusted basis of interests in the activities. property distributed to you from the partnership. Do not include the

amount of property distributions included in the partner’s income Material participation. You must (taxable income) .................................. 6.

determine if you (a) materially participated Caution. A distribution may be taxable if the amount exceeds your in each trade or business activity held adjusted basis of your partnership interest immediately before the through the partnership and (b) were a

distribution. real estate professional (defined above),

7. Your share of the partnership’s nondeductible expenses that are in each rental real estate activity held

not capital expenditures through the partnership. All ............................. 7.

determinations of material participation 8. Your share of the partnership’s losses and deductions (including are made based on your participation capital losses) ................................... 8. during the partnership’s tax year.

9. Your adjusted basis in the partnership at end of this tax year. (Add Material participation standards for lines 1 through 5 and subtract lines 6 through 8 from the total. If partners who are individuals are listed zero or less, enter -0-.) ............................. 9. below. Special rules apply to certain Caution. The deduction for your share of the partnership’s losses retired or disabled farmers and to the

and deductions is limited to your adjusted basis in your partnership surviving spouses of farmers. See the interest. If you entered zero on line 9 and the amount computed for Instructions for Form 8582 for details.

line 9 was less than zero, a portion of your share of the partnership

losses and deductions may not be deductible (see Basis Rules on Corporations should refer to the

page 2 for more information.) Instructions for Form 8810 for the material

participation standards that apply to them.

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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. more of the following apply. participating if you participated, for 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

more than 100 hours during the tax year, that: An estate is a qualifying estate if the

and your participation in the activity for • You materially participated in a trade or decedent would have satisfied the active

the tax year was not less than the business activity of the partnership or participation requirement for the activity

participation in the activity of any other • You were a real estate professional in a for the tax year the decedent died. A

individual (including individuals who were rental real estate activity of the qualifying estate is treated as actively

not owners of interests in the activity) for partnership. participating for tax years ending less

the tax year. If you determine that you did not than 2 years after the date of the

4. The activity was a significant materially participate in a trade or decedent’s death.

participation activity for the tax year, and business activity of the partnership or if The maximum special allowance that you participated in all significant you have income (loss), deductions, or single individuals and married individuals participation activities (including activities credits from a rental activity of the filing a joint return can qualify for is outside the partnership) during the year partnership (other than a rental real $25,000. The maximum is $12,500 for for more than 500 hours. A significant estate activity in which you materially married individuals who file separate participation activity is any trade or participated as a real estate professional), returns and who live apart all times during business activity in which you participated the amounts from that activity are the year. The maximum special allowance for more than 100 hours during the tax passive. Report passive income (losses), for which an estate can qualify is $25,000 year and in which you did not materially deductions, and credits as follows. reduced by the special allowance for participate under any of the material 1. If you have an overall gain (the which the surviving spouse qualifies. participation tests (other than this test 4). excess of income over deductions and 5. You materially participated in the losses, including any prior year unallowed If your modified adjusted gross income activity for any 5 tax years (whether or not loss) from a passive activity, report the (defined below) is $100,000 or less consecutive) during the 10 tax years that income, deductions, and losses from the ($50,000 or less if married filing immediately precede the tax year. activity as indicated in the instructions for separately), your loss is deductible up to 6. The activity was a personal service the boxes in which those items were the amount of the maximum special activity and you materially participated in reported. allowance referred to in the preceding the activity for any 3 tax years (whether or 2. If you have an overall loss (the paragraph. If your modified adjusted not consecutive) preceding the tax year. excess of deductions and losses, gross income is more than $100,000 A personal service activity involves the including any prior year unallowed loss, (more than $50,000 if married filing performance of personal services in the over income) or credits from a passive separately), the special allowance is fields of health, law, engineering, activity, report the income, deductions, limited to 50% of the difference between architecture, accounting, actuarial losses, and credits from all passive $150,000 ($75,000 if married filing science, performing arts, consulting, or activities using the Instructions for Form separately) and your modified adjusted any other trade or business in which 8582 or Form 8582-CR (or Form 8810), to gross income. When modified adjusted capital is not a material income-producing see if your deductions, losses, and credits gross income is $150,000 or more factor. are limited under the passive activity ($75,000 or more if married filing 7. Based on all the facts and rules. separately), there is no special allowance. circumstances, you participated in the

activity on a regular, continuous, and Special allowance for rental real estate Modified adjusted gross income is your

substantial basis during the tax year. adjusted gross income figured without activities. If you actively participated in a taking into account the following. rental real estate activity, you may be Work counted toward material • Any passive activity loss. able to deduct up to $25,000 of the loss participation. Generally, any work that • Any rental real estate loss allowed from the activity from nonpassive income. you or your spouse do in connection with under section 469(c)(7) to real estate This “special allowance” is an exception an activity held through a partnership professionals (as defined previously). to the general rule disallowing losses in (where you own your partnership interest • Any taxable social security or excess of income from passive activities. at the time the work is done) is counted equivalent railroad retirement benefits. The special allowance is not available if toward material participation. However, you were married, filed a separate return • Any deductible contributions to an IRA work in connection with the activity is not or certain other qualified retirement plans for the year, and did not live apart from counted toward material participation if under section 219. your spouse at all times during the year. either of the following applies. • The student loan interest deduction. Only individuals and qualifying estates 1. The work is not the sort of work that • The tuition and fees deduction. can actively participate in a rental real owners of the activity would usually do • The deduction for one-half of estate activity. Estates (other than and one of the principal purposes of the self-employment taxes. qualifying estates), trusts, and work that you or your spouse does is to • The exclusion from income of interest corporations cannot actively participate. avoid the passive loss or credit from Series EE and I U.S. Savings Bonds

limitations. You are not considered to actively used to pay higher education expenses.

2. You do the work in your capacity as participate in a rental real estate activity if • The exclusion of amounts received

an investor and you are not directly at any time during the tax year your under an employer’s adoption assistance

involved in the day-to-day operations of interest (including your spouse’s interest) program.

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Commercial revitalization your investment interest expense If you have unallowed losses from

deduction. The special $25,000 deduction. more than one activity of the PTP or from

allowance for the commercial the same activity of the PTP that must be Do not report passive income, gains, revitalization deduction from rental real reported on different forms, you must

estate activities is not subject to the active or losses from a PTP on Form 8582. allocate the unallowed losses on a pro

participation rules or modified adjusted Instead, use the following rules to figure rata basis to figure the amount allowed

gross income limits discussed above. See and report on the proper form or schedule from each activity or on each form.

Code Q—Commercial Revitalization your income, gains, and losses from

passive activities that you held through To allocate and keep a record of Deduction on page 11. each PTP you owned during the tax year. the unallowed losses, use 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 gains (losses), and any prior year deductions, or credits from any activity to Worksheet 5. Enter the overall loss from

which special rules apply, the partnership unallowed losses to see if you have an each activity in column (a). Complete will identify the activity and all amounts overall gain (loss) from the PTP. Include column (b) of Worksheet 5 according to only the same types of income and losses relating to it on Schedule K-1 or on an its instructions. Multiply the total attachment. you would include in your net income or unallowed loss from the PTP by each loss from a non-PTP passive activity. See If you have net income subject to ratio in column (b) and enter the result in Pub. 925 for more details. recharacterization under Temporary column (c) of Worksheet 5. Then, 2. If you have an overall gain, the net Regulations section 1.469-2T(f) and complete Worksheet 6 if all the loss from gain portion (total gain minus total losses) Regulations section 1.469-2(f), report the same activity is to be reported on one is nonpassive income. On the form or such amounts according to the form or schedule. Use Worksheet 7 schedule you normally use, report the net Instructions for Form 8582 (or Form instead of Worksheet 6 if you have more gain portion as nonpassive income and 8810). than one loss to be reported on different 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. Note. For rules on the disposition of an $4,500). On the appropriate line of Form The self-charged interest rules do not entire interest reported using the 4797, report the prior year unallowed loss apply to your partnership interest if the installment method, see the Instructions of $3,500. Be sure to enter “From PTP” to partnership made an election under for Form 8582. the left of each entry space. Regulations section 1.469-7(g) to avoid 3. If you have an overall loss (but did the application of these rules. See the not dispose of your entire interest in the Instructions for Form 8582 for more

information. PTP to an unrelated person in a fully Specific Instructions taxable transaction during the year), the

Publicly traded partnerships. The losses are allowed to the extent of the

passive activity limitations are applied Publicly Traded income, and the excess loss is carried

separately for items (other than the forward to use in a future year when you Partnership (PTP) low-income housing credit and the have income to offset it. Report as a If the “publicly traded partnership” box is rehabilitation credit) from each publicly passive loss on the schedule or form you checked, you are a partner in a publicly traded partnership (PTP). Thus, a net normally use the portion of the loss equal traded partnership (PTP) and must follow passive loss from a PTP may not be to the income. Report the income as the rules under Publicly traded deducted from other passive income. passive income on the form or schedule partnerships discussed above. Instead, a passive loss from a PTP is you normally use. suspended and carried forward to be Example. You have a Schedule E loss Partner’s Share of applied against passive income from the of $12,000 (current year losses plus prior same PTP in later years. If the partner’s year unallowed losses) and a Schedule D Liabilities

entire interest in the PTP is completely gain of $7,200. Report the $7,200 gain on The partnership will show your share of disposed of, any unused losses are the appropriate line of Schedule D. On the partnership’s nonrecourse liabilities, allowed in full in the year of disposition. Schedule E (Form 1040), line 28, report partnership-level qualified nonrecourse

If you have an overall gain from a PTP, financing, and other liabilities as of the $7,200 of the losses as a passive loss in

the net gain is nonpassive income. In end of the partnership’s tax year. If you column (f). Carry forward to 2007 the

addition, the nonpassive income is terminated your interest in the partnership unallowed loss of $4,800 ($12,000 −

included in investment income to figure during the tax year, the amounts should $7,200).

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reflect the share that existed immediately Reporting of Tax Shelter Registration • If income is reported in box 1, report

before the total disposition. A partner’s Number, to your tax return. the income on Schedule E (Form 1040),

“other liability” is any partnership liability line 28, column (g). However, if the PTP A partnership that has invested in a tax for which a partner is personally liable. box is checked, report the income shelter must provide you with a copy of its

Use the total of the three amounts for Form 8271 with your Schedule K-1. Use following the rules for Publicly traded

partnerships on page 5. computing the adjusted basis of your the information on this Form 8271 to • If a loss is reported in box 1, follow the partnership interest. complete your Form 8271. If the

partnership itself is a registration-required Instructions for Form 8582 to figure how Generally, you can use only the much of the loss can be reported on tax shelter, use the information on amounts shown next to “Qualified Schedule K-1 (that is, name of the Schedule E (Form 1040), line 28, column nonrecourse financing” and “Other” to (f). However, if the PTP box is checked, partnership, partnership identifying compute your amount at risk. Do not report the loss following the rules for number, and tax shelter registration include any amounts that are not at risk if Publicly traded partnerships. number) to complete your Form 8271. such amounts are included in either of

these categories. Box 2. Taxable Income (Loss) Boxes 1 Through 9 If your partnership is engaged in two or From Other Activities

more different types of activities subject to The amounts shown in boxes 1 through 9 This amount is not subject to the passive reflect your share of income, loss, the at-risk provisions, or a combination of activity limitations. Report the amount as deductions, credits, etc., from the at-risk activities and any other activity, the follows. partnership. These amounts do not take partnership should give you a statement • If the amount is income, report it on into consideration the following showing your share of nonrecourse Schedule E (Form 1040), line 28, column limitations. liabilities, partnership-level qualified (j). • The adjusted basis of your partnership nonrecourse financing, and other • If the amount is a loss, report it on interest. liabilities for each activity. Schedule A (Form 1040), line 27. • The amount for which you are at risk. Qualified nonrecourse financing.

Qualified nonrecourse financing generally • The passive activity limitations. Box 3. Qualified Dividends

For information on these provisions, includes financing for which no one is Report this amount on lines 9a and 9b of see Limitations on Losses, Deductions, personally liable for repayment that is Form 1040. and Credits beginning on page 2. borrowed for use in an activity of holding Note. Qualified dividends are excluded real property and that is loaned or For individuals, the following from investment income, but you can guaranteed by a federal, state, or local instructions explain how to report the elect to include part or all of these government or borrowed from a amounts shown in the boxes. For all other amounts in investment income. See the “qualified” person. Qualified nonrecourse entities, report the amounts in the boxes instructions for line 4g of Form 4952, financing secured by real property used in as instructed on your income tax return. Investment Interest Expense Deduction, an activity of holding real property that is The line numbers in these instructions for important information on making this subject to the at-risk rules is treated as an are references to forms in use for election. amount at risk. calendar year 2006. If you file your tax

Qualified persons. Qualified persons return on a calendar year basis, but your Box 4a. Net Capital Gain or include any persons actively and regularly partnership files a return for a fiscal year, (Loss) From Passive Activities engaged in the business of lending enter the amounts shown in the boxes on

money, such as a bank or savings and Limited partners only. The net capital your tax return for the year in which the

loan association. Qualified persons gain (loss) reported in box 4a, is treated partnership’s fiscal year ends. For

generally do not include related parties as being from a trade or business that is a example, if the partnership’s tax year

(unless the nonrecourse financing is single passive activity. If a net capital gain ends on June 30, 2007, report the

commercially reasonable and on is reported in box 4a, report the gain on amounts in the boxes on your 2007

substantially the same terms as loans Schedule D (Form 1040), line 12, column income tax return.

(f). involving unrelated persons), the seller of If you have losses, deductions, or the property, or a person who receives a credits from a prior year that were not If a loss is reported in box 4a, report it fee for the partnership’s investment in the deductible or usable because of certain following the Form 8582 instructions to real property. limitations, such as the basis rules or the figure how much of the loss can be

See Pub. 925 for more information on at-risk limitations, take them into account reported on Schedule D (Form 1040), line

qualified nonrecourse financing. in determining your net income, loss, or 12, column (f). However, if the PTP box is

credits for this year. However, except for checked, report the loss following the Both the partnership and you must

meet the qualified nonrecourse rules on passive activity losses and credits, do not rules for Publicly traded partnerships.

combine the prior-year amounts with any this debt before you can include the Box 4b. Net Capital Gain or amounts shown on this Schedule K-1 to amount shown next to “Qualified get a net figure to report on any (Loss) From Other Activities nonrecourse financing” in your at-risk

computation. supporting schedules, statements, or Net capital gain or (loss) from other

forms attached to your return. Instead, activities is not subject to the passive See Limitations on Losses, report the amounts separately on the activity limitations. Report the gain or Deductions, and Credits beginning on attached schedule, statement, or form on (loss) on Schedule D (Form 1040), line page 2 for more information on the at-risk a year-by-year basis. 12, column (f). limitations. For amounts other than those shown Box 5. Net Passive AMT Tax Shelter Registration on Schedule K-1, enter each item on a Adjustment separate line of Part II of Schedule E Number (Form 1040). Limited partners only. Use this amount

A partnership that is a (as well as your adjustments and tax Box 1. Taxable Income (Loss) registration-required tax shelter or has preference items from other sources) to From Passive Activities invested in a registration-required tax prepare your Form 6251, Alternative

shelter, should have entered a tax shelter Limited partners only. Any amount Minimum Tax— Individuals; Form 4626,

registration number in this box. If you reported in box 1 is treated as being from Alternative Minimum Tax—Corporations;

claim or report any income, loss, a trade or business that is a single or Schedule I of Form 1041, U.S. Income

deduction, or credit from a tax shelter, passive activity. Report this amount as Tax Return for Estates and Trusts. The

you must attach Form 8271, Investor follows. adjustment is treated as being from a

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trade or business that is a single passive activities. If you did not materially b. Rental real estate activities with

activity. participate in the trade or business active participation were your only

activity, the net capital gain or (loss) is a passive activities. Individuals should enter the amount on passive activity amount. If the amount is c. You have no prior year unallowed line 18 of Form 6251, where it is taken either (a) a loss that is not from a passive losses from these activities. into account with adjustments and activity or (b) a gain, report it on Schedule d. Your total loss from the rental real preferences from other passive activities. D (Form 1040), line 12, column (f). estate activities was not more than

Box 6. Net Other AMT $25,000 (not more than $12,500 if If the amount is a loss from a passive

Adjustment activity, report it following the Instructions married filing separately and you lived

apart from your spouse all year). Individual general and limited partners for Form 8582 to figure how much of the

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 6251. (Form 1040), line 12, column (f).

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

Box 7. General Credits f. You have no current or prior year report the loss following the rules for

Publicly traded partnerships unallowed credits from a passive activity. Limited partners only. Enter this amount . g. Your modified adjusted gross from box 7 on line 1z of Form 3800, Code A3. General partner’s 28% rate income was not more than $100,000 (not General Business Credit. Because gain (loss) from trade or business more than $50,000 if married filing general credits are treated as being from activities. If you did not materially separately and you lived apart from your a trade or business that is a single participate in the trade or business spouse all year). passive activity, you must also include the activity, the 28% rate gain or (loss) is a 2. If you have a (loss) from a passive box 7 amount on line 3 of Form 3800. passive activity amount. If the amount is activity in box 9 and you do not meet all either (a) a loss that is not from a passive Box 8. Low-Income Housing the conditions in 1 above, report the loss activity or (b) a gain, include it on line 4 of Credit following the Instructions for Form 8582 to the 28% Rate Gain Worksheet on page figure how much of the loss you can Limited partners only. Enter this amount D-8 of the Instructions for Schedule D report on Schedule E (Form 1040), line on line 4 of Form 8586, Low-Income (Form 1040). 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.

Box 9. Other for Form 8582 to figure how much of the 3. If you were a real estate

loss can be included on line 4 of the 28% professional and you materially

Codes A Through C Rate Gain Worksheet on page D-8 of the participated in the activity, report box 9 Instructions for Schedule D (Form 1040). General partners in an ELP must income or (loss) on Schedule E (Form 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 1z 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 (loss) participated in the activity. If the amount is Form 6251. However, if the AMT 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

materially participated in a trade or Code B1. General partner’s taxable activity, report it following the Instructions

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 1z 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 1z 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 4 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 • Code K7(b). Deductions allocated marketable securities are included at their

information from partnerships. and apportioned at partnership level to fair market value (FMV) on the date of

Note. The line references in this section listed foreign categories of income. distribution (minus your share of the

of the Form 1116 instructions do not • Code K7(c). Deductions allocated partnership’s gain on the securities

apply to the Schedule K-1 of Form and apportioned at partnership level to distributed to you). If this amount exceeds

1065-B. general limitation foreign source the adjusted basis of your partnership

income. interest immediately before the Code K1. Name of foreign country or Code K8(a). Total foreign taxes paid. distribution, the excess is treated as gain U.S. possession. Include on Form 1116, from the sale or exchange of your Part I, item l. For each country reported, Include this amount in Part II of Form

1116. partnership interest. Generally, this gain the partnership must give you the amount is treated as gain from the sale of a and a description of your share of the Code K8(b). Total foreign taxes capital asset and should be reported on accrued. Include this amount in Part II of following items for Codes K2 through K9. the Schedule D for your return. However, For each country or possession being Form 1116. the gain may be ordinary income. For reported, a separate column in Part I and Code K9. Reduction in taxes available details, see Pub. 541. a separate line in Part II is needed on for credit. Enter this amount on line 12

Form 1116. of Form 1116. The partnership must separately

identify both of the following. Code K2. Gross income from all Code L. Oil and Gas Activities • The FMV of the marketable securities sources. Enter this amount on line 3e of Generally, oil and gas income, when distributed (minus your share of the Form 1116. deductions, credits, and other items are gain on the securities distributed to you). Code K3. Gross income sourced at included in your distributive share of • The partnership’s adjusted basis of partner level. Although all this income income or loss from passive loss those securities immediately before the reported has been apportioned to foreign limitation activities, general credits, and distribution. source categories of income, you must the alternative minimum tax adjustment. nevertheless determine whether the Decrease the adjusted basis of your However, distributive shares of all oil income being reported is U.S. source interest in the partnership (but not below

income or foreign source income. See the and gas income, deductions, credits, and zero) by the amount of cash distributed to other items are separately reported to you and the partnership’s adjusted basis Instructions for Form 1116 for the rules to partners who are disqualified persons in of the distributed securities. Advances or source the income reported to you. Enter

only foreign source income on lines 1 and accordance with the regular partnership drawings of money or property against

3d of Form(s) 1116. A separate Form rules, here or on an attached schedule. your distributive share are treated as

1116 or 1118 is required for each foreign Note. A partner must notify the ELP of its current distributions made on the last day

status as a “disqualified person”. of the partnership’s tax year. source category of income. Do not

include income that you determined to be Codes M1 Through M9. Your basis in the distributed

U.S. source income. Miscellaneous marketable securities (other than in

Codes K4(a) Through K4(c). Foreign liquidation of your interest) is the smaller

gross income sourced at partnership Code M1. Other tax-exempt income. of:

level. The following types of income have Increase the adjusted basis of your • The partnership’s adjusted basis in the

already been sourced for you by the interest in the partnership by this amount, securities immediately before the

partnership. Include these amounts on but do not include it in income on your distribution increased by any gain

lines 1 and 3d of the applicable Forms income tax return. recognized on the distribution of the

1116 (that is, the Forms 1116 for each Code M2. Nondeductible expenses. securities or

category of income provided to you). Decrease the adjusted basis of your • The adjusted basis of your partnership

• Code K4(a). Passive foreign source interest in the partnership by this amount. interest reduced by any cash distributed

income. The nondeductible expenses paid or in the same transaction and increased by

• Code K4(b). Listed foreign incurred by the partnership are not any gain recognized on the distribution of

categories of income. deductible on your income tax return, but the securities.

• Code K4(c). General limitation they do affect your basis. If you received the securities in foreign source income. Code M3. Unrelated business taxable liquidation of your partnership interest,

Code K5. Interest expense allocated income. The partnership must give you your basis in the marketable securities is

and apportioned at the partner level. any information you need to figure equal to the adjusted basis of your

Include this amount on line 4b of the unrelated business taxable income under partnership interest reduced by any cash

applicable Forms 1116. section 512(a)(1) (but excluding any distributed in the same transaction and

Code K6. Other expenses allocated modifications required by paragraphs (8) increased by any gain recognized on the

and apportioned at the partner level. through (15) of section 512(b)) for a distribution of the securities.

partner that is a tax-exempt organization. Include this amount on line 2 of the If, within five years of a distribution to applicable Forms 1116. Reminder. A partner is required to notify you of marketable securities, you

Note. For Codes K5 and K6, do not the partnership of its tax-exempt status. contributed appreciated property (other

include any expenses allocated and Code M4. Health insurance. Include than those securities) to the partnership

apportioned to U.S. source income on any amounts paid during the tax year for and the FMV of those securities

any line of Part I of Form 1116. insurance that constitutes medical care exceeded the adjusted basis of your

Codes K7(a) Through Codes K7(c). for you, your spouse, and your partnership interest immediately before

Deductions allocated and apportioned dependents on line 29 of your 2006 Form the distribution (reduced by any cash

1040. You may be allowed to deduct such received in the distribution), you may at partnership level to foreign source amounts, even if you do not itemize have to recognize gain on the appreciated income. The following codes report the deductions. If you do itemize deductions, property. For property contributed after expenses allocated and apportioned by enter on line 1 of Schedule A (Form 1040) June 8, 1997, the 5-year period is the partnership to foreign source any amounts not deducted on line 29 of generally extended to 7 years. See categories of income. Include these Form 1040. section 737 for details. amounts on line 2 of the applicable Forms

1116 (that is, the Forms 1116 for each Code M5. Distributions of money (cash Code M6. Distributions of property

category of income provided to you). and marketable securities). This other than money. Box 9, Code M6,

• Code K7(a). Deductions allocated amount includes the distributions the shows the partnership’s adjusted basis of

and apportioned at partnership level to partnership made to you of cash and property other than money immediately

passive foreign source income. certain marketable securities. The before the property was distributed to

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you. In addition, the partnership should by the partnership. The partnership must Do not report the gain on line 5 as stated

attach a statement showing the cost basis also provide you with: on the worksheet.

and FMV of each property distributed. • The name of the corporation that Codes O1 and O2. Extraterritorial Decrease the adjusted basis of your issued the stock, Income Exclusion interest in the partnership by the amount • Your share of the partnership’s

of your basis in the distributed property. adjusted basis, Partnership did not claim the

Your basis in the distributed property • Your share of the partnership’s sales exclusion. If the partnership reports

(other than in liquidation of your interest) price of the stock, and your distributive share of foreign trading is the smaller of: • The dates the stock was bought and gross receipts (Code O1) and the • The partnership’s adjusted basis sold. extraterritorial income exclusion (Code

immediately before the distribution or O2), the partnership was not entitled to Corporate partners are not eligible for • The adjusted basis of your partnership claim the exclusion because it did not the section 1045 rollover. To qualify for interest reduced by any cash distributed meet the foreign economic process the section 1045 rollover: in the same transaction. requirements. You may still qualify for • You must have held an interest in the your distributive share of this exclusion if If you received the property in partnership during the entire period in

which the partnership held the qualified the partnership’s foreign trading gross liquidation of your interest, your basis in receipts for the tax year were $5 million or the distributed property is equal to the small business stock (more than 6

months prior to the sale) and less. adjusted basis of your partnership interest • Your distributive share of the gain To qualify for this exclusion, your reduced by any cash distributed in the

same transaction. eligible for the section 1045 rollover foreign trading gross receipts from all

cannot exceed the amount that would sources for the tax year also must have If you contributed appreciated property have been allocated to you based on your been $5 million or less. to the partnership within five years of a interest in the partnership at the time the Limited partners who qualify for the distribution of other property to you, and stock was acquired. exclusion. Report the extraterritorial the FMV of the other property exceeded See the Instructions for Schedule D exclusion amount (Code O2) as a the adjusted basis of your partnership deduction reducing the amount reported (Form 1040) for details on how to report interest immediately before the in box 1 (see the box 1 instructions on distribution (reduced by any cash the gain and the amount of the allowable page 6). postponed gain. received in the distribution), you may

have to recognize gain on the appreciated General partners who qualify for the Code M9. Gain eligible for section 1045 property. For property contributed after exclusion. Report the Code O2 amount rollover–stock not replaced. This gain in accordance with the instructions for box June 8, 1997, the 5-year period is is eligible for the section 1045 rollover. generally extended to 7 years. See 9, Code A1, B1, or C1, whichever applies. Replacement stock has not been section 737 for details. See Form 8873, Extraterritorial Income purchased by the partnership. The Exclusion, for more information. Code M7. Gain eligible for section 1202 partnership must also provide you with:

• Partnership claimed the exclusion. If The name of the corporation that exclusion. This gain from the sale or issued the stock, the partnership reports your distributive exchange of qualified small business • Your share of the partnership’s share of foreign trading gross receipts stock (as defined in the Instructions for adjusted basis, (Code O1) but not the amount of the Schedule D) is eligible for the partial • Your share of the partnership’s sales extraterritorial income exclusion, the section 1202 exclusion. The partnership price of the stock, and partnership met the foreign economic must also provide you with: • The dates the stock was bought and process requirements and claimed the • The name of the corporation that sold. exclusion when figuring your distributive issued the stock, share of partnership income. You also • Your share of the partnership’s Corporate partners are not eligible for may need to know the amount of your adjusted basis, the section 1045 rollover. To qualify for distributive share of foreign trading gross • Your share of the partnership’s sales the section 1045 rollover: receipts from this partnership to price of the stock, and • You must have held an interest in the determine if you met the $5 million or less • The dates the stock was bought and partnership during the entire period in exception discussed above for purposes sold. which the partnership held the qualified of qualifying for an extraterritorial income small business stock (more than 6 Corporate partners are not eligible for exclusion from other sources. months prior to the sale), the section 1202 exclusion. The following Note. Upon request, the partnership • Your distributive share of the gain additional limitations apply at the partner should furnish you a copy of the eligible for the section 1045 rollover level. partnership’s Form 8873 if there is a cannot exceed the amount that would • You must have held an interest in the reduction for international boycott have been allocated to you based on your partnership when the partnership operations, illegal bribes, kickbacks, etc. interest in the partnership at the time the acquired the qualified small business

stock and at all times thereafter until the stock was acquired, and Code P. Inversion Gain • You must purchase other qualified partnership disposed of the qualified The partnership must provide a statement small business stock (as defined in the small business stock. showing the amounts of each type of Instructions for Schedule D (Form 1040)) • Your distributive share of the eligible income or gain that is included in during the 60-day period that began on section 1202 gain cannot exceed the inversion gain. The partnership has the date the stock was sold by the amount that would have been allocated to included inversion gain in income partnership. you based on your interest in the elsewhere on Schedule K-1. Inversion

partnership at the time the stock was See the Instructions for Schedule D gain is also reported under Code P

acquired. (Form 1040) for details on how to report because your taxable income and

the gain and the amount of the allowable alternative minimum taxable income See the Instructions for Schedule D postponed gain. cannot be less than the inversion gain. (Form 1040) for details on how to report Also, your inversion gain (a) is not taken the gain and the amount of the allowable Code N. Unrecaptured Section into account in figuring the amount of net exclusion. 1250 Gain operating loss (NOL) for the tax year or

Code M8. Gain eligible for section 1045 Report this gain on line 11 of the the amount of NOL that can be carried

rollover–stock replaced. This gain is Unrecaptured Section 1250 Gain over to each tax year, (b) may limit the

eligible for the section 1045 rollover. Worksheet on page D-9 of the amount of your credits, and (c) is treated

Replacement stock has been purchased Instructions for Schedule D (Form 1040). as income from sources within the U.S.

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for the foreign tax credit. See section information you need to figure the determine if it meets the 90% qualifying

7874 for details. domestic production activities deduction. income test of section 7704(c)(2).

Use Form 8903, Domestic Production Partners are required to notify the Code Q. Commercial Revitalization Activities Deduction, to figure this partnership of their status as a publicly Deduction deduction. See the Instructions for Form traded partnership.. Follow the Instructions for Form 8582 for 8903 for details. • Any information or statements you commercial revitalization deductions from need to allow you to comply with the Code S2. Qualified Production rental real estate activities to figure how disclosure requirements under section much of the deduction can be reported on Activities Income (QPAI) 6111 and section 6662(d)(2)(B)(ii) and the Schedule E (Form 1040), line 28, column Report the QPAI reported to you by the list keeping requirements of Regulations (f). partnership (in box 9 using code S2) on section 301.6112-1. For more information, line 7 of Form 8903. see Form 8264 and Notice 2004-80, The following reporting

Code S3. Employer’s W-2 Wages 2004-50 I.R.B. 963; Notice 2005-17, requirements for codes R1 and R2 2005-8 I.R.B. 606; and Notice 2005-22, only apply for tax years beginning Report the portion of W-2 wages reported CAUTION

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2005-12 I.R.B. 756. on or after May 17, 2006. to you by the partnership (in box 9 using • The partnership will report any Codes R1 and R2. Interest code S3) on line 13 of Form 8903. information you need to complete a Deduction Limitation for Corporate Code T. Section 409A Income disclosure statement for reportable

Partners This is compensation to partners deferred transactions in which the partnership

A corporate partner is required to treat its under a section 409A nonqualified participates. If the partnership participates

distributive share of interest income, deferred compensation plan that does not in a transaction that must be disclosed on

interest expense, and partnership meet the requirements of section 409A. Form 8886, Reportable Transaction

liabilities as income, expense, and This amount is also reported in box 9 Disclosure Statement, both you and the

liabilities of the corporation for purposes using Code F. This amount is subject to a partnership may be required to file Form

of the interest deduction limitation under substantial additional tax to be reported 8886 for the transaction. The

section 163(j). The corporation’s on line 63 of Form 1040. See the determination of whether you are required

distributive share of interest income is instructions for line 63 of Form 1040 for to disclose a transaction of the

partnership is based on the category(s) reported in box 9 using code R1. Its details.

distributive share of interest expense is under which the transaction qualifies for

reported using code R2. The amounts Code U. Other Information disclosure and is determined by the

reported using code R1 and R2 are for The partnership will use Code U to report partnership. See the Instructions for Form

the following to partners. 8886 for details. information only, and are included in

amounts reported elsewhere on Schedule • The recapture of any credit (other than • Any other information you may need to

K-1. The corporation’s distributive share the low-income housing credit or file with your return not shown elsewhere

of partnership liabilities is shown in the investment credit) is reported to you as a on Schedule K-1. The partnership must

separately stated item. See the give you a description and the amount of first column of Schedule K-1.

instructions for the specific form identified your share for each of these items. Code S1. Domestic Production with the credit for more information on

Activities Information reporting the recapture.

The partnership must attach a statement • Any information a partner that is a

to Schedule K-1 that provides the publicly traded partnership may need to

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