Department of the Treasury 2003 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.

Change To Note and elections affecting partnership Sale or Exchange of income are made by the electing large Partnership Interest Under the Jobs and Growth Tax Relief partnership. For limited partners, income

Reconciliation Act of 2003, the general and other items from the partnership’s Generally, a partner who sells or

tax rates applicable to net capital gain for trade or business and rental activities are exchanges a partnership interest in a

individuals have been reduced. The new section 751(a) exchange must notify the treated as being from a trade or business

gains rates also apply to qualified partnership, in writing, within 30 days of that is a single passive activity. These dividend income under new section the exchange (or, if earlier, by January 15 items are reported in boxes 1, 3a, 3b, and 1(h)(11). The new rates apply to of the calendar year following the 5, with most credits being reported in installment payments received after May calendar year in which the exchange boxes 7 and 8. General partners must 5, 2003. Schedule K-1 has been revised occurred). A “section 751(a) exchange” is make their own determinations as to to take into account the partner’s shares any sale or exchange of a partnership whether the activities are passive for of these gains. The qualified dividends interest in which any money or other

will be reported as a separately stated them. Therefore, partnership items from property received by the partner in

trade or business, rental real estate, and exchange for that partner’s interest is item in box 9 of Schedule K-1.

other rental activities are separately attributable to unrealized receivables (as

reported for each activity in box 9. defined in section 751(c)) or inventory General Instructions items (as defined in section 751(d)). Income, etc., from other activities

(investment and portfolio income and The written notice to the partnership Purpose of Schedule K-1 deductions) are reported in boxes 2, 4a, must include the names and addresses of

The partnership uses Schedule K-1 to 4b, and 6 for both limited and general both parties to the exchange, the report your share of the partnership’s partners. identifying numbers of the transferor and

income, credits, deductions, etc. Keep it (if known) of the transferee, and the

for your records. Do not file it with exchange date.

your tax return. The partnership has filed Errors An exception to this rule is made for a copy with the IRS. You must report partnership items shown sales or exchanges of publicly traded You are liable for tax on your share of on your Schedule K-1 (and any attached partnership interests for which a broker is the partnership income, whether or not schedules) the same way that the required to file Form 1099-B, Proceeds

distributed. Include your share on your tax partnership treated the items on its return. From Broker and Barter Exchange return if a return is required. Use these Transactions. If you believe the partnership has made instructions to help you report the items an error on your Schedule K-1, notify the If a partner is required to notify the shown on Schedule K-1 on your tax partnership. Do not change any items on partnership of a section 751(a) exchange return. your copy of Schedule K-1. Generally, an but fails to do so, a $50 penalty may be The amount of loss and deduction that adjustment to correct an error will take imposed for each such failure. However, you may claim on your tax return may be effect for the tax year in which the no penalty will be imposed if the partner less than the amount reported on partnership actually makes the can show that the failure was due to Schedule K-1. It is the partner’s adjustment. However, if the error involves reasonable cause and not willful neglect. responsibility to consider and apply a change to your distributive share of a any applicable limitations. See

Limitations on Losses, Deductions, partnership item, the partnership should Nominee Reporting

and Credits beginning on page 2 for file an amended partnership return and Any person who holds, directly or

more information. send you a corrected Schedule K-1. indirectly, an interest in a partnership as a

nominee for another person must furnish

Electing Large a written statement to the partnership by If the treatment on your original or the last day of the month following the Partnerships amended return is inconsistent with the end of the partnership’s tax year. This partnership’s treatment, you may be This partnership has elected simplified statement must include the name, subject to the accuracy-related penalty. reporting requirements intended to make address, and identifying number of the This penalty is in addition to any tax that it simpler for you to report your share of nominee and such other person, results from making your amount or partnership income, credits, deductions, description of the partnership interest held treatment of the item consistent with that etc. Generally, income, capital gains, as nominee for that person, and other

credits, and deductions are combined at information required by Temporary shown on the partnership’s return. Any

the partnership level so that the number Regulations section 1.6031(c)-1T. A deficiency that results from making the

of partnership items separately reported nominee that fails to furnish this amounts consistent may be assessed

to partners is reduced. Most limitations statement must furnish to the person for immediately.

Cat. No. 26141W
whom the nominee holds the partnership Disqualified persons must report items • Money and your adjusted basis in

interest a copy of Schedule K-1 and of income, gain, loss, deduction, and property contributed to the partnership.

related information within 30 days of credit attributable to partnership oil and • Your share of the increase in the

receiving it from the partnership. gas properties as if the special rules for partnership’s liabilities (or your individual

electing large partnerships did not apply. liabilities caused by your assumption of A nominee who fails to furnish when partnership liabilities). due all the information required by Nonrecourse Loans • Your share of the partnership’s income Temporary Regulations section Nonrecourse loans are those liabilities of (including tax-exempt income). 1.6031(c)-1T, or who furnishes incorrect the partnership for which no partner bears information, is subject to a $50 penalty for Items that decrease your basis (but the economic risk of loss. each statement for which a failure occurs. not below zero) are:

The maximum penalty is $100,000 for all • Money and the adjusted basis of

such failures during a calendar year. If the Elections property distributed to you.

nominee intentionally disregards the Generally, the partnership decides how to • Your share of the decrease in the

requirement to report correct information, figure taxable income from its operations. partnership’s liabilities (or your individual

each $50 penalty increases to $100 or, if However, two elections are made by you liabilities assumed by the partnership).

greater, 10% of the aggregate amount of separately on your income tax return and • Your share of the partnership’s losses

items required to be reported, and the not by the partnership. These elections (including capital losses).

$100,000 maximum does not apply. are made under the following code • Your share of the partnership’s sections: nondeductible expenses. • Section 108(b)(5) (income from the International Boycotts Additional basis adjustments may discharge of indebtedness). Every partnership that had operations in, apply to partners claiming deductions for • Section 901 (foreign tax credit). or related to, a boycotting country, depletion. See Pub. 541 for more details. If the partnership attaches a statement company, or a national of a country must to Schedule K-1 indicating that it has At-Risk Limitations file Form 5713, International Boycott

Report. changed its tax year and that you may Generally, if you have (a) a loss or other

elect to report your distributive share of deduction from any activity carried on as If the partnership cooperated with an the income attributable to that change a trade or business or for the production international boycott, it must give you a ratably over 4 tax years, see Rev. Proc. of income by the partnership and (b) copy of its Form 5713. You must file your 2003-79, 2003-45 I.R.B. 1036, for details amounts in the activity for which you are own Form 5713 to report the partnership’s on making the election. To make the not at risk, you will have to complete activities and any other boycott election, you must file Form 8082, Notice Form 6198, At-Risk Limitations, to figure operations that you may have. You may of Inconsistent Treatment or your allowable loss. lose certain tax benefits if the partnership Administrative Adjustment Request, with The at-risk rules generally limit the participated in, or cooperated with, an your income tax return for each of the 4 amount of loss and other deductions that international boycott. See Form 5713 and tax years. File Form 8082 for this purpose you can claim to the amount you could the instructions for more information. in accordance with Rev. Proc. 2003-79 actually lose in the activity. However, if instead of the Form 8082 instructions. you acquired your partnership interest Definitions before 1987, the at-risk rules do not apply Additional Information to losses from an activity of holding real General Partner For more information on the treatment of property placed in service before 1987 by A general partner is a partner who is partnership income, credits, deductions, the partnership. The activity of holding personally liable for partnership debts. etc., see Pub. 541, Partnerships; Pub. mineral property does not qualify for this

535, Business Expenses; and Pub. 925, exception. The partnership should identify Limited Partner Passive Activity and At-Risk Rules. on an attachment to Schedule K-1 the

A limited partner is a partner in a To get forms and publications, see the amount of any losses that are not subject partnership formed under a state limited to the at-risk limitations. instructions for your tax return. partnership law, whose personal liability Generally, you are not at risk for for partnership debts is limited to the Limitations on Losses, amounts such as the following: amount of money or other property that • Nonrecourse loans used to finance the the partner contributed or is required to Deductions, and Credits activity, to acquire property used in the contribute to the partnership. Some

members of other entities, such as There are three separate potential activity, or to acquire your interest in the limitations on the amount of partnership activity, that are not secured by your own domestic or foreign business trusts or losses that you may deduct on your property (other than the property used in limited liability companies that are return. These limitations and the order in the activity). See the instructions for classified as partnerships, may be treated which you must apply them are as Partner’s Share of Liabilities on page 5 as limited partners for certain purposes. follows: the basis rules, the at-risk for the exception for qualified For example, see Temporary Regulations limitations, and the passive activity nonrecourse financing secured by real section 1.469-5T(e)(3), which treats all

members with limited liability as limited limitations. Each of these limitations is property. discussed separately below. • Cash, property, or borrowed amounts partners for purposes of section 469(h)(2) used in the activity (or contributed to the (concerning the passive loss limitation Basis Rules activity, or used to acquire your interest in rules). Generally, you may not claim your share the activity) that are protected against of a partnership loss (including a capital Disqualified Person loss by a guarantee, stop-loss agreement, loss) to the extent that it is greater than or other similar arrangement (excluding If you are a partner in a partnership the adjusted basis of your partnership casualty insurance and insurance against holding oil and gas properties, you are a interest at the end of the partnership’s tax tort liability). disqualified person if: year. • Amounts borrowed for use in the • You are an oil or natural gas retailer The partnership is not responsible for activity from a person who has an interest described in section 613A(d)(2) or crude keeping the information needed to figure in the activity, other than as a creditor, or oil refiner described in section 613A(d)(4) the basis of your partnership interest. You who is related, under section 465(b)(3), to or can figure the adjusted basis of your a person (other than you) having such an • Your average daily production of partnership interest by adding items that interest. domestic crude oil and natural gas increase your basis and then subtracting exceeds 500 barrels for your tax year in To help you complete Form 6198, the

which the partnership’s tax year ends. partnership should specify on an items that decrease your basis.

See section 776(b) for more details. Items that increase your basis are: attachment to Schedule K-1 your share of

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the total pre-1976 losses from a section 1. Trade or business activities in Corporations should refer to the

465(c)(1) activity for which there existed a which you materially participated. Instructions for Form 8810 for the material

corresponding amount of nonrecourse 2. Rental real estate activities in which participation standards that apply to them.

liability at the end of the year in which the you materially participated if you were a Individuals (other than limited losses occurred. Also, you should get a real estate professional for the tax year. partners). If you are an individual (either separate statement of income, expenses, You were a real estate professional only a general partner or a limited partner who etc., for each activity from the partnership. if you met both of the following conditions: owned a general partnership interest at all Passive Activity Limitations a. More than half of the personal times during the tax year), you materially services you performed in trades or Section 469 provides rules that limit the participated in an activity only if one or

deduction of certain losses and credits. businesses were performed in real more of the following apply: property trades or businesses in which These rules apply to partners who: 1. You participated in the activity for you materially participated and • Are individuals, estates, trusts, closely more than 500 hours during the tax year. b. You performed more than 750 held corporations, or personal service 2. Your participation in the activity for hours of services in real property trades corporations and the tax year constituted substantially all or businesses in which you materially • Have a passive activity loss or credit for the participation in the activity of all participated. the tax year. individuals (including individuals who are Note: For a closely held C corporation If you have a passive activity loss or not owners of interests in the activity for (defined in section 465(a)(1)(B)), the credit, use Form 8582, Passive Activity the tax year). above conditions are treated as met if Loss Limitations, to figure your allowable 3. You participated in the activity for more than 50% of the corporation’s gross passive losses and Form 8582-CR, more than 100 hours during the tax year, receipts were from real property trades or Passive Activity Credit Limitations, to and your participation in the activity for businesses in which the corporation figure your allowable passive credits. For the tax year was not less than the materially participated. a corporation, use Form 8810, Corporate participation in the activity of any other

Passive Activity Loss and Credit For purposes of this rule, each interest individual (including individuals who were

Limitations. See the instructions for these in rental real estate is a separate activity, not owners of interests in the activity) for

forms for more information. unless you elect to treat all interests in the tax year.

rental real estate as one activity. For 4. The activity was a significant If the publicly traded partnership details on making this election, see the participation activity for the tax year, and box on Schedule K-1 is checked, Instructions for Schedule E (Form 1040). you participated in all significant CAUTION do not report passive income

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If you are married filing jointly, either participation activities (including activities (loss) from the partnership on Form 8582. you or your spouse must separately meet outside the partnership) during the year See page 4 for the special rules for both of the above conditions, without for more than 500 hours. A significant publicly traded partnerships. taking into account services performed by participation activity is any trade or For limited partners of an electing the other spouse. business activity in which you participated large partnership, all income, loss, A for more than 100 hours during the tax real property trade or business is deductions, and credits from trade or year and in which you did not materially any real property development, business and rental activities generally participate under any of the material redevelopment, construction, are reported as being from a trade or participation tests (other than this test 4). reconstruction, acquisition, conversion, business that is a single passive activity. rental, operation, management, leasing, 5. You materially participated in the However, the determination of whether an or brokerage trade or business. Services activity for any 5 tax years (whether or not activity is a passive activity must be made you performed as an employee are not consecutive) during the 10 tax years that by any partner who is either a: immediately precede the tax year. treated as performed in a real property • General partner or trade or business unless you owned more 6. The activity was a personal service • Limited partner who is a disqualified than 5% of the stock (or more than 5% of activity and you materially participated in person (as defined on page 2) with the capital or profits interest) in the the activity for any 3 tax years (whether or respect to items of income, gain, loss, employer. not consecutive) preceding the tax year. deduction, and credit attributable to 3. Working interests in oil or gas A personal service activity involves the partnership oil and gas properties. wells. performance of personal services in the In addition, the partnership is required 4. The rental of a dwelling unit any fields of health, law, engineering, to provide each general partner and partner used for personal purposes during architecture, accounting, actuarial disqualified person the information the year for more than the greater of 14 science, performing arts, consulting, or necessary to comply with the passive days or 10% of the number of days that any other trade or business in which activity rules of section 469. Items of the residence was rented at fair rental capital is not a material income-producing income, gain, loss, credit, etc., must be value. factor.

separately reported to general partners 5. Activities of trading personal 7. Based on all the facts and

for each trade or business, rental real property for the account of owners of circumstances, you participated in the estate, and other rental activity. interests in the activities. activity on a regular, continuous, and

Note: Except for the publicly traded substantial basis during the tax year.

partnership discussion on page 4, the Material participation. You must

following information on passive activity determine if you materially participated (a) Work counted toward material

limitations applies only to general in each trade or business activity held participation. Generally, any work that partners. Limited partners who are through the partnership and (b) if you you or your spouse do in connection with disqualified persons should see Pub. 925 were a real estate professional (defined an activity held through a partnership for a complete discussion of the passive above), in each rental real estate activity (where you own your partnership interest activity rules. held through the partnership. All at the time the work is done) is counted determinations of material Generally, passive activities include: toward material participation. However, participation are made based on your work in connection with the activity is not 1. Trade or business activities in participation during the partnership’s counted toward material participation if which you did not materially participate tax year. either of the following applies. and

2. Activities that meet the definition of Material participation standards for 1. The work is not the sort of work that

rental activities under Temporary partners who are individuals are listed owners of the activity would usually do

Regulations section 1.469-1T(e)(3) and below. Special rules apply to certain and one of the principal purposes of the

Regulations section 1.469-1(e)(3). retired or disabled farmers and to the work that you or your spouse does is to

surviving spouses of farmers. See the avoid the passive loss or credit

Passive activities do not include: Instructions for Form 8582 for details. limitations.

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2. You do the work in your capacity as You are not considered to actively • The exclusion of amounts received

an investor and you are not directly participate in a rental real estate activity if under an employer’s adoption assistance

involved in the day-to-day operations of at any time during the tax year your program.

the activity. Examples of work done as an interest (including your spouse’s interest) Commercial revitalization investor that would not count toward in the activity was less than 10% (by deduction. The special $25,000 material participation include: value) of all interests in the activity. allowance for the commercial

a. Studying and reviewing financial Active participation is a less stringent revitalization deduction from rental real

statements or reports on operations of the requirement than material participation. estate activities is not subject to the active

activity. You may be treated as actively participation rules or modified adjusted

b. Preparing or compiling summaries participating if you participated, for gross income limits discussed above. See or analyses of the finances or operations example, in making management Code S—Commercial Revitalization

of the activity for your own use. decisions or arranging for others to Deduction on page 10.

c. Monitoring the finances or provide services (such as repairs) in a Special rules for certain other operations of the activity in a significant and bona fide sense. activities. If you have net income (loss), nonmanagerial capacity. Management decisions that can count as deductions, or credits from any activity to active participation include approving new which special rules apply, the partnership Effect of determination. If you tenants, deciding rental terms, approving will identify the activity and all amounts determine that you materially participated capital or repair expenditures, and other relating to it on Schedule K-1 or on an in (a) a trade or business activity of the similar decisions. attachment. partnership or (b) if you were a real estate

professional (defined on page 3) in a An estate is a qualifying estate if the If you have net income subject to

decedent would have satisfied the active recharacterization under Temporary rental real estate activity of the

partnership, report the income (loss), participation requirement for the activity Regulations section 1.469-2T(f) and

deductions, and credits from that activity for the tax year the decedent died. A Regulations section 1.469-2(f), report

as indicated in the instructions for the qualifying estate is treated as actively such amounts according to the

boxes in which those items were participating for tax years ending less Instructions for Form 8582 (or Form

than 2 years after the date of the 8810). reported. decedent’s death. If you have net income (loss), If you determine that you did not The maximum special allowance that deductions, or credits from any of the materially participate in a trade or following activities, treat such amounts as business activity of the partnership or if single individuals and married individuals nonpassive and report them as instructed you have income (loss), deductions, or filing a joint return can qualify for is in these instructions: credits from a rental activity of the $25,000. The maximum is $12,500 for

partnership (other than a rental real married individuals who file separate 1. Working interests in oil and gas

estate activity in which you materially returns and who lived apart all times wells.

participated as a real estate professional), during the year. The maximum special 2. The rental of a dwelling unit any

the amounts from that activity are allowance for which an estate can qualify partner used for personal purposes during

passive. Report passive income (losses), is $25,000 reduced by the special the year for more than the greater of 14

deductions, and credits as follows: allowance for which the surviving spouse days or 10% of the number of days that

qualifies. the residence was rented at fair rental 1. If you have an overall gain (the value. excess of income over deductions and If your modified adjusted gross income 3. Trading personal property for the losses, including any prior year unallowed (defined below) is $100,000 or less account of owners of interests in the loss) from a passive activity, report the ($50,000 or less if married filing activity. income, deductions, and losses from the separately), your loss is deductible up to activity as indicated in the instructions for the amount of the maximum special Self-charged interest. The partnership the boxes in which those items were allowance referred to in the preceding will report any “self-charged” interest reported. paragraph. If your modified adjusted income or expense that resulted from 2. If you have an overall loss (the gross income is more than $100,000 loans between you and the partnership excess of deductions and losses, (more than $50,000 if married filing (or between the partnership and another including any prior year unallowed loss, separately), the special allowance is partnership in which you have an over income) or credits from a passive limited to 50% of the difference between interest). If there was more than one activity, report the income, deductions, $150,000 ($75,000 if married filing activity, the partnership will provide a losses, and credits from all passive separately) and your modified adjusted statement allocating the interest income activities using the Instructions for Form gross income. When modified adjusted or expense with respect to each activity. 8582 or Form 8582-CR (or Form 8810), to gross income is $150,000 or more The self-charged interest rules do not see if your deductions, losses, and credits ($75,000 or more if married filing apply to your partnership interest if the are limited under the passive activity separately), there is no special allowance. partnership made an election under rules. Modified adjusted gross income Regulations section 1.469-7(g) to avoid is the application of these rules. See the your adjusted gross income figured Special allowance for rental real estate without taking into account: Instructions for Form 8582 for more

activities. If you actively participated in a information. • Any passive activity loss. rental real estate activity, you may be • Any rental real estate loss allowed Publicly traded partnerships. The able to deduct up to $25,000 of the loss under section 469(c)(7) to real estate passive activity limitations are applied from the activity from nonpassive income. professionals (as defined on page 3). separately for items (other than the This “special allowance” is an exception • Any taxable social security or low-income housing credit and the to the general rule disallowing losses in equivalent railroad retirement benefits. rehabilitation credit) from each publicly excess of income from passive activities. • Any deductible contributions to an IRA traded partnership (PTP). Thus, a net The special allowance is not available if or certain other qualified retirement plans passive loss from a PTP may not be you were married, file a separate return under section 219. deducted from other passive income. for the year, and did not live apart from • The student loan interest deduction. Instead, a passive loss from a PTP is your spouse at all times during the year. • The tuition and fees deduction. suspended and carried forward to be

Only individuals and qualifying estates • The deduction for one-half of applied against passive income from the

can actively participate in a rental real self-employment taxes. same PTP in later years. If the partner’s

estate activity. Estates (other than • The exclusion from income of interest entire interest in the PTP is completely

qualifying estates), trusts, and from Series EE and I U.S. Savings Bonds disposed of, any unused losses are

corporations cannot actively participate. used to pay higher education expenses. allowed in full in the year of disposition.

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If you have an overall gain from a PTP, Carry forward to 2004 the unallowed loss reflect the share that existed immediately

the net gain is nonpassive income. In of $4,800 ($12,000 − $7,200). before the total disposition. A partner’s

addition, the nonpassive income is If you have unallowed losses from “other liability” is any partnership liability

included in investment income to figure more than one activity of the PTP or from for which a partner is personally liable.

your investment interest expense the same activity of the PTP that must be Use the total of the three amounts for

deduction. reported on different forms, you must computing the adjusted basis of your

allocate the unallowed losses on a pro partnership interest. Do not report passive income, gains, rata basis to figure the amount allowed Generally, you may use only the or losses from a PTP on Form 8582. from each activity or on each form. amounts shown next to “Qualified Instead, use the following rules to figure nonrecourse financing” and “Other” to and report on the proper form or schedule To allocate and keep a record of compute your amount at risk. Do not your income, gains, and losses from the unallowed losses, use

Worksheets 5, 6, and 7 of Form include any amounts that are not at risk if passive activities that you held through

TIP

such amounts are included in either of each PTP you owned during the tax year. 8582. List each activity of the PTP in

Worksheet 5. Enter the overall loss from these categories. 1. Combine any current year income, each activity in column (a). Complete If your partnership is engaged in two or gains and losses, and any prior year column (b) of Worksheet 5 according to more different types of activities subject to unallowed losses to see if you have an the at-risk provisions, or a combination of its instructions. Multiply the total overall gain or loss from the PTP. Include unallowed loss from the PTP by each at-risk activities and any other activity, the only the same types of income and losses partnership should give you a statement ratio in column (b) and enter the result in you would include in your net income or column (c) of Worksheet 5. Then, showing your share of nonrecourse loss from a non-PTP passive activity. See complete Worksheet 6 if all the loss from liabilities, partnership-level qualified Pub. 925 for more details. nonrecourse financing, and other the same activity is to be reported on one 2. If you have an overall gain, the net liabilities for each activity. form or schedule. Use Worksheet 7 gain portion (total gain minus total losses) instead of Worksheet 6 if you have more Qualified nonrecourse financing is nonpassive income. On the form or than one loss to be reported on different secured by real property used in an schedule you normally use, report the net forms or schedules for the same activity. activity of holding real property that is gain portion as nonpassive income and Enter the net loss plus any prior year subject to the at-risk rules is treated as an the remaining income and the total losses unallowed losses in column (a) of amount at risk. Qualified nonrecourse as passive income and loss. To the left of Worksheet 6 (or Worksheet 7 if financing generally includes financing for the entry space, write “From PTP.” It is applicable). The losses in column (c) of which no one is personally liable for important to identify the nonpassive Worksheet 6 (column (e) of Worksheet 7) repayment that is borrowed for use in an income because the nonpassive portion is are the allowed losses to report on the activity of holding real property and that is included in modified adjusted gross forms or schedules. Report both these loaned or guaranteed by a Federal, state, income for purposes of figuring on Form losses and any income from the PTP on or local government or borrowed from a 8582 the “special allowance” for active the forms and schedules you normally “qualified” person. participation in a non-PTP rental real use. Qualified persons include any persons estate activity. In addition, the nonpassive 4. If you have an overall loss and you actively and regularly engaged in the income is included in investment income disposed of your entire interest in the PTP business of lending money, such as a when figuring your investment interest to an unrelated person in a fully taxable bank or savings and loan association. expense deduction on Form 4952, transaction during the year, your losses Qualified persons generally do not Investment Interest Expense Deduction. (including prior year unallowed losses) include related parties (unless the Example. If you have Schedule E allocable to the activity for the year are nonrecourse financing is commercially income of $8,000, and a Form 4797 prior not limited by the passive loss rules. A reasonable and on substantially the same year unallowed loss of $3,500 from the fully taxable transaction is one in which terms as loans involving unrelated passive activities of a particular PTP, you you recognize all your realized gain or persons), the seller of the property, or a have a $4,500 overall gain ($8,000 − loss. Report the income and losses on the person who receives a fee for the $3,500). On Schedule E, Part II, report forms and schedules you normally use. partnership’s investment in the real the $4,500 net gain as nonpassive property. Note: For rules on the disposition of an income in column (j). In column (g), report See Pub. 925 for more information on entire interest reported using the the remaining Schedule E gain of $3,500 qualified nonrecourse financing. installment method, see the Instructions ($8,000 − $4,500). On the appropriate line for Form 8582. Both the partnership and you must of Form 4797, report the prior year meet the qualified nonrecourse rules on unallowed loss of $3,500. Be sure to write this debt before you can include the “From PTP” to the left of each entry amount shown next to “Qualified space. Specific Instructions nonrecourse financing” in your at-risk 3. If you have an overall loss (but did computation. not dispose of your entire interest in the Publicly Traded See Limitations on Losses, PTP to an unrelated person in a fully Deductions, and Credits beginning on taxable transaction during the year), the Partnership page 2 for more information on the at-risk losses are allowed to the extent of the If the “publicly traded partnership” box is limitations. income, and the excess loss is carried checked, you are a partner in a publicly forward to use in a future year when you traded partnership and must follow the Tax Shelter Registration have income to offset it. Report as a rules starting on page 4 under Publicly passive loss on the schedule or form you traded partnerships. Number

normally use the portion of the loss equal If the partnership is a registration-required to the income. Report the income as Partner’s Share of tax shelter or has invested in a passive income on the form or schedule registration-required tax shelter, it should you normally use. Liabilities have entered a tax shelter registration

Example. You have a Schedule E loss The partnership will show your share of number in this box. If you claim or report of $12,000 (current year losses plus prior the partnership’s nonrecourse liabilities, any income, loss, deduction, or credit

year unallowed losses) and a Schedule D partnership-level qualified nonrecourse from a tax shelter, you must attach Form

gain of $7,200. Report the $7,200 gain on financing, and other liabilities as of the 8271, Investor Reporting of Tax Shelter

the appropriate line of Schedule D. On end of the partnership’s tax year. If you Registration Number, to your tax return. If

Schedule E, Part II, report $7,200 of the terminated your interest in the partnership the partnership has invested in a tax

losses as a passive loss in column (f). during the tax year, the amounts should shelter, it must give you a copy of its

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Form 8271 with your Schedule K-1. Use Part II, column (g). However, if the Box 5. Net Passive AMT

the information on this Form 8271 to publicly traded partnership box is Adjustment complete your Form 8271. checked, report the income following the Limited partners only. Use the amount If the partnership itself is a rules for Publicly traded partnerships

starting on page 4. reported in box 5 (as well as your registration-required tax shelter, use the • If a loss is reported in box 1, follow the adjustments and tax preference items information on Schedule K-1 (name of the Instructions for Form 8582 to figure how from other sources) to prepare your Form partnership, partnership identifying

number, and tax shelter registration much of the loss can be reported on 6251, Alternative Minimum Tax—

Schedule E, Part II, column (f). However, Individuals; Form 4626, Alternative number) to complete your Form 8271. Minimum Tax—Corporations; or if the publicly traded partnership box is

checked, report the loss following the Schedule I of Form 1041, U.S. Income Boxes 1 Through 9 rules for Publicly traded partnerships Tax Return for Estates and Trusts. The

The amounts shown in boxes 1 through 9 starting on page 4. adjustment is treated as being from a reflect your share of income, loss, credits, trade or business that is a single passive deductions, etc., from the partnership. Box 2. Taxable Income (Loss) activity. These amounts do not take into From Other Activities Individuals should enter the amount on consideration the following limitations: The amount reported in box 2 is your line 18 of Form 6251, where it is taken 1. The adjusted basis of your share of the income from other activities. into account with adjustments and partnership interest, It is not subject to the passive activity preferences from other passive activities. 2. The amount for which you are at limitations. Report the amount in box 2 as risk, or Box 6. Net Other AMT follows: 3. The passive activity limitations. Adjustment • If the amount in box 2 is income, report

it on Schedule E, Part II, column (j). Individual general and limited partners For information on these provisions, • If the amount in box 2 is a loss, report it should enter the amount from box 6 on see Limitations on Losses, on Schedule E, Part II, column (h). line 15 of Form 6251. Deductions, and Credits beginning on

page 2. Box 3a. Total Net Capital Gain Box 7. General Credits

If you are an individual, the following Limited partners only. Enter the amount (Loss) From Passive Activities instructions will tell you how to report the from box 7 on line 1r of Form 3800, amounts shown in the boxes. If you are Limited partners only. The net capital General Business Credit. Because

not an individual, report the amounts in gain (loss) for the entire year, reported in general credits are treated as being from the boxes as instructed on your tax box 3a, is treated as being from a trade or a trade or business that is a single return. business that is a single passive activity. passive activity, you must also include the

The line numbers in these instructions box 7 amount on line 3 of Form 3800. If a net capital gain is reported in box 3a,

are references to forms in use for report the gain on Schedule D (Form

calendar year 2003. If you file your tax 1040), line 12, column (f). If a loss is Box 8. Low-Income Housing

reported in box 3a, report the loss Credit return on a calendar year basis, but your following the Form 8582 instructions to partnership files a return for a fiscal year, Limited partners only. Enter the amount figure how much of the loss can be enter the amounts shown in the boxes on from box 8 on line 5 of Form 8586, reported on Schedule D, line 12, column your tax return for the year in which the Low-Income Housing Credit. This credit is (f). However, if the publicly traded partnership’s fiscal year ends. For for property placed in service after 1989 partnership box is checked, report the example, if the partnership’s tax year and is treated as being from a single loss following the rules for Publicly ends in February 2004, report the passive activity. traded partnerships starting on page 4. amounts in the boxes on your 2004 tax Box 9. Other return. Box 3b. Post-May 5, 2003, Gain If you have losses, deductions, or (Loss) From Passive Activities Codes A Through C credits from a prior year that were not General partners in an electing large deductible or usable because of certain Limited partners only. The post-May 5, partnership must separately account for limitations, such as the basis rules or the 2003, gain (loss), reported in box 3b, is any items attributable to passive loss at-risk limitations, take them into account treated as being from a trade or business limitation activities to the extent in determining your net income, loss, or that is a single passive activity. If a net necessary to comply with the section 469 credits for this year. However, except for capital gain is reported in box 3b, report passive loss rules. Therefore, the passive activity losses and credits, do not the gain on Schedule D (Form 1040), line partnership is required to report income combine the prior-year amounts with any 12, column (g). If a loss is reported in box (loss), capital gain (loss), 28% rate gain amounts shown on this Schedule K-1 to 3b, report the loss following the Form (loss), credits, and the alternative get a net figure to report on any 8582 instructions to figure how much of minimum tax adjustment separately for all supporting schedules, statements, or the loss can be reported on Schedule D, trade or business activities, rental real forms attached to your return. Instead, line 12, column (g). However, if the estate activities, and rental activities other report the amounts separately on the publicly traded partnership box is than rental real estate. attached schedule, statement, or form on checked, report the loss following the

a year-by-year basis. rules for Publicly traded partnerships Code A1. General partner’s taxable

starting on page 4. income (loss) from trade or business If you have amounts other than those activities. Report Code A1 income (loss) shown on Schedule K-1 to report on Box 4a. Total Net Capital Gain from partnership trade or business Schedule E (Form 1040), enter each item (Loss) From Other Activities activities in which you materially on a separate line of Part II of Schedule

Net capital gain (loss) for the entire year participated on Schedule E, Part II, E. column (h) or (j). See the instructions from other activities is not subject to the Box 1. Taxable Income (Loss) beginning on page 3 to determine passive activity limitations. Report the From Passive Activities whether you materially participated in a gain (loss) on Schedule D (Form 1040), trade or business activity. Limited partners only. The amount line 12, column (f).

reported in box 1 is treated as being from Report Code A1 income (loss) from

a trade or business that is a single Box 4b. Post-May 5, 2003, Gain partnership trade or business activities in

passive activity. Report this amount as (Loss) From Other Activities which you did not materially participate as

follows: follows: Report the post-May 5, 2003, gain (loss)

• If income is reported in box 1, report from other activities on Schedule D (Form 1. Report income on Schedule E, Part

the income on Schedule E (Form 1040), 1040), line 12, column (g). II, column (g). However, if the publicly

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traded partnership box on Schedule K-1 a passive activity, complete Form income on Schedule E, Part II, column

is checked, report the income following 8582-CR (or Form 8810 for corporations) (g). However, if the publicly traded

the rules for Publicly traded to figure how much of the credit is partnership box is checked, report the

partnerships starting on page 4. allowable. Enter the allowable amount on income following the rules for Publicly

2. Report a loss following the line 52 of Form 1040 or line 6c of traded partnerships starting on page 4.

Instructions for Form 8582 to figure how Schedule J, Form 1120.

much of the loss can be reported on Code B2. General partner’s net capital

Schedule E, Part II, column (f). However, Code A7. General partner’s alternative gain (loss) from rental real estate minimum tax adjustment from trade or activities (for the entire year). The net if the publicly traded partnership box is business activities. An AMT capital gain (loss) from a rental real estate checked, report the loss following the adjustment must be reported on line 15 of activity is a passive activity amount rules for Publicly traded partnerships Form 6251. However, if the AMT unless you were a real estate starting on page 4. adjustment is from a passive activity, it professional (defined on page 3) and you

Code A2. General partner’s net capital must be taken into account on line 18 with materially participated in the activity. If the adjustments and preferences from other gain (loss) from trade or business amount is either (a) a loss that is not from passive activities instead of being activities (for the entire year). If you did a passive activity or (b) a gain, report it on

not materially participate in the trade or reported on line 15. Schedule D (Form 1040), line 12, column

business activity, the net capital gain Code B1. General partner’s taxable (f). If the amount is a loss from a passive

(loss) is a passive activity amount. If the income (loss) from rental real estate activity, report it following the Instructions

amount is either (a) a loss that is not from activities. Generally, the income (loss) for Form 8582 to figure how much of the

a passive activity or (b) a gain, report it on reported in box 9, Code B1, is a passive loss can be reported on Schedule D, line

Schedule D (Form 1040), line 12, column activity amount for all general partners. 12, column (f). However, if the publicly

(f). If the amount is a loss from a passive However, the income (loss) in box 9 is not traded partnership box is checked, report

activity, report it following the Instructions from a passive activity if you were a real the loss following the rules for Publicly

for Form 8582 to figure how much of the estate professional (defined on page 3) traded partnerships starting on page 4.

loss can be reported on Schedule D, line and you materially participated in the Code B3. General partner’s post-May 12, column (f). However, if the publicly activity. 5, 2003, net capital gain (loss) from traded partnership box is checked, report rental real estate. Report this amount on Use the following instructions to the loss following the rules for Publicly Schedule D, line 12, column (g). If a loss determine where to enter the Code B1 traded partnerships starting on page 4. is reported, follow the Instructions for amount: Code A3. General partner’s post-May Form 8582, to figure how much of the 1. If you have a loss from a passive 5, 2003, net capital gain (loss) from loss can be reported on Schedule D. activity in box 9, Code B1, and you meet trade or business activities. Report this Code B4. General partner’s 28% rate all of the following conditions, enter the amount on Schedule D (Form 1040), line gain (loss) from rental real estate loss on Schedule E (Form 1040), Part II, 12, column (g). If a loss is reported, follow column (f): activities. The 28% rate gain (loss) from the Instructions for Form 8582, to figure a rental real estate activity is a passive how much of the loss can be reported on a. You actively participated in the activity amount unless you were a real Schedule D. partnership rental real estate activities. estate professional (defined on page 3) See Special allowance for rental real Code A4. General partner’s 28% rate and you materially participated in the estate activities on page 4. gain (loss) from trade or business activity. If the amount is either (a) a loss b. Rental real estate activities with activities. If you did not materially that is not from a passive activity or (b) a active participation were your only participate in the trade or business gain, report it on Schedule D (Form passive activities. activity, the 28% rate gain (loss) is a 1040), line 12, column (g). If the amount c. You have no prior year unallowed passive activity amount. If the amount is is a loss from a passive activity, report it losses from these activities. either (a) a loss that is not from a passive following the Instructions for Form 8582 to d. Your total loss from the rental real activity or (b) a gain, include it on line 4 of figure how much of the loss can be estate activities was not more than the 28% Rate Gain Worksheet on page reported on Schedule D, line 12, column $25,000 (not more than $12,500 if D-8 of the Instructions for Schedule D (g). However, if the publicly traded married filing separately and you lived (Form 1040). If the amount is a loss from partnership box is checked, report the apart from your spouse all year). a passive activity, report it following the loss following the rules for Publicly e. If you are a married person filing Instructions for Form 8582 to figure how traded partnerships starting on page 4. separately, you lived apart from your much of the loss can be included on line 4 Code B5. General partner’s general spouse all year. of the 28% Rate Gain Worksheet on credits from rental real estate f. You have no current or prior year page D-8 of the Instructions for Schedule activities. Report the general credits on unallowed credits from a passive activity. D (Form 1040). However, if the publicly line 1r of Form 3800. Unless you were a g. Your modified adjusted gross traded partnership box is checked, report real estate professional and materially income was not more than $100,000 (not the loss following the rules for Publicly participated in the rental real estate more than $50,000 if married filing traded partnerships starting on page 4. activity, you must also include the general separately and you lived apart from your Code A5. General partner’s general credits on line 3 of Form 3800. spouse all year). credits from trade or business 2. If you have a loss from a passive Code B6. General partner’s

activities. Report the general credits on activity in box 9 and you do not low-income housing credit (for meet all

line 1r of Form 3800. If you did not property placed in service after 1989) the conditions in 1 above, report the loss materially participate in the trade or from rental real estate activities. following the Instructions for Form 8582 to business activity, you must also include Report the low-income housing credit for figure how much of the loss you can the general credits on line 3 of Form report on Schedule E (Form 1040), Part property placed in service after 1989 on

3800. II, column (f). However, if the publicly line 5 of Form 8586. Unless you were a

Code A6. General partner’s traded partnership box is checked, report real estate professional and materially

nonconventional source fuel credit the loss following the rules for Publicly participated in the rental real estate

from trade or business activities. traded partnerships starting on page 4. activity, the low-income housing credit is

Report the credit for producing fuel from a 3. a passive activity credit. If you were a real estate

nonconventional source on line 52 of professional and you materially Code B7. General partner’s

Form 1040 or line 6c of Schedule J, Form participated in the activity, report box 9 rehabilitation credit from rental real

1120. If you did not materially participate income (loss) on Schedule E (Form estate activities. Report the

in the trade or business activity, the 1040), Part II, column (h) or (j). rehabilitation credit on line 1e of Form

nonconventional source fuel credit is a 4. If you have income from a passive 3468, Investment Credit. Unless you were

passive activity credit. If the credit is from activity in box 9, Code B1, enter the a real estate professional and materially

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participated in the rental real estate and preferences from other passive For a discharge of indebtedness not

activity, the credit is a passive activity activities instead of being reported on line described above, you must include this

credit, and you must also file Form 3800. 15. amount in income on Schedule E, Part II,

Code B8. General partner’s alternative column (g) or (j). Code D. Qualified Dividends minimum tax adjustment from rental Report this amount on line 9b of Form Code I. Tax-Exempt Interest real estate activities. An AMT 1040. Income adjustment must be reported on line 15 of

Form 6251. However, if the AMT Note: Qualified dividends are excluded You must report on your return, as an

adjustment is from a passive activity, it from investment income, but you may item of information, your share of the

must be taken into account on line 18 with elect to include part or all of these tax-exempt interest received or accrued

other passive activities instead of being amounts in investment income. See the by the partnership during the year.

instructions for line 4g of Form 4952, Individual partners must include this reported on line 15. Investment Interest Expense Deduction, amount on Form 1040, line 8b. Increase Code C1. General partner’s taxable for important information on making this the adjusted basis of your interest in the income (loss) from other rental election. partnership by this amount. activities. Income (loss) reported in box

9, Code C1, is a passive activity amount Code E. Limited Partner’s 28% Code J. Limited Partner’s

for all general partners. Report a loss Rate Gain (Loss) From Passive Rehabilitation Credit From Rental

following the Instructions for Form 8582. Activities Real Estate Activities Report income on Schedule E (Form Limited partners only. The 28% rate Limited partners only. Report the 1040), Part II, column (g). However, if the

box for publicly traded partnerships is gain (loss) is treated as being from a rehabilitation credit on line 1e of Form

trade or business that is a single passive 3468. Because the credit is treated as checked, report the income (loss) activity. If a gain is reported, include it on being from a single passive activity, you following the rules for Publicly traded must also file Form 3800. partnerships line 4 of the 28% Rate Gain Worksheet starting on page 4. on page D-8 of the Instructions for Code C2. General partner’s net capital Code K. Limited Partner’s Schedule D (Form 1040). If a loss is gain (loss) from other rental activities. Nonconventional Source Fuel reported, report the loss following the The net capital gain (loss) from other Credit Instructions for Form 8582 to figure how rental activities is a passive activity much of the loss can be included on line 4 Limited partners only. The amount for all general partners. Report of the 28% Rate Gain Worksheet on nonconventional source fuel credit is the gain on Schedule D (Form 1040), line page D-8 of the Instructions for Schedule treated as being from a single passive 12, column (f). Report a loss following the D (Form 1040). However, if the publicly activity. Complete Form 8582-CR (or Instructions for Form 8582 to figure how traded partnership box is checked, report Form 8810 for corporations) to figure how much of the loss can be reported on the loss following the rules for Publicly much of the credit is allowable. Enter the Schedule D, line 12, column (f). However, traded partnerships starting on page 4. allowable amount on line 52 of Form 1040 if the publicly traded partnership box is or line 6c of Schedule J, Form 1120. checked, report the loss following the Code F. Limited Partner’s 28%

rules for Publicly traded partnerships Rate Gain (Loss) From Other Codes L1 and L2. Self-Employment starting on page 4. Activities Code L1. Net earnings (loss) from Code C3. General partner’s post-May The 28% gain (loss) from other activities self-employment. Enter this amount on 5, 2003, net capital gain (loss) from is not subject to the passive activity Schedule SE (Form 1040), line 2, Section other rental activities. Report this limitations. Include it on line 4 of the 28% A or B, whichever is applicable. General amount on Schedule D, line 12, column Rate Gain Worksheet on page D-8 of the partners should reduce this amount by (g). If a loss is reported, follow the Instructions for Schedule D (Form 1040). unreimbursed partnership expenses Instructions for Form 8582 to figure how Code G. Guaranteed Payments claimed. General partners who are much of the loss can be reported on disqualified persons also should reduce Schedule D. Generally, these amounts are not passive this amount by depletion claimed on oil income, and you should report them on Code C4. General partner’s 28% rate and gas properties. If this amount is a Schedule E (Form 1040), Part II, column gain (loss) from other rental activities. loss, enter only the deductible amount on (j) (e.g., guaranteed payments for The 28% rate gain (loss) from other rental Schedule SE. For purposes of personal services). activities is a passive activity amount for self-employment tax, no income from an all general partners. Report a gain on Code H. Income From Discharge of electing large partnership is treated as Schedule D (Form 1040), line 12, column farming or fishing income. Indebtedness

(g). Report a loss following the The amount reported under Code H is Code L2. Gross nonfarm income. If Instructions for Form 8582 to figure how excluded from your gross income to the you are an individual partner, use this much of the loss can be reported on extent provided in section 108 if the amount to figure net earnings from Schedule D, line 12, column (g). discharge: self-employment under the nonfarm However, if the publicly traded 1. Occurred in a title 11 case relating optional method on Schedule SE (Form partnership box is checked, report the 1040), Section B, Part II. to bankruptcy, loss following the rules for Publicly 2. Occurred when you were insolvent, traded partnerships starting on page 4. Codes M1 Through M9. Foreign 3. Involved qualified farm Code C5. General partner’s general Tax Credit Information indebtedness, as defined in section credits from other rental activities. 108(g), or Use the information reported under Report the general credits on line 1r of 4. Codes M1 through M9 to figure your Involved qualified real property Form 3800. Because general credits from business indebtedness, as defined in foreign tax credit. For more information, other rental activities are passive activity section 108(c)(3), unless the partner is a see Form 1116, Foreign Tax Credit credits for all general partners, you must C corporation. (Individual, Estate, Trust, or Nonresident also include the general credits on line 3 Alien Individual) and its instructions; of Form 3800. This amount is applied, instead, to Form 1118, Foreign Tax Credit—

Code C6. General partner’s alternative reduce certain tax attributes. File Form Corporations, and its instructions; and

minimum tax adjustment from other 982, Reduction of Tax Attributes Due to Pub. 514, Foreign Tax Credit for

rental activities. An AMT adjustment Discharge of Indebtedness, to explain Individuals. See page 5 of the Instructions

must be reported on line 15 of Form why any amount received from the for Form 1116 for detailed instructions for

6251. However, if the AMT adjustment is discharge of indebtedness should be reporting foreign tax information from

from a passive activity, it must be taken excluded and to report your reduction of partnerships. Note: The line references in

into account on line 18 with adjustments tax attributes. this section of the Form 1116 instructions

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do not apply to the Schedule K-1 of Form general limitation foreign source the distribution, the excess is treated as

1065-B. income. gain from the sale or exchange of your

Code M1. Name of foreign country or Code M8(a). Total foreign taxes paid. partnership interest. Generally, this gain

U.S. possession. Include on Form 1116, Include this amount in Part II of Form is treated as gain from the sale of a

Part I, item l. For each country reported, 1116. capital asset and should be reported on

the Schedule D for your return. However, the partnership must give you the amount Code M8(b). Total foreign taxes and a description of your share of the the gain may be ordinary income. For accrued. Include this amount in Part II of details, see Pub. 541. following items for Codes M2 through M9. Form 1116.

For each country or possession being Code M9. Reduction in taxes available The partnership will separately identify reported, a separate column in Part I and for credit. Enter this amount on line 12 both of the following: a separate line in Part II is needed on of Form 1116. • The fair market value of the marketable

Form 1116. securities when distributed (minus your Code N. Oil and Gas Activities Code M2. Gross income from all share of the gain on the securities

sources. Enter this amount on line 3e of Generally, oil and gas income, distributed to you).

Form 1116. deductions, credits, and other items are • The partnership’s adjusted basis of

Code M3. Gross income sourced at included in your distributive share of those securities immediately before the income or loss from passive loss distribution. partner level. Although all this income limitation activities, general credits, and reported has been apportioned to foreign Decrease the adjusted basis of your the alternative minimum tax adjustment. source categories of income, you must interest in the partnership (but not below However, distributive shares of all oil and nevertheless determine whether the zero) by the amount of cash distributed to gas income, deductions, credits, and income being reported is U.S. source you and the partnership’s adjusted basis other items are separately reported to income or foreign source income. See of the distributed securities. Advances or partners who are disqualified persons page 5 of the Instructions for Form 1116 drawings of money or property against (defined on page 2) in accordance with for the rules to source the income your distributive share are treated as the regular partnership rules, here or on reported to you. Enter only foreign source current distributions made on the last day an attached schedule. income on lines 1 and 3d of Form(s) of the partnership’s tax year. 1116. A separate Form 1116 or 1118 is A partner must notify the partnership of

its status as a disqualified person. Your basis in the distributed required for each foreign source category marketable securities (other than in of income. Do not include income that you Codes O1 Through O9. liquidation of your interest) is the smaller determined to be U.S. source income. Miscellaneous of: Codes M4(a) Through M4(c). Foreign Code O1. Other tax-exempt income. • The partnership’s adjusted basis in the gross income sourced at partnership Increase the adjusted basis of your securities immediately before the level. The following types of income have interest in the partnership by the amount distribution increased by any gain already been sourced for you by the shown in box 9, Code O1, but do not recognized on the distribution of the partnership. Include these amounts on securities or include it in income on your tax return. lines 1 and 3d of the applicable Forms • The adjusted basis of your partnership 1116 (i.e., the Forms 1116 for each Code O2. Nondeductible expenses. interest reduced by any cash distributed category of income provided to you). The nondeductible expenses paid or in the same transaction and increased by • Code M4(a). Passive foreign source incurred by the partnership are not any gain recognized on the distribution of income. deductible on your tax return. Decrease the securities. • Code M4(b). Listed foreign the adjusted basis of your interest in the

categories of income. partnership by this amount. If you received the securities in

• Code M4(c). General limitation Code O3. Unrelated business taxable liquidation of your partnership interest,

foreign source income. income. The partnership will give you your basis in the marketable securities is

any information you need to figure equal to the adjusted basis of your Code M5. Interest expense allocated unrelated business taxable income under partnership interest reduced by any cash and apportioned at the partner level. section 512(a)(1) (but excluding any distributed in the same transaction and Include this amount on line 4b of the

modifications required by paragraphs (8) increased by any gain recognized on the applicable Forms 1116. Do not include distribution of the securities. any interest expense allocated and through (15) of section 512(b)) for a

apportioned to U.S. source income. partner that is a tax-exempt organization. If, within 5 years of a distribution to you

Code M6. Other expenses allocated Reminder: A partner is required to notify of marketable securities, you contributed

and apportioned at the partner level. the partnership of its tax-exempt status. appreciated property (other than those

securities) to the partnership and the fair Include this amount on line 2 of the Code O4. Health insurance. Any

applicable Forms 1116. Do not include amounts paid during the tax year for market value of those securities

any expenses allocated and apportioned exceeded the adjusted basis of your insurance that constitutes medical care

to U.S. source income on any line of Part for you, your spouse, and your partnership interest immediately before

I of Form 1116. dependents. On line 29 of your 2003 the distribution (reduced by any cash

Form 1040, you may be allowed to deduct received in the distribution), you may Codes M7(a) Through Codes M7(c). up to 100% of such amounts, even if you have to recognize gain on the appreciated Deductions allocated and apportioned do not itemize deductions. If you do property. For property contributed after at partnership level to foreign source itemize deductions, enter on line 1 of June 8, 1997, the 5-year period is income. The following codes report the Schedule A (Form 1040) any amounts not generally extended to 7 years. See expenses allocated and apportioned by deducted on line 29 of Form 1040. section 737 for details. the partnership to foreign source

categories of income. Include these Code O5. Distributions of money (cash Code O6. Distributions of property

amounts on line 2 of the applicable Forms and marketable securities). Box 9, other than money. Box 9, Code O6,

1116 (i.e., the Forms 1116 for each Code O5, shows the distributions the shows the partnership’s adjusted basis of

category of income provided to you). partnership made to you of cash and property other than money immediately

• Code M7(a). Deductions allocated certain marketable securities. The before the property was distributed to

and apportioned at partnership level to marketable securities are included at their you. In addition, the partnership will

passive foreign source income. fair market value on the date of attach a statement showing the cost basis

• Code M7(b). Deductions allocated distribution (minus your share of the and fair market value of each property

and apportioned at partnership level to partnership’s gain on the securities distributed. Decrease the adjusted basis

listed foreign categories of income. distributed to you). If the amount shown of your interest in the partnership by the

• Code M7(c). Deductions allocated here exceeds the adjusted basis of your amount of your basis in the distributed

and apportioned at partnership level to partnership interest immediately before property. Your basis in the distributed

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property (other than in liquidation of your which the partnership held the qualified foreign trading gross receipts from all

interest) is the smaller of: small business stock (more than 6 sources for the tax year also must have

• The partnership’s adjusted basis months prior to the sale) and been $5 million or less. See Form 8873,

immediately before the distribution or 2. Your distributive share of the gain Extraterritorial Income Exclusion, for more

• The adjusted basis of your partnership eligible for the section 1045 rollover information. If you qualify for the

interest reduced by any cash distributed cannot exceed the amount that would exclusion, limited partners must report the

in the same transaction. have been allocated to you based on your extraterritorial exclusion amount (Code

interest in the partnership at the time the Q2) as a deduction reducing the amount If you received the property in

liquidation of your interest, your basis in stock was acquired. reported in box 1 (see the box 1

the distributed property is equal to the instructions on page 6). General partners

adjusted basis of your partnership interest See the Instructions for Schedule D who qualify for the exclusion must report (Form 1040) for details on how to report reduced by any cash distributed in the the Code Q2 amount in accordance with

same transaction. the gain and the amount of the allowable the instructions for box 9, Code A1, B1, or postponed gain. C1, whichever applies. If you contributed appreciated property Code O9. Gain eligible for section 1045 b. Partnership claimed the exclusion. If to the partnership within 5 years of a rollover–stock not replaced. This gain the partnership reports your distributive distribution of other property to you, and is eligible for the section 1045 rollover. share of foreign trading gross receipts the fair market value of the other property Replacement stock has not been (Code Q1) but not the amount of the exceeded the adjusted basis of your purchased by the partnership. The extraterritorial income exclusion, the partnership interest immediately before partnership should also give you the partnership met the foreign economic the distribution (reduced by any cash name of the corporation that issued the process requirements and claimed the received in the distribution), you may stock, your share of the partnership’s exclusion when figuring your distributive have to recognize gain on the appreciated adjusted basis and sales price of the share of partnership income. You also property. For property contributed after stock, and the dates the stock was bought may need to know the amount of your June 8, 1997, the 5-year period is and sold. Corporate partners are not distributive share of foreign trading gross generally extended to 7 years. See eligible for the section 1045 rollover. To receipts from this partnership to section 737 for details. qualify for the section 1045 rollover: determine if you met the $5 million or less Code O7. Gain eligible for section 1202 1. You must have held an interest in exception discussed above for purposes exclusion. This gain from the sale or the partnership during the entire period in of qualifying for an extraterritorial income exchange of qualified small business which the partnership held the qualified exclusion from other sources. stock (as defined in the Instructions for

Schedule D) is eligible for the partial small business stock (more than 6 Note: Upon request, the partnership months prior to the sale), should furnish you a copy of the section 1202 exclusion. The partnership 2. Your distributive share of the gain partnership’s Form 8873 if there is a should also give you the name of the eligible for the section 1045 rollover reduction for international boycott corporation that issued the stock, your cannot exceed the amount that would operations, illegal bribes, kickbacks, etc. share of the partnership’s adjusted basis have been allocated to you based on your and sales price of the stock, and the interest in the partnership at the time the Code R. Qualified 5-year Gain dates the stock was bought and sold. stock was acquired, and Report the qualified 5-year gain on line 5 Corporate partners are not eligible for the 3. You must purchase other qualified of the Qualified 5-year Gain Worksheet section 1202 exclusion. The following small business stock (as defined in the for Schedule D (Form 1040), line 35. additional limitations apply at the partner Instructions for Schedule D (Form 1040)) level: Code S. Commercial Revitalization during the 60-day period that began on 1. You must have held an interest in Deduction the date the stock was sold by the the partnership when the partnership partnership. Follow the instructions on Form 8582 for

acquired the qualified small business commercial revitalization deductions from

stock and at all times thereafter until the See the Instructions for Schedule D rental real estate activities to figure how partnership disposed of the qualified (Form 1040) for details on how to report much of the deduction can be reported on small business stock. the gain and the amount of the allowable Schedule E, Part II, column (f).

2. Your distributive share of the postponed gain. Disclosure of Reportable eligible section 1202 gain cannot exceed Code P. Unrecaptured Section Transactions the amount that would have been 1250 Gain allocated to you based on your interest in The partnership will report any

the partnership at the time the stock was Report this gain on line 11 of the information you need to disclose

acquired. Unrecaptured Section 1250 Gain information on certain reportable Worksheet on page D-7 of the transactions in which the partnership See the Instructions for Schedule D Instructions for Schedule D (Form 1040). participates. If the partnership participates (Form 1040) for details on how to report Do not report the gain on line 5 as stated in a transaction that must be disclosed on

the gain and the amount of the allowable in the worksheet instructions. Form 8886, Reportable Transaction exclusion. Codes Q1 and Q2. Extraterritorial Disclosure Statement, both the

Code O8. Gain eligible for section 1045 partnership and its partners may be Income Exclusion rollover–stock replaced. This gain is required to file Form 8886 for the

eligible for the section 1045 rollover. a. Partnership did not claim the transaction. The determination of whether

Replacement stock has been purchased exclusion. If the partnership reports your you are required to disclose a partnership

by the partnership. The partnership distributive share of foreign trading gross transaction is based on the category(s)

should also give you the name of the receipts (Code Q1) and the extraterritorial under which the transaction qualified for

corporation that issued the stock, your income exclusion (Code Q2), the disclosure. See the Instructions for Form

share of the partnership’s adjusted basis partnership was not entitled to claim the 8886 for details.

and sales price of the stock, and the exclusion because it did not meet the Other dates the stock was bought and sold. foreign economic process requirements.

Corporate partners are not eligible for the You may qualify for your distributive share Any other information you may need to

of this exclusion because the file with your return not shown elsewhere section 1045 rollover. To qualify for the

partnership’s foreign trading gross on Schedule K-1. The partnership should section 1045 rollover: give you a description and the amount of receipts for the tax year were $5 million or 1. You must have held an interest in your share for each of these items. less. To qualify for this exclusion, your the partnership during the entire period in

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