us internal revenue service: i1065b--1999

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1999 Department of the TreasuryInternal Revenue ServiceInstructions for Form1065-BU.S. Return of Income for Electing Large PartnershipsSection references are to the Internal Revenue Code unless otherwise noted.

Paperwork Reduction Act Notice. We ask for the information on this form to carryout the Internal Revenue laws of the United States. You are required to give us theinformation. We need it to ensure that you are complying with these laws and to allowus to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subjectto the Paperwork Reduction Act unless the form displays a valid OMB control number.Books or records relating to a form or its instructions must be retained as long as theircontents may become material in the administration of any Internal Revenue law.Generally, tax returns and return information are confidential, as required by section6103.

The time needed to complete and file this form and related schedules will varydepending on individual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates orsuggestions for making these forms simpler, we would be happy to hear from you. Youcan write to the Tax Forms Committee, Western Area Distribution Center, RanchoCordova, CA 95743-0001. DO NOT send the tax form to this address. Instead, seeWhere To File on page 3.

Changes To Note

The Tax Relief Extension Act of 1999changed the definition of a capital asset,modified the treatment of gains fromconstructive ownership transactions,repealed the use of the installmentmethod for certain taxpayers, and limitedthe use of the nonaccrual experiencemethod of accounting. See Pub. 553,Highlights of 1999 Tax Changes, fordetails on these and other changes.

Photographs of MissingChildren

The Internal Revenue Service is a proudpartner with the National Center forMissing and Exploited Children.Photographs of missing children selectedby the Center may appear in instructionson pages that would otherwise be blank.You can help bring these children homeby looking at the photographs and calling1-800-THE-LOST (1-800-843-5678) if yourecognize a child.

Contents Page

Specific Instructions . . . . . . . 11

General Information . . . . . . . . 11

Part ITaxable Income or LossFrom Passive Loss LimitationActivities . . . . . . . . . . . . 12

Part IITaxable Income or LossFrom Other Activities . . . . . . 16

Schedule ACost of Goods Sold 17

Schedule BOther Information . . 17

Schedule DCapital Gains andLosses . . . . . . . . . . . . . 18

Form RecordkeepingLearning about the

law or the form Preparing the form

Copying,assembling,

and sending theform

to the IRS

Schedules K and K-1Partners'Shares of Income, Credits,Deductions, etc. . . . . . . . . 20

Specific Instructions for SchedulesK and K-1 . . . . . . . . . . . . 21

1065-B 45 hr., 21 min. 18 hr., 56 min. 29 hr., 57 min. 2 hr., 41 min.

Schedule D(Form 1065-B) 13 hr., 9 min. 2 hr., 5 min. 2 hr., 23 min. Analysis of Net Income (Loss) . . 28Schedule K-1(Form 1065-B) 9 hr., 5 min. 7 hr., 26 min. 11 hr., 38 min. Schedule LBalance Sheets . . . 28

Schedule M-1Reconciliation ofIncome (Loss) per Books WithIncome (Loss) per Return . . . 29

Schedule L(Form 1065-B) 15 hr., 47 min. 12 min. 28 min.

Schedule M-1(Form 1065-B) 3 hr., 21 min. 12 min. 16 min. Schedule M-2Analysis of Partners'

Capital Accounts . . . . . . . . 29Schedule M-2(Form 1065-B) 2 hr., 52 min. 6 min. 9 min.

Codes for Principal Business Activityand Principal Product or Service 30

Contents PageContents PageAdministrative Adjustment Requests 5Changes To Note . . . . . . . . . . 1Other Forms That May Be Required 5Photographs of Missing Children . . 1Attachments . . . . . . . . . . . . 6Unresolved Tax Problems . . . . . 2Overview . . . . . . . . . . . . . 6

How To Get Forms and Publications 2Separately Stated Items . . . . . 6

General Instructions . . . . . . . . 2Limitations . . . . . . . . . . . . 7

Purpose of Form . . . . . . . . . 2 Elections Made by the Partnership 7Electing Large Partnership Status 2Elections Made by Each Partner . 7

Definitions . . . . . . . . . . . . . 2Partner's Dealings With Partnership 7

Termination of the Partnership . . 3Contributions to the Partnership . 7

When To File . . . . . . . . . . . 3Dispositions of Contributed Property 7

Where To File . . . . . . . . . . . 3Recognition of Precontribution Gain

on Certain Partnership Distributions 8Who Must Sign . . . . . . . . . . 3

Interest and Penalties . . . . . . . 3 Unrealized Receivables and InventoryItems . . . . . . . . . . . . . . 8Accounting Methods . . . . . . . 4

Accounting Periods . . . . . . . . 4 Activities of Electing LargePartnerships . . . . . . . . . . 8Rounding Off to Whole Dollars . . 5

Special Reporting Requirements . 9Recordkeeping . . . . . . . . . . 5

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Unresolved Tax Problems

Most problems can be resolved with onecontact by calling, writing, or visiting anIRS office. But if the partnership has triedunsuccessfully to resolve a problem withthe IRS, it should contact the TaxpayerAdvocate's office. The partnership will beassigned a personal advocate who is inthe best position to try to resolve theproblem.

Contact the Taxpayer Advocate if thepartnership:q Is suffering or about to suffer asignificant hardship.q Is facing an immediate threat ofadverse action.q Will incur significant costs if relief is notgranted (including fees for professionalrepresentation).q Will suffer irreparable injury orlong-term adverse impact if relief is notgranted.q Has experienced a delay of more than30 calendar days to resolve a tax problemor inquiry.

q Has not received a response orresolution to the problem by the datepromised.

The partnership may contact aTaxpayer Advocate by calling a toll-freeassistance number,1-877-777-4778.Persons who have access to TTY/TDDequipment may call 1-800-829-4059 andask for the Taxpayer Advocate. If thepartnership prefers, it may write to theTaxpayer Advocate at the IRS office thatlast contacted the partnership.

While Taxpayer Advocates cannotchange the tax law or make a technicaltax decision, they can clear up problems

that resulted from previous contacts andensure that the partnership's case is givena complete and impartial review. Formore information about the TaxpayerAdvocate, see Pub. 1546, The TaxpayerAdvocate Service of the IRS.

How To Get Forms andPublications

Personal Computer

You can access the IRS's Internet WebSite 24 hours a day, 7 days a week atwww.irs.gov to:q

Download forms, instructions, andpublications.q See answers to frequently asked taxquestions.q Search publications on-line by topic orkeyword.q Send us comments or request help bye-mail.q Sign up to receive local and national taxnews by e-mail.

You can also reach us using filetransfer protocol at ftp.irs.gov.

CD-ROM

Order Pub. 1796, Federal Tax Productson CD-ROM, and get:q Current year forms, instructions, andpublications.q Prior year forms, instructions, andpublications.q Popular tax forms that may be filled inelectronically, printed out for submission,and saved for recordkeeping.q

The Internal Revenue Bulletin.Buy the CD-ROM on the Internet at

www.irs.gov/cdorders from the NationalTechnical Information Service (NTIS) for$16 (plus a $5 handling fee) and save30%, or call 1-877-CDFORMS(1-877-233-6767) toll free to buy theCD-ROM for $23 (plus a $5 handling fee).

By Phone and In Person

You can order forms and publications 24hours a day, 7 days a week, by calling1-800-TAX-FORM (1-800-829-3676). Youcan also get most forms and publicationsat your local IRS office.

General Instructions

Purpose of Form

Form 1065-B is an information returnused to report the income, deductions,gains, losses, etc., from the operation ofan electing large partnership (as definedin section 775). An electing largepartnership may be required to paycertain taxes, such as recapture of theinvestment credit, but generally it passesthrough any profits or losses to itspartners. Partners must include thesepartnership items on their tax returns.

A regular partnership is required toseparately report to each partner thepartner's distributive share of any item ofincome, gain, loss, deduction, or creditthat if separately taken into account byany partner would result in an income taxliability for that partner different from thatwhich would result if the item was nottaken into account separately. Unlike aregular partnership, an electing largepartnership combines most items at thepartnership level and passes through netamounts to partners. These electing large

partnership rules override the regularpartnership tax rules to the extent they areinconsistent with the regular partnershiptax rules.

Electing Large PartnershipStatus

A partnership chooses electing largepartnership status by filing Form 1065-Binstead of Form 1065. The electionapplies to the tax year for which it was

made and all later tax years and cannotbe revoked without IRS consent.

To make the election, the partnershipmust have had 100 or more partnersduring the preceding tax year. Thus, apartnership cannot make the election forits first tax year. The number of partnersis determined by counting only personsdirectly holding partnership interests,including persons holding throughnominees. Service partners are not

counted as partners for this purpose.Service partners are those partners whoperform substantial services in connectionwith the partnership's activities or whohave performed such services in the past.

Service partnerships are not eligible tomake the election if substantially all of thepartners are:q Individuals performing substantialservices in connection with thepartnership's activities.q Personal service corporations with theowner-employees performing theservices.q Retired partners who had performed the

services.q Spouses of partners performing or whohad performed the services.

In addition, commodity partnerships arenot eligible to make the election.Commodity partnerships have as theirprincipal activity the buying and selling ofcommodities (other than inventorydescribed in section 1221(a)(1)) oroptions, futures, or forwards relating tocommodities.

Once a partnership has made anelection by filing Form 1065-B, thistreatment on the return will bind thepartnership and all of its partners. The

IRS, however, is not bound by thetreatment on the return. To the extentprovided in future regulations, apartnership may cease to be treated asan electing large partnership for a tax yearin which the number of its partners fallsbelow 100.

Definitions

Partnership

A partnership is the relationship betweentwo or more persons who join to carry ona trade or business, with each personcontributing money, property, labor, or

skill and each expecting to share in theprofits and losses of the business whetheror not a formal partnership agreement ismade.

The term partnership includes alimited partnership, syndicate, group,pool, joint venture, or otherunincorporated organization, through orby which any business, financialoperation, or venture is carried on, that isnot, within the meaning of the regulations

Page 2 Instructions for Form 1065-B


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under section 7701, a corporation, trust,estate, or sole proprietorship.

General Partner

A general partner is a partner who ispersonally liable for partnership debts.

General Partnership

A general partnership is composed onlyof general partners.

Limited Partner

A limited partner is a partner in apartnership formed under a state limitedpartnership law, whose personal liabilityfor partnership debts is limited to theamount of money or other property thatthe partner contributed or is required tocontribute to the partnership. Somemembers of other entities, such asdomestic or foreign business trusts orlimited liability companies that areclassified as partnerships, may be treatedas limited partners for certain purposes.See, for example, Temporary Regulationssection 1.469-5T(e)(3), which treats allmembers with limited liability as limited

partners for purposes of section469(h)(2).

Limited Partnership

A limited partnership is formed under astate limited partnership law andcomposed of at least one general partnerand one or more limited partners.

Limited Liability Partnership

A limited liability partnership (LLP) isformed under a state limited liabilitypartnership law. Generally, a partner inan LLP is not personally liable for thedebts of the LLP or any other partner, nor

is a partner liable for the acts or omissionsof any other partner, solely by reason ofbeing a partner.

Limited Liability Company

A limited liability company (LLC) is anentity formed under state law by filingarticles of organization as an LLC. Unlikea partnership, none of the members of anLLC are personally liable for its debts. AnLLC may be classified for Federal incometax purposes either as a partnership, acorporation, or an entity disregarded asan entity separate from its owner byapplying the rules in Regulations section

301.7701-3. See Form 8832, EntityClassification Election, for more details.

Nonrecourse Loans

Nonrecourse loans are those liabilities ofthe partnership for which no partner bearsthe economic risk of loss.

Termination of thePartnership

An electing large partnership terminateswhen all its operations are discontinuedand no part of any business, financial

operation, or venture is continued by anyof its partners in a partnership. Unlikeother partnerships, an electing largepartnership does not terminate on the saleor exchange of 50% or more of thepartnership interests within a 12-monthperiod.

The partnership's tax year ends on thedate of termination which is the date thepartnership winds up its affairs.

Special rules apply in the case of a

merger, consolidation, or division of apartnership. See Regulations section1.708-1(b)(2) for details.

When To File

Generally, a domestic partnership mustfile Form 1065-B by the 15th day of the4th month following the date its tax yearended as shown at the top of Form1065-B. A partnership whose partners areall nonresident aliens must file its returnby the 15th day of the 6th month followingthe date its tax year ended. If the due datefalls on a Saturday, Sunday, or legalholiday, file on the next business day.

Caution: Unlike regular partnerships, anelecting large partnership is required tofurnish Schedules K-1 to its partners bythe first March 15 following the close ofthe partnership's tax year.

Private Delivery Services

You can use certain private deliveryservices designated by the IRS to meetthe timely mailing as timely filing/payingrule for Form 1065-B. The most recent listof designated private delivery serviceswas published by the IRS in August 1999.The list includes only the following:q Airborne Express (Airborne): Overnight

Air Express Service, Next AfternoonService, Second Day Service.q DHL Worldwide Express (DHL): DHLSame Day Service, DHL USAOvernight.q Federal Express (FedEx): FedExPriority Overnight, FedEx StandardOvernight, FedEx 2Day.q United Parcel Service (UPS): UPS NextDay Air, UPS Next Day Air Saver, UPS2nd Day Air, UPS 2nd Day Air A.M.

The private delivery service can tell youhow to get written proof of the mailingdate.

ExtensionIf you need more time to file a partnershipreturn, file Form 8736, Application forAutomatic Extension of Time To File U.S.Return for a Partnership, REMIC, or forCertain Trusts, for an automatic 3-monthextension. File Form 8736 by the regulardue date of the partnership return.

If, after you have filed Form 8736, youstill need more time to file the partnershipreturn, file Form 8800, Application forAdditional Extension of Time To File U.S.Return for a Partnership, REMIC, or for

Certain Trusts, for an additional extensionof up to 3 months. The partnership mustshow reasonable cause to get thisadditional extension. Form 8800 must befiled by the extended due date of thepartnership return.

Period Covered

Form 1065-B is an information return forcalendar year 1999 and fiscal yearsbeginning in 1999 and ending in 2000. Ifthe return is for a fiscal year or a short taxyear, fill in the tax year space at the topof the form.

Where To File

Note: For 1999, Form 1065-B cannot befiled electronically or on magnetic media.

File Form 1065-B with the InternalRevenue Service Center, Andover, MA05501.

Who Must Sign

General Partner or LLC Member

Form 1065-B is not considered to be areturn unless it is signed. One generalpartner or LLC member must sign thereturn. If a receiver, trustee in bankruptcy,or assignee controls the organization'sproperty or business, that person mustsign the return.

Paid Preparer's Information

If someone prepares the return and doesnot charge the partnership, that personshould not sign the partnership return.

Generally, anyone who is paid toprepare the partnership return must:q Sign the return, by hand, in the spaceprovided for the preparer's signature.Signature stamps or labels are notacceptable.q Fill in the other blanks in the PaidPreparer's Use Only area of the return.q Give the partnership a copy of thereturn in addition to the copy to be filedwith the IRS.

Interest and Penalties

Interest

Interest is charged on taxes not paid bythe due date, even if an extension of timeto file is granted. Interest is also charged

from the due date (including extensions)to the date of payment on the failure to filepenalty, the accuracy-related penalty, andthe fraud penalty. The interest charge isfigured at a rate determined under section6621.

Late Filing of Return

A penalty is assessed against thepartnership if it is required to file apartnership return and it (a) fails to file thereturn by the due date, includingextensions, or (b) files a return that fails

Instructions for Form 1065-B Page 3


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to show all the information required,unless such failure is due to reasonablecause. If the failure is due to reasonablecause, attach an explanation to thepartnership return. If no tax is due, thepenalty is $50 for each month or part ofa month (for a maximum of 5 months) thefailure continues, multiplied by the totalnumber of persons who were partners inthe partnership during any part of thepartnership's tax year for which the returnis due. If tax is due, the penalty is theamount stated above plus 5% of theunpaid tax for each month or part of amonth the return is late, up to a maximumof 25% of the unpaid tax. If the return ismore than 60 days late, the minimumpenalty is $100 or the balance of the taxdue on the return, whichever is smaller.

Late Payment of Tax

A partnership that does not pay the taxwhen due generally may have to pay apenalty of 1/2 of 1% a month or part of amonth, up to a maximum of 25%, for eachmonth the tax is not paid. The penalty isimposed on the net amount due. The

penalty will not be imposed if thepartnership can show that failure to payon time was due to reasonable cause.

Failure To Furnish InformationTimely

For each failure to furnish Schedule K-1to a partner when due and each failure toinclude on Schedule K-1 all theinformation required to be shown (or theinclusion of incorrect information), a $50penalty may be imposed with respect toeach Schedule K-1 for which a failureoccurs. The maximum penalty is$100,000 for all such failures during a

calendar year. If the requirement to reportcorrect information is intentionallydisregarded, each $50 penalty isincreased to $100 or, if greater, 10% ofthe aggregate amount of items requiredto be reported, and the $100,000maximum does not apply.

Trust Fund Recovery Penalty

This penalty may apply if certain excise,income, social security, and Medicaretaxes that must be collected or withheldare not collected or withheld, or thesetaxes are not paid. These taxes aregenerally reported on:q

Form 720, Quarterly Federal ExciseTax Return;q Form 941, Employer's QuarterlyFederal Tax Return;q Form 943, Employer's Annual TaxReturn for Agricultural Employees; orq Form 945, Annual Return of WithheldFederal Income Tax.

The trust fund recovery penalty may beimposed on all persons who aredetermined by the IRS to have beenresponsible for collecting, accounting for,

and paying over these taxes, and whoacted willfully in not doing so. The penaltyis equal to the unpaid trust fund tax. Seethe instructions for Form 720; Pub. 15,Circular E, Employer's Tax Guide; or Pub.51, Circular A, Agricultural Employer'sTax Guide, for more details, including thedefinition of a responsible person.

Accounting Methods

Figure ordinary income using the method

of accounting regularly used in keepingthe partnership's books and records.Generally, permissible methods includethe cash method, the accrual method, orany other method authorized by theInternal Revenue Code. In all cases, themethod used must clearly reflect income.

Generally, a partnership may not usethe cash method of accounting if (a) it hasat least one corporate partner, averageannual gross receipts of more than $5million, and it is not a farming businessor (b) it is a tax shelter (as defined insection 448(d)(3)). See section 448 fordetails.

Under the accrual method, an amountis includible in income when all the eventshave occurred that fix the right to receivethe income and the amount can bedetermined with reasonable accuracy.

Generally, an accrual basis taxpayercan deduct accrued expenses in the taxyear in which:q All events that determine liability haveoccurred,q The amount of the liability can befigured with reasonable accuracy, andq Economic performance takes place withrespect to the expense. There areexceptions for certain items, including

recurring expenses.Except for certain home construction

contracts and other real property smallconstruction contracts, long-termcontracts must generally be accounted forusing the percentage of completionmethod described in section 460.

Generally, the partnership may changeits method of accounting used to reportincome (for income as a whole or for anymaterial item) only by getting consent onForm 3115, Application for Change inAccounting Method. For more information,see Pub. 538, Accounting Periods andMethods.

Mark-to-Market Accounting Methodfor Dealers in Securities

Generally, dealers in securities must usethe mark-to-market accounting methoddescribed in section 475. Under thismethod, any security that is inventory tothe dealer must be included in inventoryat its fair market value (FMV). Anysecurity that is not inventory and that isheld at the close of the tax year is treatedas sold at its FMV on the last business

day of the tax year, and any gain or lossmust be taken into account in determininggross income. The gain or loss taken intoaccount is generally treated as ordinarygain or loss. For details, includingexceptions, see section 475 and therelated regulations.

Dealers in commodities, and traders insecurities and commodities may elect touse the mark-to-market accountingmethod. To make the election for tax

years beginning after 1998, thepartnership must file a statementdescribing the election, the first tax yearthe election is to be effective, and, in thecase of an election for traders in securitiesor commodities, the trade or business forwhich the election is made. The statementmust be filed by the due date (notincluding extensions) of the partnershipreturn for the tax year immediatelypreceding the election year and attachedto that return, or if applicable, to a requestfor an extension of time to file that return.For more details, see Rev. Proc. 99-17,1999-7 I.R.B. 52, and sections 475(e) and(f).

Accounting Periods

A partnership is generally required tohave one of the following tax years:

1. The tax year of a majority of itspartners (majority tax year).

2. If there is no majority tax year, thenthe tax year common to all of thepartnership's principal partners (partnerswith an interest of 5% or more in thepartnership profits or capital).

3. If there is neither a majority tax yearnor a tax year common to all principalpartners, then the tax year that results in

the least aggregate deferral of income.4. Some other tax year, if:

q The partnership can establish that thereis a business purpose for the tax year(see Rev. Proc. 87-32, 1987-2 C.B. 396);orq The tax year is a grandfathered year(see Rev. Proc. 87-32); orq The partnership elects under section444 to have a tax year other than arequired tax year by filing Form 8716,Election to Have a Tax Year Other Thana Required Tax Year. For a partnershipto have this election in effect, it mustmake the payments required by section

7519 and file Form 8752, RequiredPayment or Refund Under Section 7519.

A section 444 election ends if apartnership changes its accounting periodto its required tax year or some otherpermitted year or it is penalized forwillfully failing to comply with therequirements of section 7519. If thetermination results in a short tax year,type or legibly print at the top of the firstpage of Form 1065-B for the short taxyear, SECTION 444 ELECTIONTERMINATED.



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To change an accounting period, seePub. 538 and Form 1128, Application ToAdopt, Change, or Retain a Tax Year(unless the partnership is making anelection under section 444).

Note: Under the provisions of section584(h), the tax year of a common trustfund must be the calendar year.

Rounding Off to WholeDollars

You may round off cents to whole dollarson your return and accompanyingschedules. To do so, drop amounts under50 cents and increase amounts from 50to 99 cents to the next higher dollar.

Recordkeeping

The partnership must keep its records aslong as they may be needed for theadministration of any provision of theInternal Revenue Code. The partnershipusually must keep records that supportan item of income, deduction, or credit onthe partnership return for 3 years from the

date the return is due or is filed,whichever is later. It also must keeprecords that verify its basis in property foras long as they are needed to figure thebasis of the original or replacementproperty.

The partnership should also keepcopies of all returns it has filed. They helpin preparing future returns and in makingcomputations when filing an amendedreturn.

Administrative AdjustmentRequests

To correct an error on a Form 1065-Balready filed, file Form 8082, Notice ofInconsistent Treatment or AdministrativeAdjustment Request (AAR). Generally,an adjustment to a partnership itemrequested on Form 8082 will flow throughto the partners and be taken into accountin determining the amount of the sameitem for the partnership tax year in whichthe IRS allows the adjustment. If theincome, deductions, credits, or otherinformation provided to any partner onSchedule K-1 are incorrect under section704 in the partner's distributive share ofany partnership item shown on Form1065-B, file an amended Schedule K-1

(Form 1065-B) for that partner with theForm 8082. Also give a copy of theamended Schedule K-1 to that partner.

A change to the partnership's Federalreturn may affect its state return. Thisincludes changes made as a result of anexamination of the partnership return bythe IRS. For more information, contactthe state tax agency for the state in whichthe partnership return is filed.

Other Forms That May BeRequired

q Forms W-2 and W-3, Wage and TaxStatement; and Transmittal of Wage andTax Statements.q Form 720, Quarterly Federal ExciseTax Return. Use Form 720 to reportenvironmental excise taxes,communications and air transportationtaxes, fuel taxes, luxury tax on passenger

vehicles, manufacturers' taxes, shippassenger tax, and certain other excisetaxes.

Caution: SeeTrust Fund RecoveryPenaltyon page 4.q Form 926, Return by a U.S. Transferorof Property to a Foreign Corporation. Usethis form to report certain informationrequired under section 6038B.q Form 940 or Form 940-EZ, Employer'sAnnual Federal Unemployment (FUTA)Tax Return. The partnership may be liablefor FUTA tax and may have to file Form940 or 940-EZ if it paid wages of $1,500or more in any calendar quarter during the

calendar year (or the preceding calendaryear) or one or more employees workedfor the partnership for some part of a dayin any 20 different weeks during thecalendar year (or the preceding calendaryear).q Form 941, Employer's QuarterlyFederal Tax Return. Employers must filethis form quarterly to report income taxwithheld on wages and employer andemployee social security and Medicaretaxes. Agricultural employers must fileForm 943, Employer's Annual Tax Returnfor Agricultural Employees, instead ofForm 941, to report income tax withheld

and employer and employee socialsecurity and Medicare taxes onfarmworkers.

Caution: SeeTrust Fund RecoveryPenaltyon page 4.q Form 945, Annual Return of WithheldFederal Income Tax. Use this form toreport income tax withheld fromnonpayroll payments, including pensions,annuities, IRAs, gambling winnings, andbackup withholding.

Caution: SeeTrust Fund RecoveryPenaltyon page 4.q Forms 1042 and 1042-S, AnnualWithholding Tax Return for U.S. Source

Income of Foreign Persons; and ForeignPerson's U.S. Source Income Subject toWithholding. Use these forms to reportand send withheld tax on payments ordistributions made to nonresident alienindividuals, foreign partnerships, orforeign corporations to the extent suchpayments or distributions constitute grossincome from sources within the UnitedStates that is not effectively connectedwith a U.S. trade or business. A domesticpartnership must also withhold tax on aforeign partner's distributive share of such

income, including amounts that are notactually distributed. Withholding onamounts not previously distributed to aforeign partner must be made and paidover by the earlier of (a) the date on whichSchedule K-1 is sent to that partner or (b)the 15th day of the 3rd month after theend of the partnership's tax year. Formore information, see sections 1441 and1442 and Pub. 515, Withholding of Taxon Nonresident Aliens and ForeignCorporations.q Form 1096, Annual Summary andTransmittal of U.S. Information Returns.q Form 1098, Mortgage InterestStatement. Use this form to report thereceipt from any individual of $600 ormore of mortgage interest and points inthe course of the partnership's trade orbusiness for any calendar year.q Forms 1099-A, B, INT, LTC, MSA,MISC, OID, R, and S. You may have tofile these information returns to reportacquisitions or abandonments of securedproperty; proceeds from broker and barterexchange transactions; interestpayments; payments of long-term careand accelerated death benefits;miscellaneous income payments;distributions from a medical savingsaccount; original issue discount;distributions from pensions, annuities,retirement or profit-sharing plans, IRAs,insurance contracts, etc.; and proceedsfrom real estate transactions. Also, usecertain of these returns to report amountsthat were received as a nominee onbehalf of another person.

For more information, see theInstructions for Forms 1099, 1098, 5498,and W-2G.

Important: Every partnership must fileForms 1099-MISC if, in the course of itstrade or business, it makes payments ofrents, commissions, or other fixed ordeterminable income (see section 6041)totaling $600 or more to any one personduring the calendar year.

q Form 5471, Information Return of U.S.Persons With Respect to Certain ForeignCorporations. A partnership may have tofile Form 5471 if it (a) controls a foreigncorporation; or (b) acquires, disposes of,or owns 5% or more in value of theoutstanding stock of a foreign corporation;or (c) owns stock in a corporation that isa controlled foreign corporation for anuninterrupted period of 30 days or moreduring any tax year of the foreigncorporation, and it owned that stock onthe last day of that year.q Form 5713, International BoycottReport, is used by persons havingoperations in, or related to, a boycottingcountry, company, or national of acountry, to report those operations andfigure the loss of certain tax benefits. Thepartnership must give each partner a copyof the Form 5713 filed by the partnership



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if there has been participation in, orcooperation with, an international boycott.q Form 8264, Application for Registrationof a Tax Shelter. Tax shelter organizersmust file Form 8264 to get a tax shelterregistration number from the IRS.q Form 8271, Investor Reporting of TaxShelter Registration Number.Partnerships that have acquired aninterest in a tax shelter that is required tobe registered use Form 8271 to report the

tax shelter's registration number. AttachForm 8271 to any return on which adeduction, credit, loss, or other tax benefitattributable to a tax shelter is taken or anyincome attributable to a tax shelter isreported.q Form 8275, Disclosure Statement. FileForm 8275 to disclose items or positions,except those contrary to a regulation, thatare not otherwise adequately disclosedon a tax return. The disclosure is madeto avoid the parts of the accuracy-relatedpenalty imposed for disregard of rules orsubstantial understatement of tax. Form8275 is also used for disclosures relatingto preparer penalties for understatementsdue to unrealistic positions or disregardof rules.q Form 8275-R, Regulation DisclosureStatement, is used to disclose any itemon a tax return for which a position hasbeen taken that is contrary to Treasuryregulations.q Forms 8288 and 8288-A, U.S.Withholding Tax Return for Dispositionsby Foreign Persons of U.S. Real PropertyInterests; and Statement of Withholdingon Dispositions by Foreign Persons ofU.S. Real Property Interests. Use theseforms to report and send withheld tax onthe sale of U.S. real property by a foreignperson. See section 1445 and the relatedregulations for additional information.q Form 8300, Report of Cash PaymentsOver $10,000 Received in a Trade orBusiness. File this form to report thereceipt of more than $10,000 in cash orforeign currency in one transaction or aseries of related transactions.q Form 8594, Asset AcquisitionStatement. Both the purchaser and sellerof a group of assets constituting a tradeor business must file this form if section197 intangibles attach, or could attach, tosuch assets and if the purchaser's basisin the assets is determined only by theamount paid for the assets.q Form 8697, Interest ComputationUnder the Look-Back Method forCompleted Long-Term Contracts.Partnerships that are not closely held usethis form to figure the interest due or tobe refunded under the look-back methodof section 460(b)(2) on certain long-termcontracts that are accounted for undereither the percentage ofcompletion-capitalized cost method or thepercentage of completion method.

q Forms 8804, 8805, and 8813, AnnualReturn for Partnership Withholding Tax(Section 1446); Foreign Partner'sInformation Statement of Section 1446Withholding Tax; and PartnershipWithholding Tax Payment (Section 1446).File Forms 8804 and 8805 if thepartnership had effectively connectedgross income and foreign partners for thetax year. Use Form 8813 to sendinstallment payments of withheld taxbased on effectively connected taxableincome allocable to foreign partners.

Exception: Publicly traded partnershipsthat do not elect to pay tax based oneffectively connected taxable income donot file these forms. They must insteadwithhold tax on distributions to foreignpartners and report and send paymentsusing Forms 1042 and 1042-S. Seesection 1446 for more information.q Form 8832, Entity ClassificationElection. Except for a business entityautomatically classified as a corporation,a business entity with at least twomembers may choose to be classifiedeither as a partnership or an associationtaxable as a corporation. A domesticeligible entity with at least two membersthat does not file Form 8832 is classifiedunder the default rules as a partnership.However, a foreign eligible entity with atleast two members is classified under thedefault rules as a partnership only if atleast one member does not have limitedliability. File Form 8832 only if the entitydoes not want to be classified under thesedefault rules or if it wants to change itsclassification.q Form 8865, Return of U.S. Person WithRespect to Certain Foreign Partnerships.A domestic partnership that contributed

property after August 5, 1997, to a foreignpartnership in exchange for a partnershipinterest may have to file Form 8865 if: (a)immediately after the contribution, thepartnership owned, directly or indirectly,at least a 10% interest in the foreignpartnership; or (b) the FMV of theproperty you contributed to the foreignpartnership in exchange for a partnershipinterest, when added to othercontributions of property made to thepartnership during the preceding12-month period, exceeds $100,000.Also, the domestic partnership may haveto file Form 8865 to report certain

dispositions by a foreign partnership ofproperty it previously contributed to thatpartnership if it was a partner at the timeof the disposition. For more details,including penalties that may apply, seeForm 8865 and its separate instructions.q Form 8866, Interest ComputationUnder the Look-Back Method for PropertyDepreciated Under the Income ForecastMethod. Partnerships that are not closelyheld use this form to figure the interestdue or to be refunded under the look-backmethod of section 167(g)(2) for certain

property placed in service afterSeptember 13, 1995, depreciated underthe income forecast method.

Attachments

Attach schedules in alphabetical orderand other forms in numerical order afterForm 1065-B.

To assist us in processing the return,complete every applicable entry space onForm 1065-B and Schedule K-1. If you

attach statements, do not write Seeattached instead of completing theentry spaces on the forms. Penaltiesmay be assessed if the partnershipfiles an incomplete return.

If you need more space on the formsor schedules, attach separate sheets. Usethe same size and format as on theprinted forms. But show your totals onthe printed forms. Be sure to put thepartnership's name and employeridentification number (EIN) on each sheet.

Overview

The taxable income of an electing largepartnership is computed in the samemanner as that of an individual, exceptthat the items described below areseparately stated and certainmodifications are made. Thesemodifications include not allowing thededuction for personal exemptions, thenet operating loss deduction, and certainitemized deductions. Other itemizeddeductions are modified.

The netting of capital gains and lossesoccurs at the partnership level. Such netcapital gain (loss) is treated as long-termcapital gain (loss). Any excess of netshort-term capital gain over net long-termcapital loss is consolidated with thepartnership's other taxable income and isnot separately reported.

General credits are separately reportedto partners as a single item. They aretaken into account by partners as acurrent year general business credit.General credits are those credits that arenot separately reported. The refundablecredit for Federal tax paid on fuels and therefund or credit for tax paid onundistributed capital gains of a regulatedinvestment company or a real estateinvestment trust are taken by thepartnership and thus are not separately

reported to partners. The partnership alsorecaptures the investment credit andlow-income housing credit.

Separately Stated Items

Partners must take into accountseparately (under section 772(a)) theirdistributive shares of the following items(whether or not they are actuallydistributed):q Taxable income or loss from passiveloss limitation activities.



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q Taxable income or loss from otheractivities (e.g., portfolio income or loss).q Net capital gain or loss allocable topassive loss limitation activities.q Net capital gain or loss allocable toother activities.q 28% rate gain or loss allocable topassive loss limitation activities.q 28% rate gain or loss allocable to otheractivities.q Tax-exempt interest.q Net alternative minimum tax (AMT)adjustment separately computed forpassive loss limitation activities.q Net AMT adjustment separatelycomputed for other activities.q General credits.q Low-income housing credit.q Rehabilitation credit from rental realestate activities.q Credit for producing fuel from anonconventional source.q Creditable foreign taxes and foreignsource items.q Other items of income, gain, loss,deduction, or credit, to the extent the IRSdetermines separate treatment isappropriate. Examples of such itemsinclude gains on sales of qualified smallbusiness stock (information required for asection 1202 exclusion or section 1045rollover).

Note: For electing large partnerships, thetermpassive loss limitation activitiesincludes trade or business, rental realestate, and other rental activities.Partnership items from passive losslimitation activities allocated to limitedpartners are treated as being frompassive activities and subject to the

passive activity limitations. However,general partners may have materially oractively participated in some or all ofthese passive loss limitation activities.Each general partner must determine ifany partnership items from these activitiesare subject to the passive activitylimitations. To allow each general partnerto correctly apply the passive activitylimitations, the partnership must reportincome or loss and credits separately foreach trade or business activity, rental realestate activity, rental activity other thanrental real estate, and other activities(e.g., portfolio income). See page 8 for

details.The character of any item separately

stated to the partners is based on itscharacter to the partnership. The itemsare treated as incurred by the partnership,similar to the character rule for otherpartnerships under section 702(b).

Limitations

Most limitations and other provisionsaffecting taxable income or credit areapplied at the partnership level except for:

q Section 68Overall itemized deductionlimitation.q Sections 49 and 465At-risklimitations.q Section 469Passive loss limitations.

For example, the limitation onmiscellaneous itemized deductions isapplied at the partnership level. However,instead of the 2% floor, 70% of thepartnership's total miscellaneous itemizeddeductions are disallowed.

Another limitation that is applied at thepartnership level is the deduction forcharitable contributions. The deduction islimited to 10% of the partnership's taxableincome (before the charitable contributiondeduction).

Elections Made by thePartnership

All elections, other than the exceptionslisted under Elections Made by EachPartner, affecting the computation oftaxable income or any credit are made bythe partnership. For example, it chooses

the accounting method and depreciationmethods it will use. The partnership alsomakes elections under the followingsections:

1. Section 179 (election to expensecertain tangible property).

2. Section 1033 (involuntaryconversions).

3. Section 754 (manner of electingoptional adjustment to basis ofpartnership property).

There are no changes to the optionalbasis adjustment provisions as a result ofthe electing large partnership rules. Undersection 754, a partnership may elect to

adjust the basis of partnership propertywhen property is distributed or when apartnership interest is transferred. Oncean election is made under section 754, itapplies both to all distributions and to alltransfers made during the tax year and inall subsequent tax years unless theelection is revoked. See Regulationssection 1.754-1(c).

This election must be made in astatement that is filed with thepartnership's timely filed return (includingany extension) for the tax year duringwhich the distribution or transfer occurs.The statement must include:

q The name and address of thepartnership.q A declaration that the partnership electsunder section 754 to apply the provisionsof section 734(b) and section 743(b).q The signature of the general partnerauthorized to sign the partnership return.

The partnership can get an automatic12-month extension to make the section754 election provided corrective action istaken within 12 months of the originaldeadline for making the election. For

details, see Regulations section301.9100-2.

See section 754 and the relatedregulations for more information.

If there is a distribution of propertyconsisting of an interest in anotherpartnership, see section 734(b).

Elections Made by EachPartner

Elections under the following sections aremade by each partner separately on thepartner's tax return:

1. Section 108 (income fromdischarge of indebtedness). If an electinglarge partnership has income from thedischarge of any indebtedness, this isreported separately to each partner.

2. Section 901 (foreign tax credit).

Partner's Dealings WithPartnership

If a partner engages in a transaction withhis or her partnership, other than in his

or her capacity as a partner, the partneris treated as not being a member of thepartnership for that transaction. Specialrules apply to sales or exchanges ofproperty between partnerships andcertain persons, as explained in Pub. 541,Partnerships.

Contributions to thePartnership

Generally, no gain (loss) is recognized tothe partnership or any of the partnerswhen property is contributed to thepartnership in exchange for an interest inthe partnership. This rule does not apply

to any gain realized on a transfer ofproperty to a partnership that would betreated as an investment company (withinthe meaning of section 351) if thepartnership were incorporated. If, as aresult of a transfer of property to apartnership, there is a direct or indirecttransfer of money or other property to thetransferring partner, the partner may haveto recognize gain on the exchange.

The basis to the partnership of propertycontributed by a partner is the adjustedbasis in the hands of the partner at thetime it was contributed, plus any gainrecognized (under section 721(b)) by the

partner at that time. See section 723 formore information.

Dispositions of ContributedProperty

If the partnership disposes of propertycontributed to the partnership by apartner, income, gain, loss, anddeductions from that property must beallocated among the partners to take intoaccount the difference between theproperty's basis and its FMV at the timeof the contribution.



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For property contributed to thepartnership, the contributing partner mustrecognize gain or loss on a distribution ofthe property to another partner within 5years of being contributed. For propertycontributed after June 8, 1997, the 5-yearperiod is generally extended to 7 years.The gain or loss is equal to the amountthat the contributing partner should haverecognized if the property had been soldfor its FMV when distributed, because ofthe difference between the property'sbasis and its FMV at the time ofcontribution.

See section 704(c) for details and otherrules on dispositions of contributedproperty. See section 724 for thecharacter of any gain or loss recognizedon the disposition of unrealizedreceivables, inventory items, or capitalloss property contributed to thepartnership by a partner.

Recognition ofPrecontribution Gain onCertain Partnership

DistributionsA partner who contributes appreciatedproperty to the partnership must includein income any precontribution gain to theextent the FMV of other property (otherthan money) distributed to the partner bythe partnership exceeds the adjustedbasis of his or her partnership interest justbefore the distribution. Precontributiongain is the net gain, if any, that wouldhave been recognized under section704(c)(1)(B) if the partnership haddistributed to another partner all theproperty that had been contributed to thepartnership by the distributee partner

within 5 years of the distribution and thatwas held by the partnership just beforethe distribution. For property contributedafter June 8, 1997, the 5-year period isgenerally extended to 7 years.

Appropriate basis adjustments are tobe made to the adjusted basis of thedistributee partner's interest in thepartnership and the partnership's basis inthe contributed property to reflect the gainrecognized by the partner.

For more details and exceptions, seePub. 541.

Unrealized Receivables andInventory Items

Generally, if a partner sells or exchangesa partnership interest where unrealizedreceivables or inventory items areinvolved, the transferor partner mustnotify the partnership, in writing, within 30days of the exchange. The partnershipmust then file Form 8308, Report of aSale or Exchange of Certain PartnershipInterests.

If a partnership distributes unrealizedreceivables or substantially appreciatedinventory items in exchange for all or partof a partner's interest in other partnershipproperty (including money), treat thetransaction as a sale or exchangebetween the partner and the partnership.Treat the partnership gain (loss) asordinary income (loss). The income (loss)is specially allocated only to partnersother than the distributee partner.

If a partnership gives other property(including money) for all or part of thatpartner's interest in the partnership'sunrealized receivables or substantiallyappreciated inventory items, treat thetransaction as a sale or exchange of theproperty.

See Rev. Rul. 84-102, 1984-2 C.B. 119,for information on the tax consequencesthat result when a new partner joins apartnership that has liabilities andunrealized receivables. Also, see Pub.541 for more information on unrealizedreceivables and inventory items.

Activities of Electing LargePartnerships

The activities of an electing largepartnership are reported as either:q Passive loss limitation activities,including trade or business, real estaterental, and other rental activities, orq Other activities, including portfolio orinvestment activities.

Passive Loss Limitation Activities

The term passive loss limitation activitymeans any activity involving the conductof a trade or business (including anyactivity treated as a trade or businessunder section 469(c)(5) or (6)), or anyrental activity.

A limited partner's share of an electinglarge partnership's taxable income or lossfrom these activities is treated as incomeor loss from the conduct of a singlepassive trade or business activity. Thus,an electing large partnership does nothave to report items from multipleactivities separately to limited partners.

However, if a partner holds an interestin an electing large partnership other thanas a limited partner, the distributive shareof items from each activity is accountedfor separately under the passive activity

rules of section 469. Thus, for example,passive loss limitation activity income orloss is not treated as passive income withrespect to the general partnership interestof a partner who materially participates inthe partnership's trade or businessactivities. For general partners, thepartnership does have to report items foreach activity separately.

Trade or Business Activities

A trade or business activity is an activity(other than a rental activity or an activity

treated as incidental to an activity ofholding property for investment) that:

1. Involves the conduct of a trade orbusiness (within the meaning of section162),

2. Is conducted in anticipation ofstarting a trade or business, or

3. Involves research or experimentalexpenditures deductible under section174 (or that would be if you chose todeduct rather than capitalize them).

Rental Activities

Generally, except as noted below, if thegross income from an activity consists ofamounts paid principally for the use ofreal or personal tangible property held bythe partnership, the activity is a rentalactivity.

There are several exceptions to thisgeneral rule. Under these exceptions, anactivity involving the use of real orpersonal tangible property is not a rentalactivity if any of the following apply:q The average period of customer use(defined below) for such property is 7

days or less.q The average period of customer use forsuch property is 30 days or less andsignificant personal services (definedon page 9) are provided by or on behalfof the partnership.q Extraordinary personal services(defined on page 9) are provided by or onbehalf of the partnership.q The rental of such property is treatedas incidental to a nonrental activity of thepartnership under Temporary Regulationssection 1.469-1T(e)(3)(vi) andRegulations section 1.469-1(e)(3)(vi).q The partnership customarily makes the

property available during definedbusiness hours for nonexclusive use byvarious customers.q The partnership provides property foruse in a nonrental activity of a partnershipor joint venture in its capacity as an ownerof an interest in such partnership or jointventure. Whether the partnership providesproperty used in an activity of anotherpartnership or of a joint venture in thepartnership's capacity as an owner of aninterest in the partnership or joint ventureis determined on the basis of all the factsand circumstances.

In addition, a guaranteed payment

described in section 707(c) is not incomefrom a rental activity under anycircumstances.

Average period of customer use.Figure the average period of customeruse for a class of property by dividing thetotal number of days in all rental periodsby the number of rentals during the taxyear. If the activity involves renting morethan one class of property, multiply theaverage period of customer use of eachclass by the ratio of the gross rentalincome from that class to the activity's



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total gross rental income. The activity'saverage period of customer use equalsthe sum of these class-by-class averageperiods weighted by gross income. SeeRegulations section 1.469-1(e)(3)(iii).

Significant personal services. Personalservices include only services performedby individuals. In determining whetherpersonal services are significant personalservices, consider all the relevant factsand circumstances. Relevant facts andcircumstances include how often theservices are provided, the type andamount of labor required to perform theservices, and the value of the services inrelation to the amount charged for use ofthe property.

The following services are notconsidered in determining whetherpersonal services are significant:q Services necessary to permit the lawfuluse of the rental property.q Services performed in connection withimprovements or repairs to the rentalproperty that extend the useful life of theproperty substantially beyond the average

rental period.q Services provided in connection withthe use of any improved real property thatare similar to those commonly provided inconnection with long-term rentals ofhigh-grade commercial or residentialproperty. Examples include cleaning andmaintenance of common areas, routinerepairs, trash collection, elevator service,and security at entrances.

Extraordinary personal services.Services provided in connection withmaking rental property available forcustomer use are extraordinary personalservices only if the services are performedby individuals and the customers' use ofthe rental property is incidental to theirreceipt of the services.

For example, a patient's use of ahospital room generally is incidental to thecare received from the hospital's medicalstaff. Similarly, a student's use of adormitory room in a boarding school isincidental to the personal servicesprovided by the school's teaching staff.

Rental activity incidental to a nonrentalactivity. An activity is not a rental activityif the rental of the property is incidental toa nonrental activity, such as the activityof holding property for investment, a tradeor business activity, or the activity ofdealing in property.

Rental of property is incidental to anactivity of holding property for investmentif both of the following apply:q The main purpose for holding theproperty is to realize a gain from theappreciation of the property.q The gross rental income from suchproperty for the tax year is less than 2%of the smaller of the property's unadjustedbasis or its FMV.

Rental of property is incidental to atrade or business activity if all of thefollowing apply:q The partnership owns an interest in thetrade or business at all times during theyear.q The rental property was mainly used inthe trade or business activity during thetax year or during at least 2 of the 5preceding tax years.q The gross rental income from the

property for the tax year is less than 2%of the smaller of the property's unadjustedbasis or its FMV.

The sale or exchange of property thatis both rented and sold or exchangedduring the tax year (where the gain or lossis recognized) is treated as incidental tothe activity of dealing in property if, at thetime of the sale or exchange, the propertywas held primarily for sale to customersin the ordinary course of the partnership'strade or business.

See Temporary Regulations section1.469-1T(e)(3) and Regulations section1.469-1(e)(3) for more information on the

definition of rental activities for purposesof the passive activity limitations.

In reporting the partnership's incomeor losses and credits from rental activities,the partnership must separately reportrental real estate activities and rentalactivities other than rental real estateactivities.

Partners who actively participate in arental real estate activity may be able todeduct part or all of their rental real estatelosses (and the deduction equivalent ofrental real estate credits) against income(or tax) from nonpassive activities. Thecombined amount of rental real estate

losses and the deduction equivalent ofrental real estate credits from all sources(including rental real estate activities notheld through the partnership) that may beclaimed is limited to $25,000. This$25,000 amount is generally reduced forhigh-income partners.

Other Activities

The term other activities meansactivities other than passive loss limitationactivities. This is income or expensesconnected with property held forinvestment, i.e., portfolio income.Generally, portfolio income includes allgross income, other than income derivedin the ordinary course of a trade orbusiness, that is attributable to interest;dividends; royalties; income from a realestate investment trust, a regulatedinvestment company, a real estatemortgage investment conduit, a commontrust fund, a controlled foreigncorporation, a qualified electing fund, ora cooperative; income from thedisposition of property that producesincome of a type defined as portfolioincome; and income from the disposition

of property held for investment. Portfolioincome is reported separately and isreduced by portfolio deductions, allocableinvestment interest expense, andnonbusiness deductions.

Special ReportingRequirements

General Partners

Passive Activity ReportingRequirements

To allow general partners to correctlyapply the passive activity loss and creditrules, any partnership that carries onmore than one activity must:

1. Provide an attachment for eachactivity conducted through the partnershipthat identifies the type of activityconducted (trade or business, rental realestate, rental activity other than rental realestate, or investment). See GroupingActivities on page 10.

2. On the attachment for each activity,provide a schedule detailing the net

income (loss), credits, and all itemsrequired to be separately stated undersection 772(a) from each trade orbusiness activity, from each rental realestate activity, from each rental activityother than a rental real estate activity, andfrom investments.

3. Identify the net income (loss) andcredits from each oil or gas well drilled oroperated under a working interest that anypartner (other than a partner whose onlyinterest in the partnership during the yearis as a limited partner) holds through thepartnership. Further, if any partner had aninterest as a general partner in the

partnership during less than the entireyear, the partnership must identify boththe disqualified deductions from each wellthat the partner must treat as passiveactivity deductions, and the ratableportion of the gross income from eachwell that the partner must treat as passiveactivity gross income.

4. Identify the net income (loss) andthe partner's share of partnership interestexpense from each activity of renting adwelling unit that any partner uses forpersonal purposes during the year formore than the greater of 14 days or 10%of the number of days that the residenceis rented at fair rental value.

5. Identify the net income (loss) andthe partner's share of partnership interestexpense from each activity of tradingpersonal property conducted through thepartnership. For this purpose, personalproperty means property that is activelytraded such as stocks, bonds, and othersecurities. See Temporary Regulationssection 1.469-1T(e)(6).

6. For any gain (loss) from thedisposition of an interest in an activity orof an interest in property used in anactivity (including dispositions before



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1987 from which gain is being recognizedafter 1986):

a. Identify the activity in which theproperty was used at the time ofdisposition.

b. If the property was used in morethan one activity during the 12 monthspreceding the disposition, identify theactivities in which the property was usedand the adjusted basis allocated to eachactivity.

c. For gains only, if the property wassubstantially appreciated at the time of thedisposition and the applicable holdingperiod specified in Regulations section1.469-2(c)(2)(iii)(A) was not satisfied,identify the amount of the nonpassive gainand indicate whether the gain isinvestment income under the provisionsof Regulations section1.469-2(c)(2)(iii)(F).

7. Specify the amount of grossportfolio income, the interest expenseproperly allocable to portfolio income, andexpenses other than interest expense thatare clearly and directly allocable to

portfolio income.8. Identify separately any of the

following types of payments to partners:

a. Payments to a partner for servicesother than in the partner's capacity as apartner under section 707(a).

b. Guaranteed payments to a partnerfor services under section 707(c).

c. Guaranteed payments for use ofcapital.

d. If section 736(a)(2) payments aremade for unrealized receivables or forgoodwill, the amount of the payments andthe activities to which the payments areattributable.

e. If section 736(b) payments aremade, the amount of the payments andthe activities to which the payments areattributable.

9. Identify the ratable portion of anysection 481 adjustment (whether a netpositive or a net negative adjustment)allocable to each partnership activity.

10. Identify the amount of gross incomefrom each oil or gas property of thepartnership.

11. Identify any gross income fromsources that are specifically excludedfrom passive activity gross income,

including:a. Income from intangible property ifthe partner is an individual and thepartner's personal efforts significantlycontributed to the creation of the property.

b. Income from state, local, or foreignincome tax refunds.

c. Income from a covenant not tocompete (in the case of a partner who isan individual and who contributed thecovenant to the partnership).

12. Identify any deductions that are notpassive activity deductions.

13. If the partnership makes a full orpartial disposition of its interest in anotherentity, identify the gain (loss) allocable toeach activity conducted through the entity,and the gain allocable to a passive activitythat would have been recharacterized asnonpassive gain had the partnershipdisposed of its interest in property used inthe activity (because the property wassubstantially appreciated at the time of thedisposition, and the gain representedmore than 10% of the partner's total gainfrom the disposition).

14. Identify the following items fromactivities that may be subject to therecharacterization rules under TemporaryRegulations section 1.469-2T(f) andRegulations section 1.469-2(f):

a. Net income from an activity ofrenting substantially nondepreciableproperty.

b. The smaller of equity-financedinterest income or net passive incomefrom an equity-financed lending activity.

c. Net rental activity income fromproperty that was developed (by the

partner or the partnership), rented, andsold within 12 months after the rental ofthe property commenced.

d. Net rental activity income from therental of property by the partnership to atrade or business activity in which thepartner had an interest (either directly orindirectly).

e. Net royalty income from intangibleproperty if the partner acquired thepartner's interest in the partnership afterthe partnership created the intangibleproperty or performed substantialservices, or incurred substantial costs indeveloping or marketing the intangible

property.15. Identify separately the credits fromeach activity conducted by or through thepartnership.

For more information on passiveactivities, see Pub. 925, Passive Activityand At-Risk Rules.

Grouping Activities

Generally, one or more trade or businessactivities or rental activities may betreated as a single activity if the activitiesmake up an appropriate economic unit forthe measurement of gain or loss underthe passive activity rules. Whether

activities make up an appropriateeconomic unit depends on all the relevantfacts and circumstances. The factorsgiven the greatest weight in determiningwhether activities make up an appropriateeconomic unit are:q Similarities and differences in types oftrades or businesses.q The extent of common control.q The extent of common ownership.q Geographical location.q Reliance between or among theactivities.

Example. The partnership has asignificant ownership interest in a bakeryand a movie theater in Baltimore and abakery and a movie theater inPhiladelphia. Depending on the relevantfacts and circumstances, there may bemore than one reasonable method forgrouping the partnership's activities. Forinstance, the following groupings may ormay not be permissible:q A single activity,q

A movie theater activity and a bakeryactivity,q A Baltimore activity and a Philadelphiaactivity, orq Four separate activities.

Once the partnership chooses agrouping under these rules, it mustcontinue using that grouping in later taxyears unless a material change in thefacts and circumstances makes it clearlyinappropriate.

The IRS may regroup the partnership'sactivities if the partnership's grouping failsto reflect one or more appropriateeconomic units and one of the primary

purposes of the grouping is to avoid thepassive activity limitations.

Limitation on grouping certainactivities. The following activities maynot be grouped together:

1. A rental activity with a trade orbusiness activity unless the activitiesbeing grouped together make up anappropriate economic unit, and

a. The rental activity is insubstantialrelative to the trade or business activityor vice versa, or

b. Each owner of the trade orbusiness activity has the sameproportionate ownership interest in therental activity. If so, the portion of therental activity involving the rental ofproperty to be used in the trade orbusiness activity may be grouped with thetrade or business activity.

2. An activity involving the rental ofreal property with an activity involving therental of personal property (except forpersonal property provided in connectionwith the real property or vice versa).

3. Any activity with another activity ina different type of business and in whichthe partnership holds an interest as alimited partner or as a limitedentrepreneur (as defined in section

464(e)(2)) if that other activity engages inholding, producing, or distributing motionpicture films or videotapes; farming;leasing section 1245 property; orexploring for (or exploiting) oil and gasresources or geothermal deposits.

Activities conducted through otherpartnerships. Once a partnershipdetermines its activities under these rules,the partnership as a partner may usethese rules to group those activities with:q Each other,



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q Activities conducted directly by thepartnership, orq Activities conducted through otherpartnerships.

A partner may not treat as separateactivities those activities grouped togetherby a partnership.

Tax-Exempt Partners

A tax-exempt partner is subject to tax onits distributive share of partnership

income to the extent that the partnershipactivity is an unrelated business for thepartner. Therefore, partnership itemsmust be separately reported totax-exempt partners to allow them tocompute income from an unrelatedbusiness.

Publicly Traded Partnerships

For electing large partnerships, therequirement that the passive loss rules beseparately applied to each publicly tradedpartnership continues to apply.

Partnerships Holding ResidualInterests in Real Estate MortgageInvestment Conduits (REMICs)

For purposes of the excise tax onpartnerships holding residual interests inREMICs, all interests in an electing largepartnership are treated as held bydisqualified organizations. Therefore, anelecting large partnership holding aresidual interest in a REMIC is subject toan annual tax equal to 35% of the excessinclusions. The amount that is subject totax is excluded from partnership income.To report and pay this tax, file Form8831, Excise Taxes on Excess Inclusionsof REMIC Residual Interests.

Partnerships Holding Oil and GasProperties

Partnerships holding oil and gasproperties generally follow the samesimplified reporting rules as other electinglarge partnerships. However, certainpartners are treated as disqualifiedpersons, and special rules apply.

Computing depletion. Depletion isgenerally computed at the partnershiplevel. The 1,000-barrel-per-day-limitationon depletion does not apply. Depletion isalso computed without regard to the65-percent-of-taxable-income limitation and the depletion basisadjustment. The depletion deduction iscomputed with the assumptions that thepartnership is the taxpayer and that itqualifies for the percentage depletiondeduction. This deduction is reported topartners (other than disqualified persons)as part of their share of the taxableincome (loss) from passive loss limitationactivities.

Disqualified persons. Two categories oftaxpayers are defined as disqualifiedpersons:q Certain retailers and refiners who donot qualify for the section 613Apercentage depletion deduction. Seesection 613A(d)(2) and (4).q Any other person whose average dailyproduction of domestic crude oil andnatural gas exceeds 500 barrels for its taxyear in which the partnership's tax year

ends. See section 776(b) for more details.A disqualified person must notify the

partnership of its status as such.

Reporting to disqualified persons. Anelecting large partnership reportsinformation related to oil and gasactivities to a disqualified person in box9 of Schedule K-1 (Form 1065-B)providing the same information asrequired for other partnerships. Thisinformation may be provided in anattached statement if additional space isrequired. However, the simplified rules doapply to a disqualified person's share ofitems not related to oil and gas activities.

Other reporting requirements. Unlikeother partnerships, the election to deductintangible drilling and development costs(IDCs) is made at the partnership level,and the partnership may pass through afull deduction of IDCs to its partners whoare not disqualified persons. Also, anelecting large partnership (and not thepartners) makes the section 59(e) electionto capitalize and amortize certain specificIDCs for its partners who are notdisqualified persons. However, partnerswho are disqualified persons arepermitted to make their own separatesection 59(e) election.

A single AMT adjustment (under eithercorporate or noncorporate rules) is madeand reported to partners who are notdisqualified persons. This separatelyreported item is affected by the limitationon the repeal of the tax preference forexcess IDCs. For purposes of computingthis limitation, the partnership is treatedas the taxpayer. Thus, the limitation onrepeal of the IDC preference is applied atthe partnership level and is based on thecumulative reduction in the partnership'salternative minimum taxable incomeresulting from repeal of that preference.

Finally, in making partnership-levelcomputations, any item of income, gain,

loss, deduction, or credit attributable to adisqualified person is disregarded. Forexample, in computing the partnership'snet income from oil and gas for purposesof determining the IDC preference to bereported to partners as part of the AMTadjustment, disqualified persons'distributive shares of the partnership's netincome from oil and gas are not taken intoaccount.

Specific Instructions

These instructions follow the line numberson Form 1065-B. The accompanyingschedules are discussed separately.Specific instructions for most of the linesare provided on the following pages. Linesthat are not discussed in the instructions

are self-explanatory.Fill in all applicable lines and

schedules.

Enter any items specially allocated tothe partners in the appropriate box of theapplicable partner's Schedule K-1. Enterthe total amount on the appropriate lineof Schedule K. Do not enter separatelystated amounts on the numbered lines onForm 1065-B, Parts I or II, or on ScheduleA or D.

File only one Form 1065-B for eachpartnership. Mark duplicate copy on anycopy you give to a partner.

General InformationName, Address, and EmployerIdentification Number

Name. Print or type the legal name of thepartnership as it appears in thepartnership agreement.

Address. Include the suite, room, orother unit number after the street address.If the Post Office does not deliver mail tothe street address and the partnershiphas a P.O. box, show the box numberinstead.

If the partnership's address is outsidethe United States or its possessions orterritories, enter the information on theline for City or town, state, and ZIPcode in the following order: city, provinceor state, and the name of the foreigncountry. Follow the foreign country'spractice in placing the postal code in theaddress. Do not abbreviate the countryname.

If the partnership has had a change ofaddress, check box G(2). If thepartnership changes its mailing addressafter filing its return, it can notify the IRSby filing Form 8822, Change of Address.

Employer identification number (EIN).Show the correct EIN in item D on page1 of Form 1065-B.

Items A and C

Enter the applicable activity name and thecode number from the list beginning onpage 30.

For example, if, as its principalbusiness activity, the partnership (a)purchases raw materials, (b) subcontractsout for labor to make a finished productfrom the raw materials, and (c) retains titleto the goods, the partnership isconsidered to be a manufacturer and



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must enter Manufacturer in item A andenter in item C one of the codes (311110through 339900) listed underManufacturing on page 30.

Item FTotal Assets

Enter the partnership's total assets at theend of the tax year, as determined by theaccounting method regularly used inkeeping the partnership's books andrecords. If there were no assets at the endof the tax year, enter the total assets asof the beginning of the tax year.

Part ITaxable Income orLoss from Passive LossLimitation Activities

Report only amounts from passive losslimitation activities in Part I. See page 8for the definition of passive loss limitationactivity.

Do not report any tax-exempt interestincome or income from the discharge of

any indebtedness on lines 1a through 10.These amounts are accounted forseparately by each partner and arereported in box 9 of Schedule K-1 (Form1065-B). Income from discharge ofindebtedness is also reported on line 8 ofSchedule K, and tax-exempt interest isreported on line 9 of Schedule K.

If the partnership has had debtdischarged resulting from a title 11bankruptcy proceeding or while insolvent,see Form 982, Reduction of TaxAttributes Due to Discharge ofIndebtedness, and Pub. 908, BankruptcyTax Guide.

Income

Line 1aGross Receipts or Sales

Enter the gross receipts or sales from alltrade or business operations except thosethat must be reported on lines 6 through10. For example, do not include grossreceipts from farming on this line. Instead,show the net profit (loss) from farming online 7. Also, do not include on line 1aportfolio income. See section 460 forspecial rules that apply to long-termcontracts.

Installment sales. Generally, theinstallment method cannot be used for:q Sales of property after December 16,1999, that would otherwise be reportedusing the accrual method of accounting.q Dealer dispositions of property. Adealer disposition is any disposition ofpersonal property by a person whoregularly sells or otherwise disposes ofpersonal property of the same type on theinstallment plan or any disposition of realproperty held for sale to customers in theordinary course of the taxpayer's trade orbusiness.

Exception. These restrictions on usingthe installment method do not apply todispositions of property used or producedin a farming business or sales oftimeshares and residential lots for whichthe partnership elects to pay interestunder section 453(l)(3).

For sales of timeshares and residentiallots reported under the installmentmethod, the electing large partnership'sincome tax is increased by the interest

payable under section 453(l)(3). Indetermining the amount of interestpayable, the partnership is treated assubject to tax at a 39.6% rate. To reportthis addition to the tax, see theinstructions for line 26.

Enter on line 1a the gross profit oncollections from installment sales for anyof the following:q Dealer dispositions of property beforeMarch 1, 1986.q Dispositions of property used orproduced in the trade or business offarming.q Dispositions of timeshares and

residential lots reported under theinstallment method.

Attach a schedule showing thefollowing information for the current yearand the 3 preceding years:q Gross sales.q Cost of goods sold.q Gross profits.q Percentage of gross profits to grosssales.q Amount collected.q Gross profit on amount collected.

Line 2Cost of Goods Sold

See the instructions for Schedule A onpage 17.

Line 4Net Income (Loss) From RentalReal Estate Activities

Enter the net income or loss from rentalreal estate activities of the partnershipfrom Form 8825. Attach this form to Form1065-B.

Line 5Net Income (Loss) From OtherRental Activities

On line 5 enter the net income from rentalactivities other than rental real estateactivities. See page 8 of these instructionsand Pub. 925 for the definition of rentalactivities. Include on this line the gain(loss) from line 18 of Form 4797 that isattributable to the sale, exchange, orinvoluntary conversion of an asset usedin a rental activity other than a rental realestate activity.

Line 6Ordinary Income (Loss) FromOther Partnerships, Estates, andTrusts

Enter the ordinary income (loss) shownon Schedule K-1 (Form 1065, 1065-B, or

1041) or other ordinary income (loss) froma foreign partnership, estate, or trust. Besure to show the partnership's, estate's,or trust's name, address, and EIN on aseparate statement attached to thisreturn. If the amount entered is from morethan one source, identify the amount fromeach source.

Do not include rental activity income(loss) from other partnerships, estates, ortrusts on this line. Instead, report these

amounts on line 20a of Form 8825 or line5 of Form 1065-B, Part I.

Ordinary income or loss from anotherpartnership that is a publicly tradedpartnership is not reported on this line.Instead, report the amount separately onan attachment to line 16 of Schedule Kand in box 9 of Schedule K-1.

Treat shares of other items separatelyreported on Schedule K-1 issued by theother entity as if the items were realizedor incurred by this partnership.

If there is a loss from anotherpartnership, the amount of the loss thatmay be claimed is subject to the at-risk

and basis limitations as appropriate.If the tax year of your partnership does

not coincide with the tax year of the otherpartnership, estate, or trust, include theordinary income (loss) from the otherentity in the tax year in which the otherentity's tax year ends.

Line 7Net Farm Profit (Loss)

Enter the partnership's net farm profit(loss) from Schedule F (Form 1040),Profit or Loss From Farming. AttachSchedule F (Form 1040) to Form 1065-B.In figuring the partnership's net farm profit(loss), include any section 179 expensededuction. Do not include on this line anyfarm profit (loss) from other partnerships.Report those amounts on line 6.

For a special rule concerning themethod of accounting for a farmingpartnership with a corporate partner andfor other tax information on farms, seePub. 225, Farmer's Tax Guide.

Line 9Net Gain (Loss) From Form4797

On this line include only the ordinarygains or losses from the sale, exchange,or involuntary conversion of assets usedin a trade or business activity. Ordinarygains or losses from the sale, exchange,

or involuntary conversion of rental activityassets are not reported on line 9. Instead,report them on line 19 of Form 8825 orline 5 of Form 1065-B, Part I.

A partnership that is a partner inanother partnership must include onForm 4797, Sales of Business Property,its share of ordinary gains (losses) fromsales, exchanges, or involuntaryconversions (other than casualties orthefts) of the other partnership's trade orbusiness assets.



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Line 10Other Income (Loss)

Enter on line 10 trade or business income(loss) that is not included on lines 1athrough 9. Examples of such incomeinclude:

1. Interest income derived in theordinary course of the partnership's tradeor business, such as interest charged onreceivable balances.

2. Recoveries of bad debts deductedin earlier years under the specific

charge-off method.3. Taxable income from insurance

proceeds.

4. The amount of credit figured onForm 6478, Credit for Alcohol Used asFuel.

5. All section 481 income adjustmentsresulting from changes in accountingmethods. Show the computation of thesection 481 adjustments on an attachedschedule.

6. The amount of any deductionpreviously taken under section 179A thatis subject to recapture. See Pub. 535,Business Expenses, for details, includinghow to figure the recapture.

7. The recapture amount for section280F if the business use of listed propertydrops to 50% or less. To figure therecapture amount, the partnership mustcomplete Part IV of Form 4797.

Do not include items requiring separatecomputations that must be reported onSchedules K and K-1. See the instructionsfor Schedules K and K-1 beginning onpage 20.

Do not report portfolio or rentalactivity income (loss) on this line.

Deductions

Caution: Reportonlytrade or businessactivity deductions on lines 12 through 24.

Do not report the following expenseson lines 12 through 24:q Rental activity expenses. Report theseexpenses on Form 8825 or on anattached schedule for line 5 of Form1065-B, Part I.q Deductions allocable to portfolioincome. Report these deductions on page2, Part II.q Nondeductible expenses (e.g.,expenses connected with the productionof tax-exempt income). Report

nondeductible expenses on anattachment to line 16 of Schedule K andin box 9 of Schedules K-1.q Items the partnership must stateseparately that require separatecomputations by the partners. Anexample is foreign taxes paid. Thedistributive share of this expense isreported separately to each partner onSchedule K-1, box 9.

Limitations on Deductions

Section 263A uniform capitalizationrules. The uniform capitalization rules ofsection 263A require partnerships tocapitalize or include in inventory costs,certain costs incurred in connection with:q The production of real and tangiblepersonal property held in inventory or heldfor sale in the ordinary course ofbusiness. Tangible personal propertyproduced by a partnership includes a film,

sound recording, video tape, book, orsimilar property.q Real property or personal property(tangible and intangible) acquired forresale.q The production of real property andtangible personal property by apartnership for use in its trade or businessor in an activity engaged in for profit.

The costs required to be capitalizedunder section 263A are not deductibleuntil the property to which the costs relateis sold, used, or otherwise disposed of bythe partnership.

Exceptions. Section 263A does not

apply to:q Personal property acquired for resale ifthe partnership's average annual grossreceipts for the 3 prior tax years were $10million or less.q Timber.q Most property produced under along-term contract.q Certain property produced in a farmingbusiness.q Research and experimental costs undersection 174.q Intangible drilling costs for oil, gas, andgeothermal property.

q Mining exploration and developmentcosts.

Tangible personal property producedby a partnership includes a film, soundrecording, video tape, book, or similarproperty.

Partnerships subject to the rules arerequired to capitalize not only direct costsbut an allocable part of most indirect costs(including taxes) that benefit the assetsproduced or acquired for resale, or areincurred by reason of the performance ofproduction or resale activities.

For inventory, some of the indirectcoststhat must be capitalized are:q Administration expenses.q Taxes.q Depreciation.q Insurance.q Compensation paid to officersattributable to services.q Rework labor.q Contributions to pension, stock bonus,and certain profit-sharing, annuity, ordeferred compensation plans.

Regulations section 1.263A-1(e)(3)specifies other indirect costs that relate toproduction or resale activities that mustbe capitalized and those that may becurrently deductible.

Interest expense paid or incurredduring the production period ofdesignated property must be capitalizedand is governed by special rules. Formore details, see Regulations sections1.263A-8 through 1.263A-15.

For more details on the uniformcapitalization rules, see Regulationssections 1.263A-1 through 1.263A-3.

Transactions between relatedtaxpayers. Generally, an accrual basispartnership may deduct businessexpenses and interest owed to a relatedparty (including any partner) only in thetax year of the partnership that includesthe day on which the payment is includiblein the income of the related party. Seesection 267 for details.

Business start-up expenses. Businessstart-up expenses must be capitali

us internal revenue service: i1065b--1999

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