File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

File 1040x

2010 Ez Tax Form1040ez Tax ReturnCan You File 1040x OnlineFree Efile For State TaxesFree 1040ez Tax FormHow To File Amended Tax Return Turbotax2010 Form 1040aEfile 1040nr Ez 540nr Short1099 FormFree 1040x FormsFree State Filing OnlineTax AmendmentHow To File Past Taxes1040x Tax FormsHow To File 1040xTax Forms 1040 Ez2012 Income TaxAmended Federal Tax Return Form1o40 Ez FormCan I File 1040x ElectronicallyFillable State Tax Forms2013 Tax Form 1040ezTaxslayer Login PageFiling Self Employment Taxes1090 Ez2012 Tax SoftwareWww Irs GovFree Irs Tax Forms 20111040ez 2010printable Tax FormsIrs Tax ExtentionsTurbotax For 2011 TaxesState Income Tax Filing FreeNeed Help Filing A 1040x2009 1040 FormHow Can I File My 2012 Taxes LateAmend My Federal Tax Return2010 1040ez Tax FormEz Tax Form 2012Turbo Tax2011 Taxes2010 Form 1040

File 1040x

File 1040x Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. File 1040x Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. File 1040x Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. File 1040x Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. File 1040x However, a joint undertaking merely to share expenses is not a partnership. File 1040x For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. File 1040x The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. File 1040x Organizations formed after 1996. File 1040x   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. File 1040x An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. File 1040x An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. File 1040x An insurance company. File 1040x Certain banks. File 1040x An organization wholly owned by a state, local, or foreign government. File 1040x An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). File 1040x Certain foreign organizations identified in section 301. File 1040x 7701-2(b)(8) of the regulations. File 1040x A tax-exempt organization. File 1040x A real estate investment trust. File 1040x An organization classified as a trust under section 301. File 1040x 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. File 1040x Any other organization that elects to be classified as a corporation by filing Form 8832. File 1040x For more information, see the instructions for Form 8832. File 1040x Limited liability company. File 1040x   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. File 1040x Unlike a partnership, none of the members of an LLC are personally liable for its debts. File 1040x An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. File 1040x 7701-3. File 1040x See Form 8832 and section 301. File 1040x 7701-3 of the regulations for more details. File 1040x A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. File 1040x Organizations formed before 1997. File 1040x   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. File 1040x Community property. File 1040x    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. File 1040x They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. File 1040x A change in reporting position will be treated for federal tax purposes as a conversion of the entity. File 1040x   A qualified entity is a business entity that meets all the following requirements. File 1040x The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. File 1040x No person other than one or both spouses would be considered an owner for federal tax purposes. File 1040x The business entity is not treated as a corporation. File 1040x   For more information about community property, see Publication 555, Community Property. File 1040x Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. File 1040x Family Partnership Members of a family can be partners. File 1040x However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. File 1040x If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. File 1040x If capital is not a material income-producing factor, they joined together in good faith to conduct a business. File 1040x They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. File 1040x Capital is material. File 1040x   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. File 1040x Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. File 1040x Capital is not material. File 1040x   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. File 1040x Capital interest. File 1040x   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. File 1040x The owner withdraws from the partnership. File 1040x The partnership liquidates. File 1040x   The mere right to share in earnings and profits is not a capital interest in the partnership. File 1040x Gift of capital interest. File 1040x   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. File 1040x It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. File 1040x The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. File 1040x Purchase. File 1040x   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. File 1040x The fair market value of the purchased interest is considered donated capital. File 1040x For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). File 1040x Example. File 1040x A father sold 50% of his business to his son. File 1040x The resulting partnership had a profit of $60,000. File 1040x Capital is a material income-producing factor. File 1040x The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. File 1040x The $24,000 must be allocated to the father as compensation. File 1040x Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. File 1040x The son's share of partnership profit cannot be more than $18,000. File 1040x Business owned and operated by spouses. File 1040x   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. File 1040x If so, they should report income or loss from the business on Form 1065. File 1040x They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. File 1040x However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. File 1040x Qualified Joint Venture Election. File 1040x   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. File 1040x A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. File 1040x   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. File 1040x All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. File 1040x Each spouse takes into account his or her respective share of these items as a sole proprietor. File 1040x Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). File 1040x For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. File 1040x e. File 1040x , based on their respective interests in the venture). File 1040x   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. File 1040x Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. File 1040x   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. File 1040x However, this may not be true if either spouse exceeds the social security tax limitation. File 1040x   For more information on qualified joint ventures, go to IRS. File 1040x gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. File 1040x ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. File 1040x The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. File 1040x The agreement or modifications can be oral or written. File 1040x Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. File 1040x This filing date does not include any extension of time. File 1040x If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. File 1040x Terminating a Partnership A partnership terminates when one of the following events takes place. File 1040x All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. File 1040x At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. File 1040x Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. File 1040x See section 1. File 1040x 708-1(b) of the regulations for more information on the termination of a partnership. File 1040x For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. File 1040x 708-1(c) and 1. File 1040x 708-1(d) of the regulations. File 1040x Date of termination. File 1040x   The partnership's tax year ends on the date of termination. File 1040x For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. File 1040x For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. File 1040x Short period return. File 1040x   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. File 1040x The return is due the 15th day of the fourth month following the date of termination. File 1040x See Partnership Return (Form 1065), later, for information about filing Form 1065. File 1040x Conversion of partnership into limited liability company (LLC). File 1040x   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. File 1040x The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. File 1040x   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. File 1040x Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. File 1040x If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. File 1040x For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. File 1040x   The same rules apply if an LLC classified as a partnership is converted into a partnership. File 1040x IRS e-file (Electronic Filing) Please click here for the text description of the image. File 1040x e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). File 1040x Other partnerships generally have the option to file electronically. File 1040x For details about IRS e-file, see the Form 1065 instructions. File 1040x Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. File 1040x All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. File 1040x However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. File 1040x Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. File 1040x Investing partnership. File 1040x   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. File 1040x They own the property as co-owners. File 1040x They reserve the right separately to take or dispose of their shares of any property acquired or retained. File 1040x They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. File 1040x Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. File 1040x Operating agreement partnership. File 1040x   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. File 1040x They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. File 1040x They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. File 1040x They do not jointly sell services or the property produced or extracted. File 1040x Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. File 1040x However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. File 1040x Electing the exclusion. File 1040x   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. File 1040x This filing date includes any extension of time. File 1040x See Regulations section 1. File 1040x 761-2(b) for the procedures to follow. File 1040x Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. File 1040x The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. File 1040x The return must be signed by a general partner. File 1040x If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. File 1040x A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. File 1040x See the Instructions for Form 1065 for more information about who must file Form 1065. File 1040x Partnership Distributions Partnership distributions include the following. File 1040x A withdrawal by a partner in anticipation of the current year's earnings. File 1040x A distribution of the current year's or prior years' earnings not needed for working capital. File 1040x A complete or partial liquidation of a partner's interest. File 1040x A distribution to all partners in a complete liquidation of the partnership. File 1040x A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. File 1040x If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. File 1040x Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. File 1040x Effect on partner's basis. File 1040x   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. File 1040x See Adjusted Basis under Basis of Partner's Interest, later. File 1040x Effect on partnership. File 1040x   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. File 1040x The partnership may be able to elect to adjust the basis of its undistributed property. File 1040x Certain distributions treated as a sale or exchange. File 1040x   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. File 1040x Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. File 1040x Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. File 1040x   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. File 1040x   This treatment does not apply to the following distributions. File 1040x A distribution of property to the partner who contributed the property to the partnership. File 1040x Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. File 1040x Substantially appreciated inventory items. File 1040x   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. File 1040x However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. File 1040x Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. File 1040x Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. File 1040x If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. File 1040x For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. File 1040x Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. File 1040x Example. File 1040x The adjusted basis of Jo's partnership interest is $14,000. File 1040x She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. File 1040x Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. File 1040x Any gain on the land will be recognized when she sells or otherwise disposes of it. File 1040x The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. File 1040x Marketable securities treated as money. File 1040x   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. File 1040x This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. File 1040x   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). File 1040x   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. File 1040x Loss on distribution. File 1040x   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. File 1040x The adjusted basis of the partner's interest in the partnership exceeds the distribution. File 1040x The partner's entire interest in the partnership is liquidated. File 1040x The distribution is in money, unrealized receivables, or inventory items. File 1040x   There are exceptions to these general rules. File 1040x See the following discussions. File 1040x Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. File 1040x Distribution of partner's debt. File 1040x   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). File 1040x   The partner is treated as having satisfied the debt for its fair market value. File 1040x If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. File 1040x   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. File 1040x Net precontribution gain. File 1040x   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. File 1040x   The gain recognized is the lesser of the following amounts. File 1040x The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. File 1040x The “net precontribution gain” of the partner. File 1040x This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. File 1040x For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. File 1040x   The character of the gain is determined by reference to the character of the net precontribution gain. File 1040x This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. File 1040x For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. File 1040x Effect on basis. File 1040x   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. File 1040x Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. File 1040x See Basis of Partner's Interest , later. File 1040x   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. File 1040x Exceptions. File 1040x   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. File 1040x For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. File 1040x   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. File 1040x Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. File 1040x However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. File 1040x Example 1. File 1040x The adjusted basis of Emily's partnership interest is $30,000. File 1040x She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. File 1040x Her basis for the property is $20,000. File 1040x Example 2. File 1040x The adjusted basis of Steve's partnership interest is $10,000. File 1040x He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. File 1040x His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). File 1040x Complete liquidation of partner's interest. File 1040x   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. File 1040x Partner's holding period. File 1040x   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. File 1040x If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. File 1040x Basis divided among properties. File 1040x   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. File 1040x For property distributed after August 5, 1997, allocate the basis using the following rules. File 1040x Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. File 1040x If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. File 1040x Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. File 1040x If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. File 1040x If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. File 1040x Allocating a basis increase. File 1040x   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. File 1040x If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. File 1040x Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. File 1040x Example. File 1040x Eun's basis in her partnership interest is $55,000. File 1040x In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. File 1040x Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. File 1040x Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. File 1040x To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). File 1040x This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). File 1040x She first allocates $35,000 to property A (its unrealized appreciation). File 1040x The remaining $5,000 is allocated between the properties based on their fair market values. File 1040x $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. File 1040x Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). File 1040x Allocating a basis decrease. File 1040x   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. File 1040x Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. File 1040x If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. File 1040x Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). File 1040x Example. File 1040x Armando's basis in his partnership interest is $20,000. File 1040x In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. File 1040x Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. File 1040x Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. File 1040x To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). File 1040x This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). File 1040x He allocates the entire $10,000 to property D (its unrealized depreciation). File 1040x Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). File 1040x Distributions before August 6, 1997. File 1040x   For property distributed before August 6, 1997, allocate the basis using the following rules. File 1040x Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. File 1040x If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. File 1040x Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. File 1040x Partner's interest more than partnership basis. File 1040x   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. File 1040x Special adjustment to basis. File 1040x   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. File 1040x To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. File 1040x Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. File 1040x   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. File 1040x However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. File 1040x   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. File 1040x If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. File 1040x   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. File 1040x The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. File 1040x Example. File 1040x Chin Ho purchased a 25% interest in X partnership for $17,000 cash. File 1040x At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. File 1040x Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. File 1040x Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. File 1040x The value of the inventory received was 25% of the value of all partnership inventory. File 1040x (It is immaterial whether the inventory he received was on hand when he acquired his interest. File 1040x ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. File 1040x His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). File 1040x The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. File 1040x The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). File 1040x His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). File 1040x The remaining $11,500 is allocated to his new basis for the other property he received. File 1040x Mandatory adjustment. File 1040x   A partner does not always have a choice of making this special adjustment to basis. File 1040x The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. File 1040x The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. File 1040x If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. File 1040x The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. File 1040x Required statement. File 1040x   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. File 1040x The statement must provide information necessary for the partner to compute the special basis adjustment. File 1040x Marketable securities. File 1040x   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. File 1040x See Marketable securities treated as money under Partner's Gain or Loss, earlier. File 1040x The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. File 1040x Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. File 1040x These transactions include the following. File 1040x Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. File 1040x Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. File 1040x Payments by accrual basis partnership to cash basis partner. File 1040x   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. File 1040x However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. File 1040x Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. File 1040x A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. File 1040x This treatment is for purposes of determining gross income and deductible business expenses only. File 1040x For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. File 1040x Guaranteed payments are not subject to income tax withholding. File 1040x The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. File 1040x They are also listed on Schedules K and K-1 of the partnership return. File 1040x The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. File 1040x Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. File 1040x Generally, organizational and syndication expenses are not deductible by the partnership. File 1040x However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). File 1040x Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. File 1040x Minimum payment. File 1040x   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. File 1040x Example. File 1040x Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. File 1040x The partnership has net income of $20,000. File 1040x Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). File 1040x The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). File 1040x Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. File 1040x If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. File 1040x Self-employed health insurance premiums. File 1040x   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. File 1040x The partnership can deduct the payments as a business expense, and the partner must include them in gross income. File 1040x However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. File 1040x   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. File 1040x The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. File 1040x For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. File 1040x Including payments in partner's income. File 1040x   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. File 1040x Example 1. File 1040x Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. File 1040x Her distributive share of the partnership income is 10%. File 1040x The partnership has $50,000 of ordinary income after deducting the guaranteed payment. File 1040x She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. File 1040x Example 2. File 1040x Lamont is a calendar year taxpayer who is a partner in a partnership. File 1040x The partnership uses a fiscal year that ended January 31, 2013. File 1040x Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. File 1040x He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. File 1040x Payments resulting in loss. File 1040x   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. File 1040x The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. File 1040x Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. File 1040x Losses. File 1040x   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. File 1040x   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. File 1040x   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. File 1040x   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. File 1040x If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. File 1040x Gains. File 1040x   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. File 1040x More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). File 1040x The property in the hands of the transferee immediately after the transfer is not a capital asset. File 1040x Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. File 1040x More than 50% ownership. File 1040x   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. File 1040x An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. File 1040x An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. File 1040x For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. File 1040x If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. File 1040x However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. File 1040x Example. File 1040x Individuals A and B and Trust T are equal partners in Partnership ABT. File 1040x A's husband, AH, is the sole beneficiary of Trust T. File 1040x Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. File 1040x As a result, A is a more-than-50% partner. File 1040x This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. File 1040x More information. File 1040x   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. File 1040x Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. File 1040x This applies whether a partnership is being formed or is already operating. File 1040x The partnership's holding period for the property includes the partner's holding period. File 1040x The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. File 1040x The exchange is not subject to the rules explained later under Disposition of Partner's Interest. File 1040x Disguised sales. File 1040x   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. File 1040x The distribution would not have been made but for the contribution. File 1040x The partner's right to the distribution does not depend on the success of partnership operations. File 1040x   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. File 1040x However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. File 1040x If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. File 1040x Form 8275 required. File 1040x   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. File 1040x For exceptions to this requirement, see section 1. File 1040x 707-3(c)(2) of the regulations. File 1040x   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. File 1040x   Form 8275 must include the following information. File 1040x A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. File 1040x A description of the transferred property or money, including its value. File 1040x A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. File 1040x See section 1. File 1040x 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. File 1040x Contribution to partnership treated as investment company. File 1040x   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. File 1040x   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. File 1040x These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. File 1040x For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. File 1040x Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. File 1040x   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. File 1040x Contribution to foreign partnership. File 1040x   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. File 1040x Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. File 1040x The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. File 1040x   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. File 1040x See the form instructions for more information. File 1040x Basis of contributed property. File 1040x   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. File 1040x Allocations to account for built-in gain or loss. File 1040x   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. File 1040x The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. File 1040x This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. File 1040x   The partnership can use different allocation methods for different items of contributed property. File 1040x A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. File 1040x See section 1. File 1040x 704-3 of the regulations for allocation methods generally considered reasonable. File 1040x   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. File 1040x If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. File 1040x However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. File 1040x Example. File 1040x Areta and Sofia formed an equal partnership. File 1040x Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. File 1040x The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. File 1040x In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. File 1040x Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. File 1040x To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. File 1040x However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. File 1040x The entire $400 must be allocated to Areta. File 1040x Distribution of contributed property to another partner. File 1040x   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. File 1040x   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. File 1040x This amount is the difference between the property's basis and its fair market value at the time of contribution. File 1040x The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. File 1040x Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. File 1040x Disposition of certain contributed property. File 1040x   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. File 1040x Unrealized receivables. File 1040x If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. File 1040x Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. File 1040x When reading the definition, substitute “partner” for “partnership. File 1040x ” Inventory items. File 1040x If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. File 1040x Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. File 1040x Capital loss property. File 1040x If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. File 1040x The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. File 1040x Substituted basis property. File 1040x If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. File 1040x Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. File 1040x Capital interest. File 1040x   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. File 1040x This determination generally is made at the time of receipt of the partnership interest. File 1040x The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. File 1040x The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. File 1040x   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. File 1040x Profits interest. File 1040x   A profits interest is a partnership interest other than a capital interest. File 1040x If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. File 1040x However, this does not apply in the following situations. File 1040x The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. File 1040x Within 2 years of receipt, the partner disposes of the profits interest. File 1040x The profits interest is a limited partnership interest in a publicly traded partnership. File 1040x   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. File 1040x Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. File 1040x If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. File 1040x Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. File 1040x Interest acquired by gift, etc. File 1040x   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. File 1040x Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). File 1040x The basis of an interest in a partnership is increased or decreased by certain items. File 1040x Increases. File 1040x   A partner's basis is increased by the following items. File 1040x The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. File 1040x The partner's distributive share of taxable and nontaxable partnership income. File 1040x The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. File 1040x Decreases. File 1040x   The partner's basis is decreased (but never below zero) by the following items. File 1040x The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. File 1040x The partner's distributive share of the partnership losses (including capital losses). File 1040x The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. File 1040x This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. File 1040x The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. File 1040x Partner's liabilities assumed by partnership. File 1040x   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. File 1040x This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. File 1040x The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. File 1040x See Effect of Partnership Liabilities , later. File 1040x Example 1. File 1040x Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. File 1040x The partnership assumed payment of the mortgage. File 1040x The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. File 1040x If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. File 1040x The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. File 1040x However, this gain would not increase the basis of his partnership interest. File 1040x Book value of partner's interest. File 1040x   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. File 1040x Example. File 1040x Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. File 1040x His partner contributes $1,000 cash. File 1040x While each partner has increased his capital account by $1,000, which will be re
Español

Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Georgia Governors Office of Consumer Affairs

Website: Georgia Governors Office of Consumer Affairs

Address: Georgia Governors Office of Consumer Affairs
2 Martin Luther King, Jr. Dr., SE
Suite 356
Atlanta, GA 30334-9077

Phone Number: 404-651-8600

Toll-free: 1-800-869-1123 (GA)

Back to Top

Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Banking and Finance

Website: Department of Banking and Finance

Address: Department of Banking and Finance
2990 Brandywine Rd., Suite 200
Atlanta, GA 30341-5565

Phone Number: 770-986-1633

Toll-free: 1-888-986-1633 (GA)

Back to Top

Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Insurance and Safety Fire Commissioner

Website: Insurance and Safety Fire Commissioner

Address: Insurance and Safety Fire Commissioner
Two Martin Luther King, Jr., Dr.
West Tower, Suite 704
Atlanta, GA 30334

Phone Number: 404-656-2070

Toll-free: 1-800-656-2298 (GA)

Back to Top

Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Office of the Secretary of State

Website: Office of the Secretary of State

Address: Office of the Secretary of State
Division of Securities and Business Regulation
237 Coliseum Dr.
Macon, GA 31217-3858

Phone Number: 478-207-2440

Back to Top

Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Public Service Commission

Website: Public Service Commission

Address: Public Service Commission
Consumer Affairs Division
244 Washington St., SW
Atlanta, GA 30334

Phone Number: 404-656-4501

Toll-free: 1-800-282-5813 (GA)

Back to Top

The File 1040x

File 1040x 2. File 1040x   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. File 1040x ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. File 1040x In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. File 1040x Those cases are called “abusive tax shelters. File 1040x ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. File 1040x Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . File 1040x Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. File 1040x Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. File 1040x They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. File 1040x Despite appearances to the contrary, the taxpayer generally risks little. File 1040x Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. File 1040x Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. File 1040x (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. File 1040x ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. File 1040x This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. File 1040x Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. File 1040x However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. File 1040x Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. File 1040x These provisions include the following. File 1040x Disclosure of reportable transactions. File 1040x   You must disclose information for each reportable transaction in which you participate. File 1040x See Reportable Transaction Disclosure Statement , later. File 1040x   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. File 1040x To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. File 1040x   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. File 1040x They must provide this number to all persons to whom they acted as a material advisor. File 1040x They must provide the number at the time the transaction is entered into. File 1040x If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. File 1040x For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. File 1040x Requirement to maintain list. File 1040x   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. File 1040x The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. File 1040x See Regulations section 301. File 1040x 6112-1 for more information (including what information is required to be included on the list). File 1040x Confidentiality privilege. File 1040x   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. File 1040x Appraisal requirement for donated property. File 1040x   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. File 1040x If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. File 1040x If you file electronically, see Form 8453, U. File 1040x S. File 1040x Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. File 1040x For more information about appraisals, including exceptions, see Publication 561. File 1040x Passive activity loss and credit limits. File 1040x   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. File 1040x For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. File 1040x Interest on penalties. File 1040x   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. File 1040x Accounting method restriction. File 1040x   Tax shelters generally cannot use the cash method of accounting. File 1040x Uniform capitalization rules. File 1040x   The uniform capitalization rules generally apply to producing property or acquiring it for resale. File 1040x Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. File 1040x For more information, see Publication 538. File 1040x Denial of deduction for interest on an underpayment due to a reportable transaction. File 1040x   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. File 1040x This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. File 1040x Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. File 1040x The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. File 1040x Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. File 1040x So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. File 1040x In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. File 1040x The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. File 1040x Investor Reporting You may be required to file a reportable transaction disclosure statement. File 1040x Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. File 1040x Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. File 1040x Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). File 1040x In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. File 1040x  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. File 1040x If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. File 1040x If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. File 1040x See Penalty for failure to disclose a reportable transaction , later under Penalties. File 1040x The following discussion briefly describes reportable transactions. File 1040x For more details, see the Instructions for Form 8886. File 1040x Reportable transaction. File 1040x   A reportable transaction is any of the following. File 1040x A listed transaction. File 1040x A confidential transaction. File 1040x A transaction with contractual protection. File 1040x A loss transaction. File 1040x A transaction of interest entered into after November 1, 2006. File 1040x Note. File 1040x Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. File 1040x Listed transaction. File 1040x   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. File 1040x These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. File 1040x For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. File 1040x irs. File 1040x gov/irb/2009-31_IRB/ar07. File 1040x html. File 1040x Confidential transaction. File 1040x   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. File 1040x A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. File 1040x The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. File 1040x Transaction with contractual protection. File 1040x   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. File 1040x For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. File 1040x irs. File 1040x gov/irb/2007-07_IRB/ar15. File 1040x html. File 1040x Loss transaction. File 1040x   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. File 1040x A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. File 1040x   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. File 1040x For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. File 1040x irs. File 1040x gov/irb/2004-50_IRB/ar11. File 1040x html. File 1040x Transaction of interest. File 1040x   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. File 1040x The IRS has identified the following transactions of interest. File 1040x “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. File 1040x R. File 1040x B. File 1040x 545, available at www. File 1040x irs. File 1040x gov/irb/2007-36_IRB/ar20. File 1040x html. File 1040x Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. File 1040x R. File 1040x B. File 1040x 544, available at www. File 1040x irs. File 1040x gov/irb/2007-36_IRB/ar19. File 1040x html. File 1040x Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. File 1040x R. File 1040x B. File 1040x 1194, available at www. File 1040x irs. File 1040x gov/irb/2008-47_IRB/ar11. File 1040x html. File 1040x Certain transactions involving a U. File 1040x S. File 1040x taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. File 1040x R. File 1040x B. File 1040x 312, available at www. File 1040x irs. File 1040x gov/irb/2009-03_IRB/ar10. File 1040x html. File 1040x   For updates to this list, go to www. File 1040x irs. File 1040x gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. File 1040x Penalties Investing in an abusive tax shelter may lead to substantial expenses. File 1040x First, the promoter generally charges a substantial fee. File 1040x If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. File 1040x You may also be subject to the penalty for failure to pay tax. File 1040x These penalties are explained in the following paragraphs. File 1040x Accuracy-related penalties. File 1040x   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). File 1040x Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. File 1040x Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. File 1040x   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. File 1040x   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). File 1040x Negligence or disregard of rules or regulations. File 1040x   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. File 1040x The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. File 1040x    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. File 1040x It also includes any failure to keep adequate books and records. File 1040x A return position that has a reasonable basis is not negligence. File 1040x   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. File 1040x   The penalty for disregard of rules and regulations can be avoided if all the following are true. File 1040x You keep adequate books and records. File 1040x You have a reasonable basis for your position on the tax issue. File 1040x You make an adequate disclosure of your position. File 1040x Use Form 8275 to make your disclosure and attach it to your return. File 1040x To disclose a position contrary to a regulation, use Form 8275-R. File 1040x Use Form 8886 to disclose a reportable transaction (discussed earlier). File 1040x Substantial understatement of tax. File 1040x   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. File 1040x An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. File 1040x The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. File 1040x   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. File 1040x In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. File 1040x Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. File 1040x   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. File 1040x An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. File 1040x Substantial valuation misstatement. File 1040x   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. File 1040x The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. File 1040x You underpaid your tax by more than $5,000 because of the misstatement. File 1040x You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. File 1040x   You may be assessed a penalty of 40% for a gross valuation misstatement. File 1040x If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. File 1040x The penalty rate is also 40% if the property's correct value or adjusted basis is zero. File 1040x Transaction lacking economic substance. File 1040x   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. File 1040x For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. File 1040x   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. File 1040x   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. File 1040x   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. File 1040x Relevant facts include any facts affecting the tax treatment of the transaction. File 1040x    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. File 1040x Undisclosed foreign financial asset understatement. File 1040x   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. File 1040x An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. File 1040x The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. File 1040x Any foreign business you control, reportable on Form 5471, Information Return of U. File 1040x S. File 1040x Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. File 1040x S. File 1040x Persons With Respect to Certain Foreign Partnerships. File 1040x Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. File 1040x S. File 1040x Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. File 1040x Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. File 1040x    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. File 1040x See the Instructions for Form 8938 for details. File 1040x    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. File 1040x Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. File 1040x Penalty for incorrect appraisals. File 1040x   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. File 1040x For details on the penalty amount and exceptions, see Publication 561. File 1040x Penalty for failure to disclose a reportable transaction. File 1040x   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). File 1040x For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). File 1040x This penalty is in addition to any other penalty that may be imposed. File 1040x   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. File 1040x For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. File 1040x irs. File 1040x gov/irb/2007-09_IRB/ar12. File 1040x html. File 1040x Accuracy-related penalty for a reportable transaction understatement. File 1040x   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. File 1040x This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. File 1040x The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. File 1040x You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. File 1040x The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. File 1040x   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. File 1040x Civil fraud penalty. File 1040x   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. File 1040x Joint return. File 1040x   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. File 1040x Failure to pay tax. File 1040x   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. File 1040x Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. File 1040x Prev  Up  Next   Home   More Online Publications