Quick Notes

One-liners — the rules pulled out of my chapter notes and the practice questions I worked, one sentence each, brought current to 2026. The partnership mechanics are old law; what moved is noted.

What is and isn't a partnership

• A partnership is any syndicate, group, pool, joint venture or other unincorporated organization carrying on a business that is not a corporation, trust or estate. A trust is not a partnership.
• A two-member LLC that files nothing is a partnership. A one-member LLC that files nothing is a Schedule C or E.
• Mere co-ownership of rental property, with no services beyond what a landlord provides, is not a partnership. Two brothers who inherit a building each file Schedule E.
• Sharing expenses is not a partnership. Sharing profits from a business is.
• A pure investment club of individuals can elect out of partnership treatment under Sec. 761(a) if every member agrees; each then reports his own share.
• An interest in a partnership cannot be depreciated or amortized and is excluded from Sec. 197.
• Spouses can be a qualified joint venture (two Schedule Cs) only if the business is not in a state-law LLC, except in community-property states. Colorado is not one.
• A family partnership counts only a spouse, ancestors, lineal descendants and trusts for them. Brothers and sisters are not "family" for Sec. 704(e) and need no special test to be partners.
• A family member gets a capital interest recognized if capital is a material income-producing factor, the interest was acquired in a bona fide transaction, and the family member actually owns and controls it. If capital is not material, the family member must contribute real services.
• The donor of a family-partnership interest must first be allocated reasonable compensation for services; the donee's share is figured on what is left. Gift 20% of a $100,000 business where the donor's services are worth $30,000, and the donee gets $14,000, not $20,000.
• A partner performing services worth $55,000 in a capital-intensive family partnership with $80,000 of profit reports $55,000 plus half of the remaining $25,000: $67,500.
• The simplest way to change profit shares is to amend the agreement; do it by the return's due date for it to cover the year.
• If the agreement is silent, a partner's interest is set by relative contributions, interests in economic profit and loss and cash flow, and rights to capital on liquidation. The partnership's nonrecourse debt is not a factor.
• Partnership attribution (Sec. 267 / 707(b)) runs to spouse, siblings, children, grandchildren and parents, plus proportionate ownership through a corporation if the person owns 50% or more of it. Stock-redemption attribution under Sec. 318 drops siblings and attributes partnership-held stock to every partner regardless of percentage.

Tax year and filing

• Required year: majority-interest year first (partners owning more than 50% with the same year), then principal partners' year (all 5%-or-more partners with the same year), then least aggregate deferral.
• Least aggregate deferral: for each candidate year-end, multiply each partner's profit share by the months from that year-end to the partner's year-end, add them up, pick the smallest. A tie lets the partnership choose; an existing year that qualifies must be kept.
• A 60% corporate partner with a March 31 year makes March 31 the required year, no computation needed.
• Sec. 444 lets a partnership keep a fiscal year with no more than three months of deferral, if it is not in a tiered structure and has not made the election before. A partnership whose partners all share its year has nothing to defer and cannot elect.
• Income deferral is never a business purpose; a natural (seasonal) business year can be.
• A new partner keeps his own tax year; he reports the partnership's items in his year that contains the partnership's year-end.
• Form 1065 is due the 15th day of the third month after year-end: March 15 for a calendar year, January 15 for an October 31 year. Form 7004 adds six months.
• Late-filing penalty: $255 per partner per month or part of a month, up to 12 months, for 2025 returns filed in 2026, indexed yearly. updated 2026 Rev. Proc. 84-35 abates it for a partnership of 10 or fewer individual (or estate) partners who all reported on time. added 2026
• The partners make the estimated payments; the partnership makes none.
• Only one partner need sign the 1065, and the signature is evidence of authority.
• Every partnership designates a partnership representative on each year's return. The opt-out from centralized audit needs 100 or fewer partners, all individuals, estates, or C or S corporations; one LLC or trust partner kills it. added 2026
• An audit adjustment is collected from the partnership at the top rate as an imputed underpayment unless the partnership pushes it out to the reviewed-year partners within 45 days. added 2026
• Information-return penalties (Secs. 6721/6722) are per return, tiered by how late, with a smaller annual cap for businesses with $5 million or less in gross receipts.
• A partner must report items consistently with the K-1, or file Form 8082 to say why not.

Contributions and basis at formation

• No gain or loss on contributing property for an interest, even appreciated property and even for a disproportionate interest. The partnership takes the partner's basis (plus any gain the partner recognized); the partner takes the same basis in the interest.
• The partnership's basis in a contributed building is the partner's basis, unadjusted for the mortgage on it.
• A capital interest received for services is ordinary income at FMV when received (Sec. 83), and that income is the partner's basis. A 25% interest in a $60,000 partnership for services is $15,000 of income and $15,000 of basis.
• A profits interest for services is generally not taxed on receipt and starts at zero basis.
• Liability shifted to the other partners is a deemed cash distribution; the partner's own share of partnership debt is a deemed contribution. Net them.
• Contribute property with an $8,000 basis and a $4,000 mortgage for a 20% interest: basis is $8,000 – $3,200 = $4,800.
• Contribute property with an $8,000 basis and a $12,000 mortgage for a 20% interest: the other partners take on $9,600; basis goes to zero and the $1,600 excess is capital gain. Basis is never negative.
• Marlene: $25,000 basis, $40,000 mortgage, 30% interest; relieved of $28,000; $3,000 gain, zero basis.
• Gain is measured against the aggregate basis of everything contributed, cash included. Kae contributes land with a $15,000 basis and an $18,000 mortgage, and the other partner takes half: $9,000 relief against $15,000 of basis, no gain.
• The partnership's basis in the property goes up by any gain the contributing partner recognized: Bob's $15,000 building becomes $16,000 to the partnership after his $1,000 gain.
• Cash-basis accounts payable are not liabilities for basis. Bank loans and notes are.
• The partnership's holding period in contributed property includes the partner's, even if the partner recognized gain. The partner's holding period in the interest includes the holding period of contributed capital and Sec. 1231 assets, but starts fresh for inventory, receivables or services.
• A built-in capital loss on contributed property stays capital for five years; built-in inventory gain stays ordinary for five years; built-in receivables stay ordinary forever (Sec. 724).
• Contributing property and promptly getting cash back is a disguised sale, and since July 2025 the rule applies on its own without regulations. added 2026

Operations, allocations and the running basis

• Every partner is taxed on the distributive share whether or not anything was distributed; distributions are tax-free up to basis.
• Separately stated: capital gains and losses, Sec. 1231, guaranteed payments, interest, dividends, royalties, tax-exempt income, investment income and expense, rental activities, cancellation of debt, recovery items, charitable contributions, foreign taxes, oil and gas depletion, Sec. 179, distributions, QBI items. Not separately stated: Form 4797 Part II ordinary gains and losses, salaries, cost of goods sold.
• Charitable contributions, foreign income taxes, and a Sec. 1231 loss on machinery held five years are all left out of ordinary income and passed through separately.
• Sec. 179 is limited by the partnership's taxable income and again by each partner's; a $30,000 purchase with $25,000 of partnership income passes through $25,000, split by share.
• An allocation must have substantial economic effect; giving tax-exempt interest to the high-bracket partner and taxable interest to the low-bracket one does not.
• A built-in gain on contributed property goes to the contributor when the partnership sells; post-contribution gain is shared normally. Mary's $80,000-basis, $100,000-value asset sold for $110,000: $25,000 to Mary, $5,000 to Tony.
• A built-in loss goes to the contributor too: Jim's $15,000-basis land worth $10,000, sold for $8,000, gives Jim $5,000 of precontribution loss plus his share of the rest.
• Basis order each year: add income (taxable and tax-exempt) and debt increases; subtract distributions; subtract nondeductible items; subtract losses last, not below zero.
• Nondeductible expenses reduce basis in full: $5,000 of meals with $2,500 disallowed still takes $5,000 off basis.
• A recourse liability belongs to the partner who would pay if everything were worthless. A guarantee puts the whole guaranteed debt in the guarantor's basis. A side agreement capping a partner's exposure caps the share.
• A general partner "liable for all debts" but capped at $10,000 by a side agreement gets $10,000 of basis from a $15,000 loan, and a $42,000 loss share is deductible only to the $40,000 of basis.
• Nonrecourse debt is shared by profit ratio when there is no minimum gain. Harvey's one-fifth share of a $50,000 nonrecourse loan is $10,000 of basis.
• An LLC's bank loan with no member guarantee is nonrecourse to the members. added 2026
• Refinancing: new debt up, old debt down, net the change. $200,000 borrowed to retire $170,000 is a $30,000 increase, times the partner's share.
• Borrowed money that buys depreciable assets gives basis because it creates basis in the partnership's assets.
• Guaranteed payments do not change basis.
• Loss gates in order: basis (Sec. 704(d)), at-risk (Sec. 465), passive (Sec. 469), excess business loss (Sec. 461(l)). A share of nonrecourse debt gives basis but is not at risk, except qualified nonrecourse real estate financing.
• Excess business loss cap for 2026: $256,000 single, $512,000 joint; 2025: $313,000 / $626,000; permanent; the excess becomes an NOL carryover. updated 2026
• Business interest is limited at the partnership level to 30% of EBITDA-based ATI, permanently, from 2025; excess business interest passed to a partner reduces basis when allocated. added 2026
• The QBI deduction is figured on the partner's return from the K-1's QBI, W-2 wages, UBIA and SSTB information; the partnership does not take it. Guaranteed payments are not QBI. 2026 thresholds $201,750 / $403,500. updated 2026
• Partnership elections (accounting method, depreciation, bonus, Sec. 179, inventory, installment, Sec. 754) are made by the partnership; the foreign tax credit vs. deduction choice and Sec. 108 debt-discharge treatment are made by each partner.
• A gift of a partnership interest is tax-free to the donor unless the debt share exceeds basis; the donee takes the donor's basis, adjusted through the gift date.
• A deceased partner's year closes at death for that partner only; SE income runs through the end of the month of death (8/12 of $18,000 is $12,000 for an August 20 death).
• An inherited interest takes a date-of-death value basis plus the debt share, less IRD.

Guaranteed payments and dealing with the partnership

• A guaranteed payment is set without regard to partnership income: a fixed salary, interest on capital, rent on contributed property, or the shortfall under a guaranteed minimum.
• Guaranteed minimum: Meena gets 30% but not less than $13,000; with $30,000 of income her share is $9,000, so the guaranteed payment is $4,000. With $100,000 of income and a $20,000 floor on a 40% share, there is no guaranteed payment; the $40,000 is all distributive share.
• A guaranteed payment is ordinary income to the partner, deductible (or capitalized) by the partnership, reported in the partner's year that includes the partnership's year-end, subject to SE tax, excluded from QBI, and has no effect on basis.
• Monthly guaranteed payments from an April-to-March fiscal-year partnership are reported in the partner's year the partnership year ends, so a calendar-year partner reports nothing in the first calendar year.
• A guaranteed payment that pushes the partnership into a loss is still fully income to the recipient, who also takes his share of the loss. Joy: $60,000 payment plus a $2,500 share of the $10,000 loss.
• A partner is never an employee of the partnership: no W-2, no withholding; the partner pays SE tax and estimates.
• Partnership-paid health insurance for a partner is a guaranteed payment, then an above-the-line deduction on the partner's 1040. added 2026
• SE income of a general partner: distributive share of ordinary business income plus guaranteed payments for services. Alex: $5,000 guaranteed plus $40,000 share is $45,000; Arthur's $40,000 share is all SE income.
• Limited partners' distributive shares are exempt from SE tax; whether a working LLC member is a limited partner is unsettled — Tax Court says no (Soroban, functional test), the Fifth Circuit said state-law status controls (Sirius Solutions, January 2026). At the desk, a working Colorado LLC member pays SE tax. added 2026
• A partner acting as an outsider (a true loan, services not customarily performed by a partner, a sale of property) is taxed as an unrelated person: interest income, fee income, gain or loss recognized.
• Losses on sales between a partnership and a more-than-50% partner, or between two partnerships more than 50% commonly owned, are disallowed; the buyer's later gain is recognized only to the extent it exceeds the disallowed loss, and the seller never gets the loss back.
• Red sells land with an $85,000 basis to Hood for $70,000 (both controlled by Wolf): $15,000 loss disallowed. Hood sells for $76,000: $0 gain. Hood sells for $125,000: $25,000 gain.
• Gain on a sale between a partner and a more-than-50% partnership is ordinary if the property is not a capital asset in the buyer's hands. Dora's capital asset sold to her partnership, which will depreciate it, produces $8,000 of ordinary income.
• A partnership that sells land to another partnership owned by a partner and her mother at 30% each is not related under the more-than-50% test, so the gain is recognized and is capital.
• Interest on a loan used to buy a partnership interest is business interest in proportion to the partnership's business assets: 80% business assets, 80% business interest.

Distributions

• A distribution of money (including liability relief and marketable securities) is capital gain only to the extent it exceeds outside basis. No loss on a current distribution, ever.
• Property distributed takes the partnership's basis, capped at the partner's outside basis less money received in the same distribution. Stan: $15,000 basis, $6,000 cash, property with $11,000 partnership basis takes $9,000. Paul: $10,000 basis, $4,000 cash, $8,000 property takes $6,000.
• When the cap applies, basis goes first to receivables and inventory, then to other property; a required decrease goes first to assets that have declined in value, then by relative adjusted basis. Karen's computer and desk: $750 and $250.
• Joan: $15,000 basis, $2,500 cash and land with a $7,500 basis and $5,000 FMV; no gain, no loss; basis drops by $10,000 and the land is $7,500 to her.
• Greg: $20,000 basis, $1,000 cash and property with a $1,500 basis; no gain; property is $1,500 to him.
• Carol: $50,000 basis, $10,000 cash and land with a $30,000 basis; the land is $30,000 to her, not its $50,000 value.
• The 7-year rules run both ways: contributed property distributed to another partner within seven years triggers the contributor's built-in gain (Sec. 704(c)(1)(B)); a contributor of appreciated property who receives other property within seven years recognizes the lesser of the remaining built-in gain or the value received over basis (Sec. 737).
• Reuben's land, $25,000 basis and $60,000 value at contribution, distributed to another partner in year 5: Reuben recognizes $35,000. Taxpayer D with no precontribution gain recognizes nothing when the land goes to another partner.
• Bob under Sec. 737: $6,000 remaining precontribution gain, machinery worth $37,000 against a $35,000 basis: $2,000 of gain even though the machinery's basis was under his outside basis.
• A disproportionate distribution of hot assets (receivables, or inventory worth more than 120% of basis) is an exchange that produces ordinary income under Sec. 751(b).
• Depreciation recapture inside the partnership is an unrealized receivable. The hot asset in most small LLCs is the equipment, not the receivables. added 2026
• Every distribution of property other than money, current or liquidating, requires the partner to attach Form 7217, one per distribution date, for 2024 and later years. added 2026
• The partner's holding period in distributed property includes the partnership's. Distributed receivables stay ordinary forever; distributed inventory stays ordinary for five years.

Sale of an interest

• Gain or loss on a sale is amount realized (cash + property + the seller's share of partnership debt) less outside basis adjusted through the sale date. The property originally contributed is irrelevant.
• Carl: zero basis, $15,000 cash, relieved of $10,000 of debt; amount realized $25,000, all gain.
• Kumar, Scott and Fred (the same question three ways): $20,000 basis including a $15,000 debt share, sold for $10,000 cash; amount realized $25,000; $5,000 capital gain. Walk away for nothing with a zero basis and the $15,000 debt relief is a $15,000 capital gain.
• Dan: $35,000 basis including $19,000 of debt, sold for $16,000 cash plus debt assumed; amount realized $35,000; no gain. Henry: $20,000 basis with $5,000 of debt, sold for $15,000; no gain. Joseph: $38,000 basis with $30,000 of debt, sold for $15,000; $7,000 gain. Rita: $40,000 with $30,000, sold for $20,000; $10,000 gain.
• Linda: sold for $25,000, basis $22,500 including $12,500 of debt; gain $15,000 ($25,000 + $12,500 – $22,500).
• Gain is capital under Sec. 741 except the share attributable to unrealized receivables and inventory, which is ordinary under Sec. 751(a). On a sale all inventory counts; the 120% test is for distributions only.
• Lloyd: $95,000 realized, $40,000 basis, $15,000 of receivables; $15,000 ordinary, $40,000 capital. Candy: $47,000 realized, $24,000 basis, $10,000 of receivables; $10,000 ordinary, $13,000 capital. Cynthia: $43,000 realized, $19,000 basis, $6,000 receivables; $6,000 ordinary, $18,000 capital.
• Abby: $225 total gain, $150 of it her half of the inventory appreciation, ordinary; $75 capital. Archie: $1,500 gain, $1,000 ordinary (half the inventory appreciation). Michael: zero basis, $30,000 sale, $10,000 share of inventory income; $10,000 ordinary, $20,000 capital.
• The partnership files Form 8308 for a Sec. 751 sale and gives the seller and buyer the statement by January 31; penalty relief for the Part IV figures has been year-to-year. added 2026
• Look-through on the capital portion: unrecaptured Sec. 1250 gain at 25%, collectibles at 28%. added 2026
• A gifted interest sold by the donee: donor's basis, tacked holding period, capital gain (Hart Jr.: $85,000 – $60,000 = $25,000 long-term).
• Exchanging one partnership interest for another is not a like-kind exchange.
• A partnership no longer terminates when 50% or more of the interests are sold; that rule ended with 2017. It terminates only when the business stops or one owner is left. updated 2026
• Cobb and Danver selling their half to Frank: the partnership did not terminate. Beck dies, his estate shares profits until liquidated April 30 of the next year: the partnership terminated April 30, when Crocker became the only owner.
• Converting a partnership to an LLC is not a sale, exchange or liquidation; the year does not close and the EIN continues. Converting to an S corporation is a deemed liquidation and every partner's debt share becomes a distribution that day. added 2026

Liquidation and retirement

• A retiring partner is a partner until the last liquidating payment and keeps getting a K-1.
• Sec. 736(b) payments (for the partner's share of property) are distributions: no deduction to the partnership, no change to the other partners' shares, capital gain to the retiree above basis. Sec. 736(a) payments (everything else; anything measured by income) are distributive share or guaranteed payments: ordinary, SE taxable, and they reduce the remaining partners' income.
• In a service partnership (capital not material), a general partner's payments for receivables, and for goodwill unless the agreement provides for it, are Sec. 736(a). added 2026
• Gain on a liquidating distribution: money over basis, capital. Loss: only if the partner receives nothing but money, receivables and inventory, and only to the extent basis exceeds the money plus the partnership's basis in those items; one piece of other property kills the loss.
• Amber: $17,000 basis, $11,000 cash and zero-basis receivables; $6,000 capital loss. Partner Z: $100,000 basis, $10,000 cash and equipment; no loss; equipment basis $90,000.
• Property in a liquidation takes a substituted basis: outside basis less money, allocated first to receivables and inventory at the partnership's basis, then to other property.
• Vance and Hop: $180,000 basis, $100,000 cash, real estate with a $70,000 partnership basis; the real estate is $80,000 to the partner.
• Ms. A: $40,000 basis, $20,000 cash, inventory with a $10,000 basis, land with a $15,000 basis; the land is $10,000 to her.
• Ted: $30,000 basis, $10,000 cash, inventory with a $12,000 basis, two parcels with $12,000 and $4,000 of basis; $8,000 remains for the parcels, a $8,000 decrease, allocated by relative basis: $6,000 and $2,000.
• Increase (outside basis exceeds the property's partnership basis): assign partnership basis, then appreciation to each appreciated asset up to its appreciation, then the rest by FMV. Ruth: apartment house $58,000, office building $14,500. Mary: equipment $30,000, building $120,000. Bob (Sunshine): collating machine $165, intangible $235. Partner A: Asset X $4,400, Asset Y $1,100.
• Decrease (property's partnership basis exceeds outside basis): assign partnership basis, then the decrease to assets that have declined, up to the decline, then the rest by relative remaining basis. Dave: land $18,750, building $6,250. Jeff: building $44,444, computer $5,556. Asya: building $88,889, computer $11,111. John: property C $8,000.
• The partner's holding period in liquidated property includes the partnership's.
• Order of payment when a partnership winds up: creditors first (a partner's loan to the partnership is a creditor claim), then limited partners, then general partners by share.

Parked for other chapters

These came up in the same question set and belong elsewhere; I'll move them when those chapters are built.

• Sec. 318 attribution for stock redemptions: spouse, children, grandchildren and parents, not siblings; partnership stock to every partner proportionately; corporate stock to a 50%-or-more shareholder proportionately. R owns 54 of 100 shares constructively.
• Substantially disproportionate redemption (Sec. 302(b)(2)): after the redemption the shareholder must own less than 50% of the vote and less than 80% of what he owned before, measured on both voting and common stock. Mr. B at 40% must redeem 12 shares to get under 32%.
• A complete redemption of all a shareholder's stock is an exchange (capital gain); a partial redemption that leaves him with 100% of the vote is a dividend to the extent of E&P.
• Sec. 351 boot: gain is recognized up to the cash plus FMV of other property received; Dylon recognizes $20,000.
• An NOL excludes nonbusiness deductions in excess of nonbusiness income and nonbusiness capital losses; wages count as business income. Destry's NOL is $7,000.
• A correction of an error is not a change in accounting method; switching cash to accrual or changing inventory valuation is, and needs Form 3115.
• Cash over $10,000 received in a trade or business, in one or several related transactions within 12 months, goes on Form 8300 within 15 days.
• Under Sec. 263A, rent on equipment used to build a facility is capitalized into the facility, not deducted.

Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.