Partnership taxation: New ownership disclosures require extra digging

By Jane McCurdy, CPA

The IRS Form 1065, U.S. Return of Partnership Income, is the tax return that partnerships must file annually. Beginning with the 2009 tax year, partnerships are required to answer two new questions when filing Form 1065.

  1. At the end of the tax year, did any entity or individual have, directly or indirectly, an ownership interest of 50% or more in the partnership?
  2. At the end of the tax year, did the partnership own 20% or more directly of the stock of a corporation or interest in another partnership; or did the partnership own 50% or more, directly or indirectly, of the stock of a corporation or interest in another partnership?
These two questions essentially ask for a chain of ownership involving the partnership. On the surface, these questions would appear straightforward. However, in addition to looking at the direct ownership, one must consider the constructive ownership rules. These rules are defined in Internal Revenue Code Section 267(c). Basically, these new rules mean that the partnership must look "up and down the chain" of ownership in entities and must also look at family relationships. These concepts are best illustrated through some examples:
Example 1
Corporation A owns, directly, an interest of 50% of Partnership B. Corporation A also owns, directly, an interest of 15% in Partnership C. Partnership B owns, directly an interest of 70% in Partnership C. So, we've got the following ownerships:
As a result, Corporation A owns, directly or indirectly, 50% of Partnership C (15% directly and 35% indirectly through its ownership of Partnership B). Partnership C should report on the 2009 Form 1065 that it is owned 50% by Corporation A and 70% by Partnership B.
Note: Ownership percentages of direct and indirect ownership can exceed 100%.
Example 2
Individual A owns 50% of Partnership X. Individual B, the daughter of A, does not own any part of Partnership X, but she does own 80% of Partnership Y. Partnership Y owns 30% of Partnership X. Therefore, the following ownerships exist:
Individual A owns, directly or indirectly, 74% of Partnership X (50% directly and 24% indirectly through his relationship to his daughter and her ownership in Partnership Y, which owns part of Partnership X). Partnership X should report on the 2009 Form 1065 that it is owned 74% by Individual A.
Note: Another anomaly of these constructive ownership rules is that the ownership shown on Schedule B might not always agree to the ownership shown on the Schedule K-1 for that partner.
Example 3
Partnership A owns a 45% interest in Partnership B. Partnership A owns 15% of Partnership C and Partnership B owns 85% of Partnership C. So, the following ownership structures exist:
Partnership A owns, directly, a 45% interest in Partnership B and directly and indirectly a 53% interest in Partnership C (15% directly and 38% indirectly through its ownership of Partnership B). What is shown on Partnership A's Form 1065 is 45% interest in Partnership B (since that is a more than 20% direct ownership) and a 53% interest in Partnership C (since that is a more than 50% direct or indirect ownership). This example illustrates the look-through principle that must be used in answering these questions. At first glance, one might think that Partnership C does not need to be disclosed because Partnership A only owns less than 20%, but further inspection of the "chain of ownership" reveals the need to include Partnership C on the Form 1065.
What all this means for the preparation of 2009 partnership tax returns in the coming months is that the partnerships will need to consider not only their direct owners but also ask questions about who owns their partners or who is related to their partners as well as what do they own. Feel free to contact Jane McCurdy at for additional information.


About the author
Jane McCurdy, CPA, is a senior manager in the tax department of Camp Hill, PA-based McKonley & Asbury specializing in non-profit, individual, and partnership tax services.

You may like these other stories...

IRS must take oath on Lerner emails: judgeMackenzie Weinger of Politico reported on Thursday that a federal judge ordered the IRS to explain under oath how it lost emails connected to Lois Lerner, the ex-IRS official at the...
The Republican-controlled House of Representatives passed a bill on Friday morning that would permanently extend the bonus depreciation tax break for businesses.The measure, HR 4718, which was crafted by Representative Pat...
The Republican-led House of Representatives is expected to pass a bill this week that would permanently extend the bonus depreciation tax break. But don’t expect President Obama to sign it.The Obama administration said...

Upcoming CPE Webinars

Jul 16
Hand off work to others with finesse and success. Kristen Rampe, CPA will share how to ensure delegated work is properly handled from start to finish in this content-rich one hour webinar.
Jul 17
This webcast will cover the preparation of the statement of cash flows and focus on accounting and disclosure policies for other important issues described below.
Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.