Samll partnership exception

[appelman]

I have a client who wants to interpret the small partnership exception to mean that no 1065 has to be filed at all, with all income and expense being reported on the partners' Schedule C's. Is he correct on this?

Actually, this is a California partnership, and CA does not conform to the small partnership exception, so a 565 would presumably have to be filed in any case.

[Lion]

Schedule E page 2. Not schedule C. But, I wouldn't do it that way for a client. I would try to use that exception to avoid P&I on a new client who had that problem in a prior year. (And, I used it once for partners who forgot to mail their partnership return but did give their K-1s to their personal preparer!)

[DaveinTexas]

I had heard of this in the past

I have a client who wants to interpret the small partnership exception to mean that no 1065 has to be filed at all, with all income and expense being reported on the partners' Schedule C's. Is he correct on this?

Actually, this is a California partnership, and CA does not conform to the small partnership exception, so a 565 would presumably have to be filed in any case.

But for a long time could not find a cite, regarding the non-requirement to file a 1065 if there were fewer than 10 partners. I may have stumbled onto it, here's the cite: http://www.irs.gov/pub/irs-wd/0135029.pdf

Here's the part that applies on page 3:
"The penalty will not be imposed if the partnership can show that failure to file a complete or timely return is due to reasonable cause. The Committee understands that small partnerships (those with 10 or fewer partners) often do not file partnership returns, but rather each partner files a detailed statement of his share of partnership income and deductions with his own return. Although these partnerships may technically be required to file partnership returns, the Committee believes that full reporting of the partnership income and deductions by each partner is adequate and that it is reasonable not to file a partnership return in this instance."

Of course, The first line of the PDF states, "In accordance with I.R.C. § 6110(k)(3), this document is not to be cited as precedent.". So buyer beware but I did hear this particular subject discussed at a seminar, the speaker (very knowlegeable and experienced) discussed and supported this provision.

To step out of the devil's advocate shoes though, it may behoove your client to consider filing the 1065 in the future to avoid problems that exist with partnerships (aligning the partnership agreement with the tax return, unequal distributions, property ownership, depreciation on assets, etc).

[Gretel]

The problem with no filing a partnership return is that one still has to follow partnership rules and report everything exactly as a K-1 would show. If it is not a very simple return it could create a problem.

[appelman]

Dave, thanks for the cite.

Since they have to file the CA 565, anyhow, I will certainly encourage them to file the 1065, albeit a bit late.

[DaveinTexas]

You bet

It may help others in a similar situation.

[appelman]

I do wonder, however...

If you really never file a 1065, where on the 1040 would you put all the details?

[DaveinTexas]

It would be a mess but

For simple partnerships with no equipment and no investments, just the Schedule C would do the trick. Otherwise you might need a statement detailing each partnership item (interest, dividends, 1231 gains/losses, depreciation, etc) then you would need to add all of the corresponding forms (Sch B, C, D, 4797, 4562 etc.). That would be quite a mess but if all partners did not file a timely return, the rev proc 84-35 would not alleviate the penalty. You would have to rely on this Rev Proc 81-11. And, if there were 9 partners involved it could potentially save the clients a lot of heartache. Although, I have never used this to alleviate late file penalties so I can't speak from experience (only tell you what others have tried and had success with).