Parternships

[Chief]

What makes a parternship? I have a new client whose returns in past have filed a family only rental business filed on Sch E. Does the absence of an official agreement mean this is not a parternship. The client owns 25% of the rental equipment business. Other memb ers of her family own the remainder. I am tempted to file as the previous preparer did and as he does for the rest of the family I assume.
I have written to the previous preparer for clarification of 2005 records and the 2006 infornation yet to brought to me by my client.
Am I on the right track?.

[dsi]

This sounds to me like a 1065 is in order. Furthermore, if it is an equipment rental business, I don't think it should go on Sch E.

[JoshinNC]

There's is no requirement that a partnership agreement exist

If 2 or more individuals engage in business together it is a partnership. I also agree with the other poster that a business engaged in renting equipment would not be reported on Sch. E. Was the previous preparer an EA or CPA? These letters don't always guarantee success when choosing a professional, but are good starting points.

[Chief]

Partnerships

The previous preparer is a
CPA. I assume a CPA knows what he is doing. But a CPA in Tennessee did my own personal returns years ago and took my moving expenses because I was retiring. It did not matter to him that I was not moving from abroad back home but was moving from one state to another. The jerk could not read plain English in the moving regulations of IRS.
This matter becomes more interesting and I await anxiously to receive his p@l statement for the rental business. Uhm. I can hardly wait to read Black Bart's comments and Brad's statement on this situation. In theology I am in ardent disputute of situation ethics. Come on now guys!

[JoshinNC]

From the IRS pub on Partnerships

"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. However, a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. "

The prior preparer is misreading this statement to indicate that because they are in the business of renting equipment they are exempt from partnership taxation. However, they are mistaken. The rental discussed in the publication is not that of a business that's sole purpose is to rent equipment. If so than I will begin filing a Sch. E for my tax business and state that my client's are merely renting use of my brain and office equipment for a period of time, and then they return it to me for my own use or to allow someone else to use it.

Sometimes you have to apply prudence to what you are reading to come up with the correct answer.

[OldJack]

This sounds to me like a 1065 is in order. Furthermore, if it is an equipment rental business, I don't think it should go on Sch E.

I agree with dsi.

A business of renting equipment is not allowed to use 1040 Sch-E, page 1. Sch-E, page 1, is only for real estate rentals and royalties.

If the business is a single owner rental of equipment is reported on 1040 Sch-C, and 1040 Sch-SE.

A Partnership filing 1065 would report its rental of equipment on 1040 Sch-E, page 2, and 1040 Sch-SE.

[Chief]

Parternships David, Josh, & Old Jack

I appreciate very much your posts to this topic. The 1040SE sheds further light on the issue. I am sure the CPA was attempting to get his clients the best tax Treatment available. although he was WRONG.
The income was reported as passive income thus avoiding the SE tax. Although the person owns 25% of the business she could have declined or sold it. By retaining her interest she became materially involved and thus must pay the SE tax.
Guys is my thinking on this matter clear? I will file a 1065 and a 1040SE with my clients return regardless of the way the CPA had formerly reported it.

[Chief]

Partnerships Revisited

I now have the summary of the 2006 rental activity for the shop mentioned. The shop itself is rented out to an individual/company. The mother owns 50% and a son owns 25% and a daughter 25%. Does this sound like a partnership arrangement to you? In 2005 it was reported on Sch E. The daughter is the wife of my client. I still think it could be on 1065 but now not so certain? What do you think?
It is an arrangement where the co-owners share expenses to rent out the building. It looks like it could be on Sch E as the previous preparer did?

[dsi]

Chief, why not ask to see the deed to the property?

[outwest]

To me..

I sounds like the prior preparer had it right under the mere co-ownership rules. Funny how one casual word (equipment) launched everyone everyone into a tirade about the incompetent prior preparer.

Seems to me that when there is an unexpected position on a return, the first response should be "are we sure of the facts" rather than "the last guy was an idiot".

IMHO...

I now have the summary of the 2006 rental activity for the shop mentioned. The shop itself is rented out to an individual/company. The mother owns 50% and a son owns 25% and a daughter 25%. Does this sound like a partnership arrangement to you? In 2005 it was reported on Sch E. The daughter is the wife of my client. I still think it could be on 1065 but now not so certain? What do you think?
It is an arrangement where the co-owners share expenses to rent out the building. It looks like it could be on Sch E as the previous preparer did?

[Chief]

Partnerships

You are so right. This indeed has been a learning experience for me. You can't jump the gun until all the facts are presented. I am so glad I didnt call the prior preparer on this but waited until all the facts were in. Again this Board is the greatest learning tool we have and people like you are the ones that make it great.
However, I think when one has a new client it is healthy to question what has been done by the previous preparer. That is the only way to learn about the situation.