Election Under IRC Section 761(a)

IRC Code section 761(a) will allow the members of a tax partnership to elect out of Subchapter K, of the partnership law, by reporting the income on their individual Form 1040 tax returns, but it only applies to partnerships owning investments that have specific attributes. The partnership entity remains a partnership entity for purposes of the limitation on allowable credits and other tax attributes. What this means is that as a partner in a partnership, you will report your income on your individual form 1040 tax return and not file a separate form 1065 partnership return each year.

IRC Section 761(a):

§ 761.  Terms defined. 

(a) Partnership.  For purposes of this subtitle, the term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate.

Under regulations the Secretary may, at the election of all the members of an unincorporated organization, exclude such organization from the application of all or part of this subchapter [IRC Sections 701 et seq.], if it is availed of--
(1) for investment purposes only and not for the active conduct of a business,
(2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted, or
(3) by dealers in securities for a short period for the purpose of underwriting, selling, or distributing a particular issue of securities

if the income of the members of the organization may be adequately determined without the computation of partnership taxable income.

Treasury Regulation Section 1.761-2

(1) The organization must be availed of for investment purposes only and not for the active conduct of a trade or business or for the joint production, extraction, or use of property, but not for the purposes of selling services or property produced or extracted.

The members of such an organization must be able to compute their income without the necessity of computing partnership taxable income.

Any syndicate, group, pool, or joint venture which is classified as an association, does not fall within these regulations.

(2) Investing Partnership. Where the participants in the joint purchase, retention, sale, or exchange of investment property:

a) Own the property as co-owners,
b) Reserve the right to separately take or dispose of their shares of any property acquired or retained,
c) Do not actively conduct business or irrevocably authorize some person or persons acting as a representative capacity to purchase, sell, or exchange such investment property.

(3) The required election shall be made pursuant to these regulations on a timely filed return. Due to the complexity and the contradicting language of the regulations, I suggest that you read the regulations several times to come to a sufficient understanding how to proceed in making your elections.

Partnership or Joint Venture

A partnership includes a syndicate group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on and which is not, within the meaning of this title, a corporation or trust or estate.

A joint venture has been defined as a special combination of two or more persons, where some specific venture of a profit is jointly sought without any actual partnership or corporate designation.

In many respects, the concepts of joint venture are similar to the concept of a partnership, and many of the principles of partnership law are applicable to joint ventures. A primary distinction between the two concepts is that a joint venture is generally established for a single business purpose while a partnership is formed to carry on a business for profit over a long period of time. Fishback v US 215 F Supp 621 (1963).

Conduit rule under IRC Section 702(b)

The character of items constituting distributive shares of income, gain, loss, deduction, or credit included in a partner's distributive share shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the manner as incurred by the partnership. Thus this conduit rule requires that for the purpose of determining the nature of an item, gain, loss, deduction, or credit, in the hands of the partnership, before distribution, or a partner after distribution, the partnership is to be viewed as an entity and such items are to be characterized from the viewpoint of the partnership and not the viewpoint of the individual partner. Podell v Comm 55 TC 429 (1970).