RS 01802.360 Allocating NE From a Partnership


A division of earnings in accordance with the partnership agreement in effect at the time that a partnership return for a taxable year is due, will be recognized for income tax purposes and for figuring NESE.


1. General

Allegations and agreement to the distribution of earnings can usually be accepted. Further inquiry should be made if:

  1. a. 

    It appears the percentage has been changed arbitrarily from year to year, or;

  2. b. 

    Distribution appears unreasonable or arbitrary, or appears designed solely to qualify one for benefits or avoid work deductions.

NOTE: Real changes in duties and responsibilities often give rise to changes in the percentage of distribution which are reasonable.

2. Section 704(e)

The distribution of income must:

  1. a. 

    Allow for reasonable compensation for services rendered to the partnership by the donor before the donee's share is determined; and

  2. b. 

    Ensure that the share of the partnership income allocated to the donee is not proportionately greater than the donor's share attributable to the donor's capital.

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RS 01802.360 - Allocating NE From a Partnership - 11/14/2002
Batch run: 07/03/2014