Does an investment club have to file a partnership return
| HelpRegister |
Does an investment club have to file a partnership return A frequent question is about the need to file a partnership return, Form
1065.
Rip, you are always recommending that investment
clubs file a partnership return. Isn't there an exception that says an investing
partnership can elect not to do this. If so, wouldn't the treasurer's job be a
lot easier under this election.
You are correct in that there is an election that a group can make not to be considered a partnership (Section 761 of the IRS code). Up until 1994, NAIC recommended that investment clubs avail themselves of this election. In 1994 they reversed themselves and recommended strongly that investment clubs not make this election and to file a partnership return. The IRS, not to be outdone in inconsistency, showed investment clubs how to make this election in their publications 541 and 550, up until the year 1998. At the same time they were doing this, the IRS was sending very strange letters to clubs who were asking permission to break the election. In these letters, the IRS was saying that the election under 761 never applied to investment clubs in the first place. Now, the information on how investment clubs can elect under 761 is conspicuously absent from the IRS publications. Having said all that, in my not so humble opinion, it is extremely dangerous to elect 761 and not file a partnership return. The reason is that if you elect not to be taxed as a partnership, you are saying that each member is a co-owner of each asset of the partnership. So you do not report your share of all of the partnership's dividends, you report your share of dividends from each stock the partnership owns. The same method will apply to any expense, or stock sale. Even more dangerous is what happens if a member has a partial withdrawal. Under partnership rules, a member can receive a partial withdrawal tax free until his/her basis has been exceeded. If the club has elected not to be taxed as a partnership, each withdrawal is a taxable sale of a portion of each asset to the remaining members. Because of the inconsistent position of the IRS, it is doubtful if they would ever try to apply the rules so stringently, but why take the chance. It's not all that much harder to file the return and give the k-1's to the partners. The treasurer has to give members all the information that a k-1 would entail. Why not supply the real thing? It's a very cloudy picture, but one thing is very clear to me. I would urge every investment club to file a federal partnership return. Buddy Mattingly asks a follow up question with regard to
my article about making the election under 761 or the IRS code NOT to
file an partnership income tax return. My advice, which can be found at http://www.bivio.com/trez_talk/mail-msg?t=101500003 was
NOT to make this election.
Our investment club was formed in November of
1992. At that time we elected to be considered an investing partnership
and therefore have not filed returns all of these years. After reading
your response to the previous question I began to question our position.
What would be the ramification of beginning to file a partnership
return in 2000 on a go forward basis. Your response to the previous
implies one must ask permission to break this election, but that the IRS
does not recogize the election in the first place for Investment
clubs. I agree with you that this was not my understanding when we elected
out of doing a tax return. So again my question is going forward
should the club begin filing returns, therefore avoiding any
future exposure we might have with regard to penalties, or will this wake
up a sleeping dog so to speak.
Now remember, it was you that called the IRS a dog, not I <g>. This is an interesting question and has been debated by quite a few people, including yours truly. NAIC has strongly advocated that clubs do not ask permission to revoke 761, but just start filing returns. This is in direct conflict with the regulations which say that you must apply for permission to revoke. I was part of a tax workshop which ended up recommending that clubs do ask for permission to revoke. A few clubs followed our recommendation to ask permission and got very puzzling letters from the IRS. The content of these letters was that investment clubs never were eligible to make this election in the first place. So, reluctantly, I have changed my stance, and now
recommend that clubs just start to file the partnership return. I have never
heard of a club getting into trouble by doing this. I firmly believe that the
IRS has been caught giving conflicting advice in this matter, and would like to
let the matter drop.
I remain firm, however, in my stance that all clubs should
be filing a partnership return.
|
|
||||||