U.S. Return of Income for Electing Large Partnerships (Form 1065- B), Partner's Share of Income (Loss) From an Electing Large Partnership (Schedule K-1)

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Page 1 of 11 Partner’s Instructions for Schedule K-1 (Form 1065-B) 16:19 - 7-SEP-2007
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2007

Department of the Treasury
Internal Revenue Service

Partner’s Instructions for
Schedule K-1 (Form
1065-B)
Partner’s Share of Income (Loss) From an Electing Large Partnership
(For Partner’s Use Only)
Section references are to the Internal
Revenue Code unless otherwise noted.

What’s New
1. Investors are no longer required to
file Forms 8271 that are due on or after
August 3, 2007. Accordingly, the box on
Schedule K-1 used to report the “Tax
shelter registration number” has been
deleted.
2. The categories of foreign source
income have been renamed and
reordered. These changes are reflected in
the code descriptions for Box 9, codes
K4(a) through K4(c), and Box 9, codes
K7(a) through K7(c). These changes
relate to the changes made to Form 1116,
Foreign Tax Credit.

General Instructions
Purpose of Schedule K-1
The partnership uses Schedule K-1 to
report your share of the partnership’s
income, deductions, credits, etc. Keep it
for your records. Do not file it with your
tax return. The partnership has filed a
copy with the IRS.
You are liable for tax on your share of
the partnership income, whether or not
distributed. Include your share on your tax
return if a return is required. Use these
instructions to help you report the items
shown on Schedule K-1 on your tax
return.
The amount of loss and deduction that
you can claim on your tax return may be
less than the amount reported on
Schedule K-1. It is the partner’s
responsibility to consider and apply any
applicable limitations. See Limitations on
Losses, Deductions, and Credits
beginning on page 2 for more information.

Electing Large
Partnerships (ELPs)
This partnership has elected simplified
reporting requirements intended to make
it simpler for you to report your share of
partnership income, credits, deductions,

etc. Generally, income, capital gains,
credits, and deductions are combined at
the partnership level so that the number
of partnership items separately reported
to partners is reduced. Most limitations
and elections affecting partnership
income are made by the electing large
partnership.
For limited partners, income and other
items from the partnership’s trade or
business and rental activities are treated
as being from a trade or business that is a
single passive activity. These items are
reported in boxes 1, 4a, and 5, with most
credits being reported in boxes 7 and 8.
General partners must make their own
determinations as to whether the activities
are passive for them. Therefore,
partnership items from trade or business,
rental real estate, and other rental
activities are separately reported for each
activity in box 9.
Income, etc., from other activities
(investment and portfolio income and
deductions) are reported in boxes 2, 3,
4b, and 6 for both limited and general
partners.

Errors
You must report partnership items shown
on your Schedule K-1 (and any attached
schedules) the same way that the
partnership treated the items on its return.
If you believe the partnership has made
an error on your Schedule K-1, notify the
partnership. Do not change any items on
your copy of Schedule K-1. Generally, an
adjustment to correct an error will take
effect for the tax year in which the
partnership actually makes the
adjustment. However, if the error involves
a change to your distributive share of a
partnership item, the partnership should
file an amended partnership return and
send you a corrected Schedule K-1.
If the treatment on your original or
amended return is inconsistent with the
partnership’s treatment, you may be
subject to the accuracy-related penalty.
This penalty is in addition to any tax that
results from making your amount or
treatment of the item consistent with that
shown on the partnership’s return. Any
deficiency that results from making the
Cat. No. 26141W

amounts consistent may be assessed
immediately.

Sale or Exchange of
Partnership Interest
Generally, a partner who sells or
exchanges a partnership interest in a
section 751(a) exchange must notify the
partnership, in writing, within 30 days of
the exchange (or, if earlier, by January 15
of the calendar year following the
calendar year in which the exchange
occurred). A “section 751(a) exchange” is
any sale or exchange of a partnership
interest in which any money or other
property received by the partner in
exchange for that partner’s interest is
attributable to unrealized receivables (as
defined in section 751(c)) or inventory
items (as defined in section 751(d)).
The written notice to the partnership
must include the names and addresses of
both parties to the exchange, the
identifying numbers of the transferor and
(if known) of the transferee, and the
exchange date.
An exception to this rule is made for
sales or exchanges of publicly traded
partnership interests for which a broker is
required to file Form 1099-B, Proceeds
From Broker and Barter Exchange
Transactions.
If a partner is required to notify the
partnership of a section 751(a) exchange
but fails to do so, a $50 penalty may be
imposed for each such failure. However,
no penalty will be imposed if the partner
can show that the failure was due to
reasonable cause and not willful neglect.

Nominee Reporting
Any person who holds, directly or
indirectly, an interest in a partnership as a
nominee for another person must furnish
a written statement to the partnership by
the last day of the month following the
end of the partnership’s tax year. This
statement must include the name,
address, and identifying number of the
nominee and such other person,
description of the partnership interest held
as nominee for that person, and other
information required by Temporary
Regulations section 1.6031(c)-1T. A

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Partner’s Instructions for Schedule K-1 (Form 1065-B)

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nominee who fails to furnish this
statement must furnish to the person for
whom the nominee holds the partnership
interest a copy of Schedule K-1 and
related information within 30 days of
receiving it from the partnership.
A nominee who fails to furnish when
due all the information required by
Temporary Regulations section
1.6031(c)-1T, or who furnishes incorrect
information, is subject to a $50 penalty for
each statement for which a failure occurs.
The maximum penalty is $100,000 for all
such failures during a calendar year. If the
nominee intentionally disregards the
requirement to report correct information,
each $50 penalty increases to $100 or, if
greater, 10% of the aggregate amount of
items required to be reported, and the
$100,000 maximum does not apply.

International Boycotts
Every partnership that had operations in,
or related to, a boycotting country,
company, or a national of a country must
file Form 5713, International Boycott
Report.
If the partnership cooperated with an
international boycott, it must provide you
with a copy of its Form 5713. As a
general or limited partner, you must file
your own Form 5713 to report the
partnership’s activities and any other
boycott operations that you may have.
You may lose certain tax benefits if the
partnership participated in, or cooperated
with, an international boycott. See Form
5713 and its instructions for more
information.

Definitions
General Partner
A general partner is a partner who is
personally liable for partnership debts.

Limited Partner
A limited partner is a partner in a
partnership formed under a state limited
partnership law, whose personal liability
for partnership debts is limited to the
amount of money or other property that
the partner contributed or is required to
contribute to the partnership. Some
members of other entities, such as
domestic or foreign business trusts or
limited liability companies that are
classified as partnerships, may be treated
as limited partners for certain purposes.
For example, see Temporary Regulations
section 1.469-5T(e)(3), which treats all
members with limited liability as limited
partners for purposes of section 469(h)(2)
(relating to the passive activity loss
limitation rules).

Disqualified Person
If you are a partner in a partnership
holding oil and gas properties, you are a
“disqualified person” if:
• You are an oil or natural gas retailer
described in section 613A(d)(2) or crude
oil refiner described in section 613A(d)(4)
or

• Your average daily production of
domestic crude oil and natural gas
exceeds 500 barrels for your tax year in
which the partnership’s tax year ends.
See section 776(b) for more details.
Note. Disqualified persons must report
items of income, gain, loss, deduction,
and credit attributable to partnership oil
and gas properties as if the special rules
for ELPs did not apply.

Nonrecourse Loans
Nonrecourse loans are those liabilities of
the partnership for which no partner bears
the economic risk of loss.

Elections
Generally, the partnership decides how to
figure taxable income from its operations.
However, two elections are made by you
separately on your income tax return and
not by the partnership. These elections
are made under the following code
sections.
• Section 108(b)(5) (income from the
discharge of indebtedness).
• Section 901 (foreign tax credit).

Change of Tax Year
If the partnership attaches a statement to
Schedule K-1 indicating that it has
changed its tax year and that you can
elect to report your distributive share of
the income attributable to that change
ratably over 4 tax years, see Rev. Proc.
2003-79, 2003-45 I.R.B. 1036, for details
on making the election. To make the
election, you must file Form 8082, Notice
of Inconsistent Treatment or
Administrative Adjustment Request, with
your income tax return for each of the 4
tax years. File Form 8082 for this purpose
in accordance with Rev. Proc. 2003-79
instead of the Form 8082 instructions.

Additional Information
For more information on the treatment of
partnership income, deductions, credits,
etc., see the following:
• Pub. 541, Partnerships;
• Pub. 535, Business Expenses; and
• Pub. 925, Passive Activity and At-Risk
Rules.
To get forms and publications, see the
instructions for your tax return.

Limitations on Losses,
Deductions, and Credits
There are three separate potential
limitations on the amount of partnership
losses that you can deduct on your return.
These limitations and the order in which
you must apply them are as follows: the
basis rules, the at-risk limitations, and the
passive activity limitations. Each of these
limitations is discussed separately below.

Basis Rules
Generally, you cannot claim your share of
a partnership loss (including a capital
loss) to the extent that it is greater than
the adjusted basis of your partnership
interest at the end of the partnership’s tax

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year. Any losses and deductions not
allowed this year because of the basis
limit can be carried forward indefinitely
and deducted in a later year subject to the
basis limit for that year.
The partnership is not responsible for
keeping the information needed to figure
the basis of your partnership interest. You
can figure the adjusted basis of your
partnership interest by adding items that
increase your basis and then subtracting
items that decrease your basis.
Use the worksheet on page 3 to figure
the basis of your interest in the
partnership.
Note. Additional basis adjustments may
apply to partners claiming deductions for
depletion. See chapter 9 of Pub. 535 for
details.

At-Risk Limitations
Generally, if you have (a) a loss or other
deduction from any activity carried on as
a trade or business or for the production
of income by the partnership and (b)
amounts in the activity for which you are
not at risk, you will have to complete
Form 6198, At-Risk Limitations, to figure
your allowable loss.
The at-risk rules generally limit the
amount of loss and other deductions that
you can claim to the amount you could
actually lose in the activity. However, if
you acquired your partnership interest
before 1987, the at-risk rules do not apply
to losses from an activity of holding real
property placed in service before 1987 by
the partnership. The activity of holding
mineral property does not qualify for this
exception. The partnership should identify
on an attachment to Schedule K-1 the
amount of any losses that are not subject
to the at-risk limitations.
Generally, you are not at risk for
amounts such as the following.
• Nonrecourse loans used to finance the
activity, to acquire property used in the
activity, or to acquire your interest in the
activity, that are not secured by your own
property (other than the property used in
the activity). See the instructions for
Partner’s Share of Liabilities on page 5 for
the exception for qualified nonrecourse
financing secured by real property.
• Cash, property, or borrowed amounts
used in the activity (or contributed to the
activity, or used to acquire your interest in
the activity) that are protected against
loss by a guarantee, stop-loss agreement,
or other similar arrangement (excluding
casualty insurance and insurance against
tort liability).
• Amounts borrowed for use in the
activity from a person who has an interest
in the activity, other than as a creditor, or
who is related, under section 465(b)(3), to
a person (other than you) having such an
interest.
You should get a separate statement
of income, expenses, etc., for each
activity from the partnership.

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Partner’s Instructions for Schedule K-1 (Form 1065-B)

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Passive Activity Limitations
Section 469 provides rules that limit the
deduction of certain losses and credits.
These rules apply to partners who:
• Are individuals, estates, trusts, closely
held corporations, or personal service
corporations and
• Have a passive activity loss or credit for
the tax year.
Individuals, estates, and trusts. If you
have a passive activity loss or credit, use
Form 8582, Passive Activity Loss
Limitations, to figure your allowable
passive losses and Form 8582-CR,
Passive Activity Credit Limitations, to
figure your allowable passive credits.
If the publicly traded partnership
(PTP) box on Schedule K-1 is
CAUTION checked, do not report passive
income (loss) from the partnership on
Form 8582. See page 5 for the special
rules for PTPs.

!

Corporations. Use Form 8810,
Corporate Passive Activity Loss and
Credit Limitations. See the instructions for
more information.

For limited partners of an ELP, all
income, loss, deductions, and credits
from trade or business and rental
activities generally are reported as being
from a trade or business that is a single
passive activity.
However, the determination of
whether an activity is a passive activity
must be made by any partner who is
either a:
• General partner or
• Limited partner who is a disqualified
person (as defined on page 2) with
respect to items of income, gain, loss,
deduction, and credit attributable to
partnership oil and gas properties.
In addition, the partnership is required
to provide each general partner and
disqualified person the information
necessary to comply with the passive
activity rules of section 469. Items of
income, gain, loss, credit, etc., must be
separately reported to general partners
for each trade or business, rental real
estate, and other rental activity.

Worksheet for Adjusting the Basis of a Partner’s
Interest in the Partnership

Keep for Your Records

1. Your adjusted basis at the end of the prior year. Do not enter less
than zero. Enter -0- if this is your first tax year. . . . . . . . . . . . . . .

1.

Increases:
2. Money and your adjusted basis in property contributed to the
partnership less the associated liabilities (but not less than zero).

2.

3. Your increased share of or assumption of partnership liabilities.
(Subtract your share of liabilities shown on your 2006 Schedule K-1
from your share of liabilities shown on your 2007 Schedule K-1 and
add the amount of any partnership liabilities you assumed during
the tax year.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.

4. Your share of the partnership’s income or gain (including
tax-exempt income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.

5. Any gain recognized this year on contributions of property. Do not
include gain from transfer of liabilities . . . . . . . . . . . . . . . . . . . .

5.

Decreases:
6. Withdrawals and distributions of money and the adjusted basis of
property distributed to you from the partnership. Do not include the
amount of property distributions included in the partner’s income
(taxable income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.

Caution. A distribution may be taxable if the amount exceeds your
adjusted basis of your partnership interest immediately before the
distribution.
7. Your share of the partnership’s nondeductible expenses that are
not capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.

8. Your share of the partnership’s losses and deductions (including
capital losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.

9. Your adjusted basis in the partnership at end of this tax year. (Add
lines 1 through 5 and subtract lines 6 through 8 from the total. If
zero or less, enter -0-.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.

Caution. The deduction for your share of the partnership’s losses
and deductions is limited to your adjusted basis in your partnership
interest. If you entered zero on line 9 and the amount computed for
line 9 was less than zero, a portion of your share of the partnership
losses and deductions may not be deductible (see Basis Rules on
page 2 for more information.)

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Except for the PTP discussion on
page 5, the following information
CAUTION on passive activity limitations
applies only to general partners.

!

Generally, passive activities include:
1. Trade or business activities in
which you did not materially participate
and
2. Activities that meet the definition of
rental activities under Temporary
Regulations section 1.469-1T(e)(3) and
Regulations section 1.469-1(e)(3).
Passive activities do not include the
following.
1. Trade or business activities in
which you materially participated.
2. Rental real estate activities in which
you materially participated if you were a
“real estate professional” for the tax year.
You were a real estate professional only if
you met both of the following conditions.
a. More than half of the personal
services you performed in trades or
businesses were performed in real
property trades or businesses in which
you materially participated and
b. You performed more than 750
hours of services in real property trades
or businesses in which you materially
participated.
Note. For a closely held C corporation
(defined in section 465(a)(1)(B)), the
above conditions are treated as met if
more than 50% of the corporation’s gross
receipts were from real property trades or
businesses in which the corporation
materially participated.
For purposes of this rule, each interest
in rental real estate is a separate activity,
unless you elect to treat all interests in
rental real estate as one activity. For
details on making this election, see the
Instructions for Schedule E (Form 1040).
If you are married filing jointly, either
you or your spouse must separately meet
both of the above conditions, without
taking into account services performed by
the other spouse.
A real property trade or business is
any real property development,
redevelopment, construction,
reconstruction, acquisition, conversion,
rental, operation, management, leasing,
or brokerage trade or business. Services
you performed as an employee are not
treated as performed in a real property
trade or business unless you owned more
than 5% of the stock (or more than 5% of
the capital or profits interest) in the
employer.
3. Working interests in oil or gas
wells.
4. The rental of a dwelling unit any
partner used for personal purposes during
the year for more than the greater of 14
days or 10% of the number of days that
the residence was rented at fair rental
value.
5. Activities of trading personal
property for the account of owners of
interests in the activities.

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Partner’s Instructions for Schedule K-1 (Form 1065-B)

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Material participation. You must
determine if you (a) materially participated
in each trade or business activity held
through the partnership and (b) were a
real estate professional (defined above),
in each rental real estate activity held
through the partnership. All
determinations of material participation
are made based on your participation
during the partnership’s tax year.
Material participation standards for
partners who are individuals are listed
below. Special rules apply to certain
retired or disabled farmers and to the
surviving spouses of farmers. See the
Instructions for Form 8582 for details.
Corporations should refer to the
Instructions for Form 8810 for the material
participation standards that apply to them.
Individuals (other than limited
partners). If you are an individual (either
a general partner or a limited partner who
owned a general partnership interest at all
times during the tax year), you materially
participated in an activity only if one or
more of the following apply.
1. You participated in the activity for
more than 500 hours during the tax year.
2. Your participation in the activity for
the tax year constituted substantially all
the participation in the activity of all
individuals (including individuals who are
not owners of interests in the activity for
the tax year).
3. You participated in the activity for
more than 100 hours during the tax year,
and your participation in the activity for
the tax year was not less than the
participation in the activity of any other
individual (including individuals who were
not owners of interests in the activity) for
the tax year.
4. The activity was a significant
participation activity for the tax year, and
you participated in all significant
participation activities (including activities
outside the partnership) during the year
for more than 500 hours. A significant
participation activity is any trade or
business activity in which you participated
for more than 100 hours during the tax
year and in which you did not materially
participate under any of the material
participation tests (other than this test 4).
5. You materially participated in the
activity for any 5 tax years (whether or not
consecutive) during the 10 tax years that
immediately precede the tax year.
6. The activity was a personal service
activity and you materially participated in
the activity for any 3 tax years (whether or
not consecutive) preceding the tax year.
A personal service activity involves the
performance of personal services in the
fields of health, law, engineering,
architecture, accounting, actuarial
science, performing arts, consulting, or
any other trade or business in which
capital is not a material income-producing
factor.
7. Based on all the facts and
circumstances, you participated in the
activity on a regular, continuous, and
substantial basis during the tax year.

Work counted toward material
participation. Generally, any work that
you or your spouse do in connection with
an activity held through a partnership
(where you own your partnership interest
at the time the work is done) is counted
toward material participation. However,
work in connection with the activity is not
counted toward material participation if
either of the following applies.
1. The work is not the sort of work that
owners of the activity would usually do
and one of the principal purposes of the
work that you or your spouse does is to
avoid the passive loss or credit
limitations.
2. You do the work in your capacity as
an investor and you are not directly
involved in the day-to-day operations of
the activity. Examples of work done as an
investor that would not count toward
material participation include:
a. Studying and reviewing financial
statements or reports on operations of the
activity.
b. Preparing or compiling summaries
or analyses of the finances or operations
of the activity for your own use.
c. Monitoring the finances or
operations of the activity in a
nonmanagerial capacity.
Effect of determination. Income
(loss), deductions, and credits from an
activity are nonpassive if you determine
that:
• You materially participated in a trade or
business activity of the partnership or
• You were a real estate professional in a
rental real estate activity of the
partnership.
If you determine that you did not
materially participate in a trade or
business activity of the partnership or if
you have income (loss), deductions, or
credits from a rental activity of the
partnership (other than a rental real
estate activity in which you materially
participated as a real estate professional),
the amounts from that activity are
passive. Report passive income (losses),
deductions, and credits as follows.
1. If you have an overall gain (the
excess of income over deductions and
losses, including any prior year unallowed
loss) from a passive activity, report the
income, deductions, and losses from the
activity as indicated in the instructions for
the boxes in which those items were
reported.
2. If you have an overall loss (the
excess of deductions and losses,
including any prior year unallowed loss,
over income) or credits from a passive
activity, report the income, deductions,
losses, and credits from all passive
activities using the Instructions for Form
8582 or Form 8582-CR (or Form 8810), to
see if your deductions, losses, and credits
are limited under the passive activity
rules.

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Special allowance for rental real estate
activities. If you actively participated in
a rental real estate activity, you may be
able to deduct up to $25,000 of the loss
from the activity from nonpassive income.
This “special allowance” is an exception
to the general rule disallowing losses in
excess of income from passive activities.
The special allowance is not available if
you were married, filed a separate return
for the year, and did not live apart from
your spouse at all times during the year.
Only individuals and qualifying estates
can actively participate in a rental real
estate activity. Estates (other than
qualifying estates), trusts, and
corporations cannot actively participate.
You are not considered to actively
participate in a rental real estate activity if
at any time during the tax year your
interest (including your spouse’s interest)
in the activity was less than 10% (by
value) of all interests in the activity.
Active participation is a less stringent
requirement than material participation.
You may be treated as actively
participating if you participated, for
example, in making management
decisions or arranging for others to
provide services (such as repairs) in a
significant and bona fide sense.
Management decisions that can count as
active participation include approving new
tenants, deciding rental terms, approving
capital or repair expenditures, and other
similar decisions.
An estate is a qualifying estate if the
decedent would have satisfied the active
participation requirement for the activity
for the tax year the decedent died. A
qualifying estate is treated as actively
participating for tax years ending less
than 2 years after the date of the
decedent’s death.
The maximum special allowance that
single individuals and married individuals
filing a joint return can qualify for is
$25,000. The maximum is $12,500 for
married individuals who file separate
returns and who live apart all times during
the year. The maximum special allowance
for which an estate can qualify is $25,000
reduced by the special allowance for
which the surviving spouse qualifies.
If your modified adjusted gross income
(defined below) is $100,000 or less
($50,000 or less if married filing
separately), your loss is deductible up to
the amount of the maximum special
allowance referred to in the preceding
paragraph. If your modified adjusted
gross income is more than $100,000
(more than $50,000 if married filing
separately), the special allowance is
limited to 50% of the difference between
$150,000 ($75,000 if married filing
separately) and your modified adjusted
gross income. When modified adjusted
gross income is $150,000 or more
($75,000 or more if married filing
separately), there is no special allowance.

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Partner’s Instructions for Schedule K-1 (Form 1065-B)

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Modified adjusted gross income is your
adjusted gross income figured without
taking into account the following.
• Any passive activity loss.
• Any rental real estate loss allowed
under section 469(c)(7) to real estate
professionals (as defined previously).
• Any overall loss from a publicly-traded
partnership.
• Any taxable social security or
equivalent railroad retirement benefits.
• Any deductible contributions to an IRA
or certain other qualified retirement plans
under section 219.
• The domestic production activities
deduction.
• The student loan interest deduction.
• The tuition and fees deduction.
• The deduction for one-half of
self-employment taxes.
• The exclusion from income of interest
from Series EE and I U.S. Savings Bonds
used to pay higher education expenses.
• The exclusion of amounts received
under an employer’s adoption assistance
program.
Commercial revitalization
deduction. The special $25,000
allowance for the commercial
revitalization deduction from rental real
estate activities is not subject to the active
participation rules or modified adjusted
gross income limits discussed above. See
Code Q — Commercial Revitalization
Deduction on page 11.
Special rules for certain other
activities. If you have net income (loss),
deductions, or credits from any activity to
which special rules apply, the partnership
will identify the activity and all amounts
relating to it on Schedule K-1 or on an
attachment.
If you have net income subject to
recharacterization under Temporary
Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f), report
such amounts according to the
Instructions for Form 8582 (or Form
8810).
If you have net income (loss),
deductions, or credits from any of the
following activities, treat such amounts as
nonpassive and report them as instructed
in these instructions.
• Working interests in oil and gas wells.
• The rental of a dwelling unit any partner
used for personal purposes during the
year for more than the greater of 14 days
or 10% of the number of days that the
residence was rented at fair rental value.
• Trading personal property for the
account of owners of interests in the
activity.
Self-charged interest. The partnership
must report any “self-charged” interest
income or expense that resulted from
loans between you and the partnership
(or between the partnership and another
partnership in which you have an
interest). If there was more than one
activity, the partnership will provide a
statement allocating the interest income
or expense with respect to each activity.
The self-charged interest rules do not

apply to your partnership interest if the
partnership made an election under
Regulations section 1.469-7(g) to avoid
the application of these rules. See the
Instructions for Form 8582 for more
information.
Publicly traded partnerships. The
passive activity limitations are applied
separately for items (other than the
low-income housing credit and the
rehabilitation credit) from each publicly
traded partnership (PTP). Thus, a net
passive loss from a PTP may not be
deducted from other passive income.
Instead, a passive loss from a PTP is
suspended and carried forward to be
applied against passive income from the
same PTP in later years. If the partner’s
entire interest in the PTP is completely
disposed of, any unused losses are
allowed in full in the year of disposition.
If you have an overall gain from a PTP,
the net gain is nonpassive income. In
addition, the nonpassive income is
included in investment income to figure
your investment interest expense
deduction.
Do not report passive income, gains,
or losses from a PTP on Form 8582.
Instead, use the following rules to figure
and report on the proper form or schedule
your income, gains, and losses from
passive activities that you held through
each PTP you owned during the tax year.
1. Combine any current year income,
gains (losses), and any prior year
unallowed losses to see if you have an
overall gain (loss) from the PTP. Include
only the same types of income and losses
you would include in your net income or
loss from a non-PTP passive activity. See
Pub. 925 for more details.
2. If you have an overall gain, the net
gain portion (total gain minus total losses)
is nonpassive income. On the form or
schedule you normally use, report the net
gain portion as nonpassive income and
the remaining income and the total losses
as passive income and loss. To the left of
the entry space, enter “From PTP.” It is
important to identify the nonpassive
income because the nonpassive portion is
included in modified adjusted gross
income for purposes of figuring on Form
8582 the “special allowance” for active
participation in a non-PTP rental real
estate activity. In addition, the nonpassive
income is included in investment income
when figuring your investment interest
expense deduction on Form 4952,
Investment Interest Expense Deduction.
Example. If you have Schedule E
income of $8,000, and a Form 4797 prior
year unallowed loss of $3,500 from the
passive activities of a particular PTP, you
have a $4,500 overall gain ($8,000 −
$3,500). On Schedule E (Form 1040), line
28, report the $4,500 net gain as
nonpassive income in column (j). In
column (g), report the remaining
Schedule E gain of $3,500 ($8,000 −
$4,500). On the appropriate line of Form
4797, report the prior year unallowed loss

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of $3,500. Be sure to enter “From PTP” to
the left of each entry space.
3. If you have an overall loss (but did
not dispose of your entire interest in the
PTP to an unrelated person in a fully
taxable transaction during the year), the
losses are allowed to the extent of the
income, and the excess loss is carried
forward to use in a future year when you
have income to offset it. Report as a
passive loss on the schedule or form you
normally use the portion of the loss equal
to the income. Report the income as
passive income on the form or schedule
you normally use.
Example. You have a Schedule E loss
of $12,000 (current year losses plus prior
year unallowed losses) and a Schedule D
gain of $7,200. Report the $7,200 gain on
the appropriate line of Schedule D. On
Schedule E (Form 1040), line 28, report
$7,200 of the losses as a passive loss in
column (f). Carry forward to 2008 the
unallowed loss of $4,800 ($12,000 −
$7,200).
If you have unallowed losses from
more than one activity of the PTP or from
the same activity of the PTP that must be
reported on different forms, you must
allocate the unallowed losses on a pro
rata basis to figure the amount allowed
from each activity or on each form.
To allocate and keep a record of

TIP the unallowed losses, use
Worksheets 5, 6, and 7 of Form
8582. List each activity of the PTP in
Worksheet 5. Enter the overall loss from
each activity in column (a). Complete
column (b) of Worksheet 5 according to
its instructions. Multiply the total
unallowed loss from the PTP by each
ratio in column (b) and enter the result in
column (c) of Worksheet 5. Then,
complete Worksheet 6 if all the loss from
the same activity is to be reported on one
form or schedule. Use Worksheet 7
instead of Worksheet 6 if you have more
than one loss to be reported on different
forms or schedules for the same activity.
Enter the net loss plus any prior year
unallowed losses in column (a) of
Worksheet 6 (or Worksheet 7 if
applicable). The losses in column (c) of
Worksheet 6 (column (e) of Worksheet 7)
are the allowed losses to report on the
forms or schedules. Report both these
losses and any income from the PTP on
the forms and schedules you normally
use.
4. If you have an overall loss and you
disposed of your entire interest in the PTP
to an unrelated person in a fully taxable
transaction during the year, your losses
(including prior year unallowed losses)
allocable to the activity for the year are
not limited by the passive loss rules. A
fully taxable transaction is one in which
you recognize all your realized gain
(loss). Report the income and losses on
the forms and schedules you normally
use.
Note. For rules on the disposition of an
entire interest reported using the

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installment method, see the Instructions
for Form 8582.

Specific Instructions
Publicly Traded
Partnership (PTP)
If the “publicly traded partnership” box is
checked, you are a partner in a publicly
traded partnership (PTP) and must follow
the rules under Publicly traded
partnerships discussed above.

Partner’s Share of
Liabilities
The partnership will show your share of
the partnership’s nonrecourse liabilities,
partnership-level qualified nonrecourse
financing, and other liabilities as of the
end of the partnership’s tax year. If you
terminated your interest in the partnership
during the tax year, the amounts should
reflect the share that existed immediately
before the total disposition. A partner’s
“other liability” is any partnership liability
for which a partner is personally liable.
Use the total of the three amounts for
computing the adjusted basis of your
partnership interest.
Generally, you can use only the
amounts shown next to “Qualified
nonrecourse financing” and “Other” to
figure your amount at risk. Do not include
any amounts that are not at risk if such
amounts are included in either of these
categories.
If your partnership is engaged in two or
more different types of activities subject to
the at-risk provisions, or a combination of
at-risk activities and any other activity, the
partnership should give you a statement
showing your share of nonrecourse
liabilities, partnership-level qualified
nonrecourse financing, and other
liabilities for each activity.
Qualified nonrecourse financing.
Qualified nonrecourse financing generally
includes financing for which no one is
personally liable for repayment that is
borrowed for use in an activity of holding
real property and that is loaned or
guaranteed by a federal, state, or local
government or borrowed from a
“qualified” person. Qualified nonrecourse
financing secured by real property used in
an activity of holding real property that is
subject to the at-risk rules is treated as an
amount at risk.
Qualified persons. Qualified persons
include any persons actively and regularly
engaged in the business of lending
money, such as a bank or savings and
loan association. Qualified persons
generally do not include related parties
(unless the nonrecourse financing is
commercially reasonable and on
substantially the same terms as loans
involving unrelated persons), the seller of
the property, or a person who receives a

fee for the partnership’s investment in the
real property.
See Pub. 925 for more information on
qualified nonrecourse financing.
Both the partnership and you must
meet the qualified nonrecourse rules on
this debt before you can include the
amount shown next to “Qualified
nonrecourse financing” in your at-risk
computation.
See Limitations on Losses,
Deductions, and Credits beginning on
page 2 for more information on the at-risk
limitations.

passive activity. Report this amount as
follows.
• If income is reported in box 1, report
the income on Schedule E (Form 1040),
line 28, column (g). However, if the PTP
box is checked, report the income
following the rules for Publicly traded
partnerships on page 5.
• If a loss is reported in box 1, follow the
Instructions for Form 8582 to figure how
much of the loss can be reported on
Schedule E (Form 1040), line 28, column
(f). However, if the PTP box is checked,
report the loss following the rules for
Publicly traded partnerships.

Boxes 1 Through 9

Box 2. Taxable Income (Loss)
From Other Activities

The amounts shown in boxes 1 through 9
reflect your share of income, loss,
deductions, credits, etc., from the
partnership. These amounts do not take
into consideration the following
limitations.
• The adjusted basis of your partnership
interest.
• The amount for which you are at risk.
• The passive activity limitations.
For information on these provisions,
see Limitations on Losses, Deductions,
and Credits beginning on page 2.
For individuals, the following
instructions explain how to report the
amounts shown in the boxes. For all other
entities, report the amounts in the boxes
as instructed on your income tax return.
The line numbers in these instructions
are references to forms in use for
calendar year 2007. If you file your tax
return on a calendar year basis, but your
partnership files a return for a fiscal year,
enter the amounts shown in the boxes on
your tax return for the year in which the
partnership’s fiscal year ends. For
example, if the partnership’s tax year
ends on June 30, 2008, report the
amounts in the boxes on your 2008
income tax return.
If you have losses, deductions, or
credits from a prior year that were not
deductible or usable because of certain
limitations, such as the basis rules or the
at-risk limitations, take them into account
in determining your net income, loss, or
credits for this year. However, except for
passive activity losses and credits, do not
combine the prior-year amounts with any
amounts shown on this Schedule K-1 to
get a net figure to report on any
supporting schedules, statements, or
forms attached to your return. Instead,
report the amounts separately on the
attached schedule, statement, or form on
a year-by-year basis.
For amounts other than those shown
on Schedule K-1, enter each item on a
separate line of Part II of Schedule E
(Form 1040).

Box 1. Taxable Income (Loss)
From Passive Activities
Limited partners only. Any amount
reported in box 1 is treated as being from
a trade or business that is a single

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This amount is not subject to the passive
activity limitations. Report the amount as
follows.
• If the amount is income, report it on
Schedule E (Form 1040), line 28, column
(j).
• If the amount is a loss, report it on
Schedule A (Form 1040), line 28.

Box 3. Qualified Dividends
Report this amount on lines 9a and 9b of
Form 1040.
Note. Qualified dividends are excluded
from investment income, but you can
elect to include part or all of these
amounts in investment income. See the
instructions for line 4g of Form 4952,
Investment Interest Expense Deduction,
for important information on making this
election.

Box 4a. Net Capital Gain or
(Loss) From Passive Activities
Limited partners only. The net capital
gain (loss) reported in box 4a, is treated
as being from a trade or business that is a
single passive activity. If a net capital gain
is reported in box 4a, report the gain on
Schedule D (Form 1040), line 12, column
(f).
If a loss is reported in box 4a, report it
following the Form 8582 instructions to
figure how much of the loss can be
reported on Schedule D (Form 1040), line
12, column (f). However, if the PTP box is
checked, report the loss following the
rules for Publicly traded partnerships.

Box 4b. Net Capital Gain or
(Loss) From Other Activities
Net capital gain or (loss) from other
activities is not subject to the passive
activity limitations. Report the gain or
(loss) on Schedule D (Form 1040), line
12, column (f).

Box 5. Net Passive AMT
Adjustment
Limited partners only. Use this amount
(as well as your adjustments and tax
preference items from other sources) to
prepare your Form 6251, Alternative
Minimum Tax — Individuals; Form 4626,
Alternative Minimum Tax — Corporations;
or Schedule I of Form 1041, U.S. Income
Tax Return for Estates and Trusts. The

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adjustment is treated as being from a
trade or business that is a single passive
activity.
Individuals should enter the amount on
line 18 of Form 6251, where it is taken
into account with adjustments and
preferences from other passive activities.

Box 6. Net Other AMT
Adjustment
Individual general and limited partners
should enter this amount on line 15 of
Form 6251.

Box 7. General Credits
Limited partners only. Enter this amount
from box 7 on line 1x of Form 3800,
General Business Credit. Because
general credits are treated as being from
a trade or business that is a single
passive activity, you must also include the
box 7 amount on line 3 of Form 3800.

Box 8. Low-Income Housing
Credit
Limited partners only. Enter this amount
on line 4 of Form 8586, Low-Income
Housing Credit. This credit is treated as
being from a single passive activity.

Box 9. Other
Codes A Through C
General partners in an ELP must
separately account for any items
attributable to passive loss limitation
activities to the extent necessary to
comply with the section 469 passive loss
rules. Therefore, the partnership is
required to report income or (loss), capital
gain or (loss), 28% rate gain or (loss),
credits, and the alternative minimum tax
adjustment separately for all trade or
business activities, rental real estate
activities, and rental activities other than
rental real estate.
Code A1. General partner’s taxable
income (loss) from trade or business
activities. Report Code A1 income
(loss) from partnership trade or business
activities in which you materially
participated on Schedule E (Form 1040),
line 28, column (h) or (j). See the
instructions to determine whether you
materially participated in a trade or
business activity.
Report Code A1 income or (loss) from
partnership trade or business activities in
which you did not materially participate as
follows.
1. Report any income on Schedule E
(Form 1040), line 28, column (g).
However, if the PTP box on Schedule K-1
is checked, report the income following
the rules for Publicly traded partnerships.
2. Report a loss following the
Instructions for Form 8582 to figure how
much of the loss can be reported on
Schedule E (Form 1040), line 28, column
(f). However, if the PTP box is checked,
report the loss following the rules for
Publicly traded partnerships.
Code A2. General partner’s net capital
gain or (loss) from trade or business

activities. If you did not materially
participate in the trade or business
activity, the net capital gain or (loss) is a
passive activity amount. If the amount is
either (a) a loss that is not from a passive
activity or (b) a gain, report it on Schedule
D (Form 1040), line 12, column (f).
If the amount is a loss from a passive
activity, report it following the Instructions
for Form 8582 to figure how much of the
loss can be reported on Schedule D
(Form 1040), line 12, column (f).
However, if the PTP box is checked,
report the loss following the rules for
Publicly traded partnerships.
Code A3. General partner’s 28% rate
gain (loss) from trade or business
activities. If you did not materially
participate in the trade or business
activity, the 28% rate gain or (loss) is a
passive activity amount. If the amount is
either (a) a loss that is not from a passive
activity or (b) a gain, include it on line 4 of
the 28% Rate Gain Worksheet on page
D-8 of the Instructions for Schedule D
(Form 1040).
If the amount is a loss from a passive
activity, report it following the Instructions
for Form 8582 to figure how much of the
loss can be included on line 4 of the 28%
Rate Gain Worksheet on page D-8 of the
Instructions for Schedule D (Form 1040).
However, if the PTP box is checked,
report the loss following the rules for
Publicly traded partnerships.
Code A4. General partner’s general
credits from trade or business
activities. Report the general credits on
line 1x of Form 3800. If you did not
materially participate in the trade or
business activity, you must also include
the general credits on line 3 of Form
3800.
Code A5. General partner’s alternative
minimum tax adjustment from trade or
business activities. Generally, an AMT
adjustment must be reported on line 15 of
Form 6251. However, if the AMT
adjustment is from a passive activity, it
must be taken into account on line 18 with
adjustments and preferences from other
passive activities.
Code B1. General partner’s taxable
income (loss) from rental real estate
activities. Generally, the income or
(loss) reported in box 9, Code B1, is a
passive activity amount for all general
partners. However, the income or (loss) in
box 9 is not from a passive activity if you
were a real estate professional and you
materially participated in the activity.
Use the following instructions to
determine where to enter the Code B1
amount.
1. If you have a loss from a passive
activity in box 9, Code B1, and you meet
all of the following conditions, enter the
loss on Schedule E (Form 1040), line 28,
column (f).
a. You actively participated in the
partnership rental real estate activities.
See Special allowance for rental real
estate activities on page 4.

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b. Rental real estate activities with
active participation were your only
passive activities.
c. You have no prior year unallowed
losses from these activities.
d. Your total loss from the rental real
estate activities was not more than
$25,000 (not more than $12,500 if
married filing separately and you lived
apart from your spouse all year).
e. If you are a married person filing
separately, you lived apart from your
spouse all year.
f. You have no current or prior year
unallowed credits from a passive activity.
g. Your modified adjusted gross
income was not more than $100,000 (not
more than $50,000 if married filing
separately and you lived apart from your
spouse all year).
2. If you have a (loss) from a passive
activity in box 9 and you do not meet all
the conditions in 1 above, report the loss
following the Instructions for Form 8582 to
figure how much of the loss you can
report on Schedule E (Form 1040), line
28, column (f). However, if the PTP box is
checked, report the loss following the
rules for Publicly traded partnerships.
3. If you were a real estate
professional and you materially
participated in the activity, report box 9
income or (loss) on Schedule E (Form
1040), line 28, column (h) or (j).
4. If you have income from a passive
activity in box 9, Code B1, enter the
income on Schedule E (Form 1040), line
28, column (g). However, if the PTP box
is checked, report the income following
the rules for Publicly traded partnerships.
Code B2. General partner’s net capital
gain or (loss) from rental real estate
activities (for the entire year). The net
capital gain or (loss) from a rental real
estate activity is a passive activity amount
unless you were a real estate
professional and you materially
participated in the activity. If the amount is
either (a) a loss that is not from a passive
activity or (b) a gain, report it on Schedule
D (Form 1040), line 12, column (f).
If the amount is a loss from a passive
activity, report it following the Instructions
for Form 8582 to figure how much of the
loss can be reported on Schedule D, line
12, column (f). However, if the PTP box is
checked, report the loss following the
rules for Publicly traded partnerships.
Code B3. General partner’s 28% rate
gain or (loss) from rental real estate
activities. The 28% rate gain or (loss)
from a rental real estate activity is a
passive activity amount unless you were
a real estate professional and you
materially participated in the activity. If the
amount is either (a) a loss that is not from
a passive activity or (b) a gain, include it
on line 4 of the 28% Rate Gain
Worksheet on page D-8 of the
Instructions for Schedule D (Form 1040).
If the amount is a loss from a passive
activity, report it following the Instructions
for Form 8582 to figure how much of the

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loss can be included on line 4 of the 28%
Rate Gain Worksheet on page D-8 of the
Instructions for Schedule D (Form 1040).
However, if the PTP box is checked,
report the loss following the rules for
Publicly traded partnerships.
Code B4. General partner’s general
credits from rental real estate
activities. Report the general credits on
line 1x of Form 3800. Unless you were a
real estate professional and materially
participated in the rental real estate
activity, you must also include the general
credits on line 3 of Form 3800.
Code B5. General partner’s
low-income housing credit from rental
real estate activities. Report the
low-income housing credit on line 4 of
Form 8586. Unless you were a real estate
professional and materially participated in
the rental real estate activity, the
low-income housing credit is a passive
activity credit.
Code B6. General partner’s
rehabilitation credit from rental real
estate activities. Report the
rehabilitation credit on line 1k of Form
3468, Investment Credit. Unless you were
a real estate professional and materially
participated in the rental real estate
activity, the credit is a passive activity
credit, and you must also file Form 3800.
Code B7. General partner’s alternative
minimum tax adjustment from rental
real estate activities. An AMT
adjustment must be reported on line 15 of
Form 6251. However, if the AMT
adjustment is from a passive activity, it
must be taken into account on line 18 with
other passive activities instead of being
reported on line 15.
Code C1. General partner’s taxable
income or (loss) from other rental
activities. Income (loss) reported in box
9, Code C1, is a passive activity amount
for all general partners. Report a loss
following the Instructions for Form 8582.
Report income on Schedule E (Form
1040), line 28, column (g). However, if the
PTP box is checked, report the income
(loss) following the rules for Publicly
traded partnerships.
Code C2. General partner’s net capital
gain or (loss) from other rental
activities. The net capital gain (loss)
from other rental activities is a passive
activity amount for all general partners.
Report the gain on Schedule D (Form
1040), line 12, column (f). Report a loss
following the Instructions for Form 8582 to
figure how much of the loss can be
reported on Schedule D (Form 1040), line
12, column (f). However, if the PTP box is
checked, report the loss following the
rules for Publicly traded partnerships.
Code C3. General partner’s 28% rate
gain or (loss) from other rental
activities. The 28% rate gain or (loss)
from other rental activities is a passive
activity amount for all general partners. If
the amount is a gain, include it on line 4
of the 28% Rate Gain Worksheet on page
D-8 of the Instructions for Schedule D

(Form 1040). Report a loss following the
Instructions for Form 8582 to figure how
much of the loss can be included on line 4
of the 28% Rate Gain Worksheet on page
D-8 of the Instructions for Schedule D
(Form 1040). However, if the PTP box is
checked, report the loss following the
rules for Publicly traded partnerships.
Code C4. General partner’s general
credits from other rental activities.
Report the general credits on line 1x of
Form 3800. Because general credits from
other rental activities are passive activity
credits for all general partners, you must
also include the general credits on line 3
of Form 3800.
Code C5. General partner’s alternative
minimum tax adjustment from other
rental activities. An AMT adjustment
must be reported on line 15 of Form
6251. However, if the AMT adjustment is
from a passive activity, it must be taken
into account on line 18 with adjustments
and preferences from other passive
activities instead of being reported on line
15.

Code D. Limited Partner’s 28%
Rate Gain or (Loss) From Passive
Activities
Limited partners only. The 28% rate
gain or (loss) is treated as being from a
trade or business that is a single passive
activity. If a gain is reported, include it on
line 4 of the 28% Rate Gain Worksheet
on page D-8 of the Instructions for
Schedule D (Form 1040).
If a loss is reported, report the loss
following the Instructions for Form 8582 to
figure how much of the loss can be
included on line 4 of the 28% Rate Gain
Worksheet on page D-8 of the
Instructions for Schedule D (Form 1040).
However, if the PTP box is checked,
report the loss following the rules for
Publicly traded partnerships.

Code E. Limited Partner’s 28%
Rate Gain or (Loss) From Other
Activities
The 28% gain or (loss) from other
activities is not subject to the passive
activity limitations. Include it on line 4 of
the 28% Rate Gain Worksheet on page
D-8 of the Instructions for Schedule D
(Form 1040).

Code F. Guaranteed Payments
Generally, these amounts are not passive
income. Report them on Schedule E
(Form 1040), line 28, column (j) (for
example, guaranteed payments for
personal services).

Code G. Income From Discharge of
Indebtedness
The amount reported under Code G is
excluded from your gross income to the
extent provided in section 108 if the
discharge:
• Occurred in a title 11 case relating to
bankruptcy,
• Occurred when you were insolvent,

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• Involved qualified farm indebtedness,
as defined in section 108(g), or
• Involved qualified real property
business indebtedness, as defined in
section 108(c)(3), unless the partner is a
C corporation.
This amount is applied, instead, to
reduce certain tax attributes. File Form
982, Reduction of Tax Attributes Due to
Discharge of Indebtedness, to explain
why any amount received from the
discharge of indebtedness should be
excluded and to report your reduction of
tax attributes.
For a discharge of indebtedness not
described above, you must include this
amount in income on Schedule E (Form
1040), line 28, column (g) or (j).
Code H. Tax-Exempt Interest
Income
Report on your income tax return, as an
item of information, your share of the
tax-exempt interest received or accrued
by the partnership during the year.
Individual partners must include this
amount on Form 1040, line 8b. Increase
the adjusted basis of your interest in the
partnership by this amount.

Code I. Limited Partner’s
Rehabilitation Credit From Rental
Real Estate Activities
Limited partners only. Report this
amount on line 1k of Form 3468. Because
the credit is treated as being from a single
passive activity, you must also file Form
3800.

Codes J1 and J2. Self-Employment
Code J1. Net earnings or (loss) from
self-employment. Enter this amount on
Schedule SE (Form 1040), line 2, Section
A or B, whichever is applicable. General
partners should reduce this amount by
unreimbursed partnership expenses
claimed. General partners who are
disqualified persons also should reduce
this amount by depletion claimed on oil
and gas properties. If this amount is a
loss, enter only the deductible amount on
Schedule SE. For purposes of
self-employment tax, no income from an
ELP is treated as farming or fishing
income.
Code J2. Gross nonfarm income.
Individual partners use this amount to
figure net earnings from self-employment
under the nonfarm optional method on
Schedule SE (Form 1040), Section B,
Part II.

Codes K1 Through K9. Foreign Tax
Credit Information
Use the information reported under
Codes K1 through K9 to figure your
foreign tax credit. For more information,
see Form 1116, Foreign Tax Credit
(Individual, Estate, or Trust) and its
instructions; Form 1118, Foreign Tax
Credit — Corporations, and its
instructions; and Pub. 514, Foreign Tax
Credit for Individuals. See page 4 of the
Instructions for Form 1116 for detailed

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instructions for reporting foreign tax
information from partnerships.
Note. The line references in this section
of the Form 1116 instructions do not
apply to the Schedule K-1 of Form
1065-B.
Code K1. Name of foreign country or
U.S. possession. Include on Form
1116, Part I, item g. For each country
reported, the partnership must give you
the amount and a description of your
share of the following items for Codes K2
through K9. For each country or
possession being reported, a separate
column in Part I and a separate line in
Part II is needed on Form 1116.
Code K2. Gross income from all
sources. Enter this amount on line 3e of
Form 1116.
Code K3. Gross income sourced at
partner level. Although all this income
reported has been apportioned to foreign
source categories of income, you must
nevertheless determine whether the
income being reported is U.S. source
income or foreign source income. See the
Instructions for Form 1116 for the rules to
source the income reported to you. Enter
only foreign source income on lines 1a
and 3d of Form 1116. A separate Form
1116 or 1118 is required for each foreign
source category of income. Do not
include income that you determined to be
U.S. source income.
Codes K4(a) Through K4(c). Foreign
gross income sourced at partnership
level. The following types of income
have already been sourced for you by the
partnership. Include these amounts on
lines 1a and 3d of the applicable Form
1116 (that is, the Form 1116 for each
category of income provided to you).
• Code K4(a). Passive category
foreign source income.
• Code K4(b). General category
foreign source income.
• Code K4(c). Other foreign source
income.
Code K5. Interest expense allocated
and apportioned at the partner level.
Include this amount on line 4b of the
applicable Forms 1116.
Code K6. Other expenses allocated
and apportioned at the partner level.
Include this amount on line 2 of the
applicable Forms 1116.
Note. For Codes K5 and K6, do not
include any expenses allocated and
apportioned to U.S. source income on
any line of Part I of Form 1116.
Codes K7(a) Through Codes K7(c).
Deductions allocated and apportioned
at partnership level to foreign source
income. The following codes report the
expenses allocated and apportioned by
the partnership to foreign source
categories of income. Include these
amounts on line 2 of the applicable Forms
1116 (that is, the Forms 1116 for each
category of income provided to you).
• Code K7(a). Deductions allocated
and apportioned at partnership level to

passive category foreign source
income.
• Code K7(b). Deductions allocated
and apportioned at partnership level to
general category foreign source
income.
• Code K7(c). Deductions allocated
and apportioned at partnership level to
other foreign source income.
Code K8(a). Total foreign taxes paid.
Include this amount in Part II of Form
1116.
Code K8(b). Total foreign taxes
accrued. Include this amount in Part II of
Form 1116.
Code K9. Reduction in taxes available
for credit. Enter this amount on line 12
of Form 1116.

Code L. Oil and Gas Activities
Generally, oil and gas income,
deductions, credits, and other items are
included in your distributive share of
income or loss from passive loss
limitation activities, general credits, and
the alternative minimum tax adjustment.
However, distributive shares of all oil
and gas income, deductions, credits, and
other items are separately reported to
partners who are disqualified persons in
accordance with the regular partnership
rules, here or on an attached schedule.
Note. A partner must notify the ELP of
its status as a “disqualified person”.

Codes M1 Through M9.
Miscellaneous
Code M1. Other tax-exempt income.
Increase the adjusted basis of your
interest in the partnership by this amount,
but do not include it in income on your
income tax return.
Code M2. Nondeductible expenses.
Decrease the adjusted basis of your
interest in the partnership by this amount.
The nondeductible expenses paid or
incurred by the partnership are not
deductible on your income tax return, but
they do affect your basis.
Code M3. Unrelated business taxable
income. The partnership must give you
any information you need to figure
unrelated business taxable income under
section 512(a)(1) (but excluding any
modifications required by paragraphs (8)
through (15) of section 512(b)) for a
partner that is a tax-exempt organization.
Reminder. A partner is required to notify
the partnership of its tax-exempt status.
Code M4. Health insurance. Include
any amounts paid during the tax year for
insurance that constitutes medical care
for you, your spouse, and your
dependents on line 29 of your 2007 Form
1040. You may be allowed to deduct such
amounts, even if you do not itemize
deductions. If you do itemize deductions,
enter on line 1 of Schedule A (Form 1040)
any amounts not deducted on line 29 of
Form 1040.
Code M5. Distributions of money (cash
and marketable securities). This
amount includes the distributions the

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partnership made to you of cash and
certain marketable securities. The
marketable securities are included at their
fair market value (FMV) on the date of
distribution (minus your share of the
partnership’s gain on the securities
distributed to you). If this amount exceeds
the adjusted basis of your partnership
interest immediately before the
distribution, the excess is treated as gain
from the sale or exchange of your
partnership interest. Generally, this gain
is treated as gain from the sale of a
capital asset and should be reported on
the Schedule D for your return. However,
the gain may be ordinary income. For
details, see Pub. 541.
The partnership must separately
identify both of the following.
• The FMV of the marketable securities
when distributed (minus your share of the
gain on the securities distributed to you).
• The partnership’s adjusted basis of
those securities immediately before the
distribution.
Decrease the adjusted basis of your
interest in the partnership (but not below
zero) by the amount of cash distributed to
you and the partnership’s adjusted basis
of the distributed securities. Advances or
drawings of money or property against
your distributive share are treated as
current distributions made on the last day
of the partnership’s tax year.
Your basis in the distributed
marketable securities (other than in
liquidation of your interest) is the smaller
of:
• The partnership’s adjusted basis in the
securities immediately before the
distribution increased by any gain
recognized on the distribution of the
securities or
• The adjusted basis of your partnership
interest reduced by any cash distributed
in the same transaction and increased by
any gain recognized on the distribution of
the securities.
If you received the securities in
liquidation of your partnership interest,
your basis in the marketable securities is
equal to the adjusted basis of your
partnership interest reduced by any cash
distributed in the same transaction and
increased by any gain recognized on the
distribution of the securities.
If, within five years of a distribution to
you of marketable securities, you
contributed appreciated property (other
than those securities) to the partnership
and the FMV of those securities
exceeded the adjusted basis of your
partnership interest immediately before
the distribution (reduced by any cash
received in the distribution), you may
have to recognize gain on the appreciated
property. For property contributed after
June 8, 1997, the 5-year period is
generally extended to 7 years. See
section 737 for details.
Code M6. Distributions of property
other than money. Box 9, Code M6,
shows the partnership’s adjusted basis of

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property other than money immediately
before the property was distributed to
you. In addition, the partnership should
attach a statement showing the cost basis
and FMV of each property distributed.
Decrease the adjusted basis of your
interest in the partnership by the amount
of your basis in the distributed property.
Your basis in the distributed property
(other than in liquidation of your interest)
is the smaller of:
• The partnership’s adjusted basis
immediately before the distribution or
• The adjusted basis of your partnership
interest reduced by any cash distributed
in the same transaction.
If you received the property in
liquidation of your interest, your basis in
the distributed property is equal to the
adjusted basis of your partnership interest
reduced by any cash distributed in the
same transaction.
If you contributed appreciated property
to the partnership within five years of a
distribution of other property to you, and
the FMV of the other property exceeded
the adjusted basis of your partnership
interest immediately before the
distribution (reduced by any cash
received in the distribution), you may
have to recognize gain on the appreciated
property. For property contributed after
June 8, 1997, the 5-year period is
generally extended to 7 years. See
section 737 for details.
Code M7. Gain eligible for section 1202
exclusion. This gain from the sale or
exchange of qualified small business
stock (as defined in the Instructions for
Schedule D) is eligible for the partial
section 1202 exclusion. The partnership
must also provide you with:
• The name of the corporation that
issued the stock,
• Your share of the partnership’s
adjusted basis,
• Your share of the partnership’s sales
price of the stock, and
• The dates the stock was bought and
sold.
Corporate partners are not eligible for
the section 1202 exclusion. The following
additional limitations apply at the partner
level.
• You must have held an interest in the
partnership when the partnership
acquired the qualified small business
stock and at all times thereafter until the
partnership disposed of the qualified
small business stock.
• Your distributive share of the eligible
section 1202 gain cannot exceed the
amount that would have been allocated to
you based on your interest in the
partnership at the time the stock was
acquired.
See the Instructions for Schedule D
(Form 1040) for details on how to report
the gain and the amount of the allowable
exclusion.
Code M8. Gain eligible for section 1045
rollover – stock replaced. This gain is
eligible for the section 1045 rollover.

Replacement stock has been purchased
by the partnership. The partnership must
also provide you with:
• The name of the corporation that
issued the stock,
• Your share of the partnership’s
adjusted basis,
• Your share of the partnership’s sales
price of the stock, and
• The dates the stock was bought and
sold.
Corporate partners are not eligible for
the section 1045 rollover. To qualify for
the section 1045 rollover:
• You must have held an interest in the
partnership during the entire period in
which the partnership held the qualified
small business stock (more than 6
months prior to the sale) and
• Your distributive share of the gain
eligible for the section 1045 rollover
cannot exceed the amount that would
have been allocated to you based on your
interest in the partnership at the time the
stock was acquired.
See the Instructions for Schedule D
(Form 1040) for details on how to report
the gain and the amount of the allowable
postponed gain.
Code M9. Gain eligible for section 1045
rollover – stock not replaced. This gain
is eligible for the section 1045 rollover.
Replacement stock has not been
purchased by the partnership. The
partnership must also provide you with:
• The name of the corporation that
issued the stock,
• Your share of the partnership’s
adjusted basis,
• Your share of the partnership’s sales
price of the stock, and
• The dates the stock was bought and
sold.
Corporate partners are not eligible for
the section 1045 rollover. To qualify for
the section 1045 rollover:
• You must have held an interest in the
partnership during the entire period in
which the partnership held the qualified
small business stock (more than 6
months prior to the sale),
• Your distributive share of the gain
eligible for the section 1045 rollover
cannot exceed the amount that would
have been allocated to you based on your
interest in the partnership at the time the
stock was acquired, and
• You must purchase other qualified
small business stock (as defined in the
Instructions for Schedule D (Form 1040))
during the 60-day period that began on
the date the stock was sold by the
partnership.
See the Instructions for Schedule D
(Form 1040) for details on how to report
the gain and the amount of the allowable
postponed gain.

Code N. Unrecaptured Section
1250 Gain
Report this gain on line 11 of the
Unrecaptured Section 1250 Gain
Worksheet on page D-9 of the
Instructions for Schedule D (Form 1040).

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Do not report the gain on line 5 as stated
on the worksheet.

Codes O1 and O2. Extraterritorial
Income Exclusion
Partnership did not claim the
exclusion. If the partnership reports
your distributive share of foreign trading
gross receipts (Code O1) and the
extraterritorial income exclusion (Code
O2), the partnership was not entitled to
claim the exclusion because it did not
meet the foreign economic process
requirements. You may still qualify for
your distributive share of this exclusion if
the partnership’s foreign trading gross
receipts for the tax year were $5 million or
less.
To qualify for this exclusion, your
foreign trading gross receipts from all
sources for the tax year also must have
been $5 million or less.
Limited partners who qualify for the
exclusion. Report the extraterritorial
exclusion amount (Code O2) as a
deduction reducing the amount reported
in box 1 (see the box 1 instructions on
page 6).
General partners who qualify for the
exclusion. Report the Code O2 amount
in accordance with the instructions for box
9, Code A1, B1, or C1, whichever applies.
See Form 8873, Extraterritorial Income
Exclusion, for more information.
Partnership claimed the exclusion. If
the partnership reports your distributive
share of foreign trading gross receipts
(Code O1) but not the amount of the
extraterritorial income exclusion, the
partnership met the foreign economic
process requirements and claimed the
exclusion when figuring your distributive
share of partnership income. You also
may need to know the amount of your
distributive share of foreign trading gross
receipts from this partnership to
determine if you met the $5 million or less
exception discussed above for purposes
of qualifying for an extraterritorial income
exclusion from other sources.
Note. Upon request, the partnership
should furnish you a copy of the
partnership’s Form 8873 if there is a
reduction for international boycott
operations, illegal bribes, kickbacks, etc.

Code P. Inversion Gain
The partnership must provide a statement
showing the amounts of each type of
income or gain that is included in
inversion gain. The partnership has
included inversion gain in income
elsewhere on Schedule K-1. Inversion
gain is also reported under Code P
because your taxable income and
alternative minimum taxable income
cannot be less than the inversion gain.
Also, your inversion gain (a) is not taken
into account in figuring the amount of net
operating loss (NOL) for the tax year or
the amount of NOL that can be carried
over to each tax year, (b) may limit the
amount of your credits, and (c) is treated
as income from sources within the U.S.

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for the foreign tax credit. See section
7874 for details.

Code Q. Commercial Revitalization
Deduction
Follow the Instructions for Form 8582 for
commercial revitalization deductions from
rental real estate activities to figure how
much of the deduction can be reported on
Schedule E (Form 1040), line 28, column
(f).
The following reporting
requirements for codes R1 and R2
CAUTION only apply for tax years beginning
on or after May 17, 2006.

!

Codes R1 and R2. Interest
Deduction Limitation for Corporate
Partners
A corporate partner is required to treat its
distributive share of interest income,
interest expense, and partnership
liabilities as income, expense, and
liabilities of the corporation for purposes
of the interest deduction limitation under
section 163(j). The corporation’s
distributive share of interest income is
reported in box 9 using code R1. Its
distributive share of interest expense is
reported using code R2. The amounts
reported using code R1 and R2 are for
information only, and are included in
amounts reported elsewhere on Schedule
K-1. The corporation’s distributive share
of partnership liabilities is shown in the
first column of Schedule K-1.

Code S1. Domestic Production
Activities Information
The partnership must attach a statement
to Schedule K-1 that provides the

information you need to figure the
domestic production activities deduction.
Use Form 8903, Domestic Production
Activities Deduction, to figure this
deduction. See the Instructions for Form
8903 for details.

Code S2. Qualified Production
Activities Income (QPAI)
Report the QPAI reported to you by the
partnership (in box 9 using code S2) on
line 7 of Form 8903.

Code S3. Employer’s W-2 Wages
Report the portion of W-2 wages reported
to you by the partnership (in box 9 using
code S3) on line 15 of Form 8903.

Code T. Section 409A Income
This is compensation to partners deferred
under a section 409A nonqualified
deferred compensation plan that does not
meet the requirements of section 409A.
This amount is also reported in box 9
using Code F. This amount is subject to a
substantial additional tax to be reported
on line 63 of Form 1040. See the
instructions for line 63 of Form 1040 for
details.

Code U. Other Information
The partnership will use Code U to report
the following to partners.
• The recapture of any credit (other than
the low-income housing credit or
investment credit) is reported to you as a
separately stated item. See the
instructions for the specific form identified
with the credit for more information on
reporting the recapture.
• Any information a partner that is a
publicly traded partnership may need to

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determine if it meets the 90% qualifying
income test of section 7704(c)(2).
Partners are required to notify the
partnership of their status as a publicly
traded partnership.
• Any information or statements you
need to allow you to comply with the
disclosure requirements under section
6111 and section 6662(d)(2)(B)(ii) and the
list keeping requirements of Regulations
section 301.6112-1. For more information,
see Form 8264 and Notice 2004-80,
2004-50 I.R.B. 963; Notice 2005-17,
2005-8 I.R.B. 606; and Notice 2005-22,
2005-12 I.R.B. 756.
• The partnership will report any
information you need to complete a
disclosure statement for reportable
transactions in which the partnership
participates. If the partnership participates
in a transaction that must be disclosed on
Form 8886, Reportable Transaction
Disclosure Statement, both you and the
partnership may be required to file Form
8886 for the transaction. The
determination of whether you are required
to disclose a transaction of the
partnership is based on the category(s)
under which the transaction qualifies for
disclosure and is determined by the
partnership. See the Instructions for Form
8886 for details.
• Any other information you may need to
file with your return not shown elsewhere
on Schedule K-1. The partnership must
give you a description and the amount of
your share for each of these items.