Instructions for Form 1065-B (2006)

Specific Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

These instructions follow the line numbers on Form 1065-B. The accompanying schedules are discussed separately. Specific instructions for most of the lines are provided on the following pages. Lines that are not discussed in the instructions are self-explanatory.

Fill in all applicable lines and schedules.

Enter any items specially allocated to the partners in the appropriate box of the applicable partner's Schedule K-1. Enter the total amount on the appropriate line of Schedule K. Do not enter separately stated amounts on the numbered lines on Form 1065-B, Parts I or II, or on Schedule A or Schedule D.

File only one Form 1065-B for each partnership. Mark “Duplicate Copy” on any copy you give to a partner.

Name, Address, and Employer Identification Number

Name. Print or type the legal name of the ELP as it appears in the partnership agreement.

If the ELP has changed its name, check box G(2).

Address. Include the suite, room, or other unit number after the street address. If the Post Office does not deliver mail to the street address and the partnership has a P.O. box, show the box number instead.

If the ELP receives its mail in care of a third party (such as an accountant or an attorney), enter on the street address line “C/O” followed by the third party's name and street address or P.O. box.

If the ELP's address is outside the United States or its possessions or territories, enter the information on the line for “City or town, state, and ZIP code” in the following order: city, province or state, and the name of the foreign country. Follow the foreign country's practice in placing the postal code in the address. Do not abbreviate the country name.

If the ELP has had a change of address (including a change to an “in care of” address), check box G(3). If the partnership changes its mailing address after filing its return, it can notify the IRS by filing Form 8822, Change of Address.

Employer identification number (EIN). Show the correct EIN in item D on page 1 of Form 1065-B.

Items A and C

Enter the applicable activity name and the code number from the list beginning on page 33.

For example, if, as its principal business activity, the ELP (a) purchases raw materials, (b) subcontracts out for labor to make a finished product from the raw materials, and (c) retains title to the goods, the ELP is considered to be a manufacturer and must enter “Manufacturer” in item A and enter in item C one of the codes (311110 through 339900) listed under “Manufacturing” on page 33.

Item F. Total Assets

Enter the ELP's total assets at the end of the tax year, as determined by the accounting method regularly used in keeping the ELP's books and records. If there were no assets at the end of the tax year, enter “0.”

Item J. Schedule M-3

A partnership must complete Schedule M-3, Net Income (Loss) Reconciliation for Certain Partnerships, instead of Schedule M-1, if any of the following apply.

The amount of total assets at the end of the tax year is $10 million or more.
The amount of adjusted total assets for the year is $10 million or more. Adjusted total assets is defined in the instructions for Schedule M-3.
The amount of total receipts for the tax year is $35 million or more.
An entity that is a reportable entity partner with respect to the partnership owns or is deemed to own, directly or indirectly, an interest of 50% or more in the partnership's capital, profit, or loss, on any day during the tax year of the partnership. Reportable entity partner is defined in the instructions for Schedule M-3.

A partnership filing Form 1065-B that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1.

If you are required to file Schedule M-3, check the “Schedule M-3 required” (box J) at the top of page 1 of Form 1065-B. See the instructions for Schedule M-3 for more information.

Part I. Taxable Income or Loss from Passive Loss Limitation Activities

Report only amounts from passive loss limitation activities in Part I. See the discussion of Passive Loss Limitation Activities on page 10. Do not report any tax-exempt interest income or income from the discharge of any indebtedness on lines 1a through 10. These amounts are accounted for separately by each partner and are reported in box 9 of Schedule K-1 (Form 1065-B). Income from discharge of indebtedness is also reported on line 8 of Schedule K, and tax-exempt interest income is reported on line 9 of Schedule K.

Cancelled debt exclusion. If the ELP has had debt discharged resulting from a title 11 bankruptcy proceeding or while insolvent, see Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and Pub. 908, Bankruptcy Tax Guide.

Income

Line 1a. Gross Receipts or Sales

Enter the gross receipts or sales from all trade or business operations except those that must be reported on lines 6 through 10. For example, do not include gross receipts from farming on this line. Instead, show the net profit (loss) from farming on line 7. Also, do not include rental activity income or portfolio income.

In general, advance payments are reported in the year of receipt. To report income from long-term contracts, see section 460. For special rules for reporting certain advance payments for goods and long-term contracts, see Regulations section 1.451-5. For permissible methods for reporting advance payments for services and most goods by an accrual method partnership, see Rev. Proc. 2004-34, 2004-22 I.R.B. 991.

Installment sales. Generally, the installment method cannot be used for dealer dispositions of property. A “dealer disposition” is any disposition of:

Personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan or
Real property held for sale to customers in the ordinary course of the taxpayer's trade or business.

Exception. These restrictions on using the installment method do not apply to dispositions of property used or produced in a farming business. See section 453(l) for details and exceptions.

For sales of timeshares and residential lots reported under the installment method, the ELP's income tax is increased by the interest payable under section 453(l)(3). In determining the amount of interest payable, the partnership is treated as subject to tax at a 35% rate. To report this addition to the tax, see the instructions for line 26.

Enter on line 1a the gross profit on collections from installment sales for any of the following.

Dealer dispositions of property before
March 1, 1986.
Dispositions of property used or produced in the trade or business of farming.
Dispositions of timeshares and residential lots reported under the installment method.

Attach a schedule showing the following information for the current year and the 3 preceding years.

Gross sales.
Cost of goods sold.
Gross profits.
Percentage of gross profits to gross sales.
Amount collected.
Gross profit on amount collected.

Nonaccrual-experience method. Partnerships that qualify to use the nonaccrual-experience method (described on page 4) should attach a schedule showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Enter the net amount on line 1a.

Line 2. Cost of Goods Sold

See the instructions for Schedule A.

Line 4. Net Rental Real Estate Income (Loss)

Enter the net income or (loss) from rental real estate activities of the partnership from Form 8825. Attach this form to Form 1065-B. If the amount entered is from more than one activity, attach a schedule identifying the amount from each activity.

Line 5. Net Income (Loss) From Other Rental Activities

Enter the net income from rental activities other than rental real estate activities. See page 10 of these instructions and Pub. 925 for the definition of rental activities. Include on this line the gain or (loss) from line 17 of Form 4797 that is attributable to the sale, exchange, or involuntary conversion of an asset used in a rental activity other than a rental real estate activity. If the amount entered is from more than one activity, attach a schedule identifying the amount from each activity.

Line 6. Ordinary Income (Loss) From Other Partnerships, Estates, and Trusts

Enter the ordinary income or (loss) shown on Schedule K-1 (Form 1065, 1065-B, or 1041) or other ordinary income (loss) from a foreign partnership, estate, or trust. Be sure to show the partnership's, estate's, or trust's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one source, identify the amount from each source.

Do not include rental activity income or (loss) from other partnerships, estates, or trusts on this line. Instead, report these amounts on line 20a of Form 8825 or line 5 of Form 1065-B, Part I.

Ordinary income or (loss) from another PTP is not reported on this line. Instead, report the amount separately on an attachment to line 15 of Schedule K and in box 9 of Schedule K-1.

Treat shares of other items separately reported on Schedule K-1 issued by the other entity as if the items were realized or incurred by this partnership.

If there is a loss from another partnership, the amount of the loss that may be claimed is subject to the at-risk and basis limitations as appropriate.

If the tax year of your PTP does not coincide with the tax year of the other partnership, estate, or trust, include the ordinary income or (loss) from the other entity in the tax year in which the other entity's tax year ends.

Line 7. Net Farm Profit (Loss)

Enter the partnership's net farm profit (loss) from Schedule F (Form 1040), Profit or Loss From Farming. Attach Schedule F (Form 1040) to Form 1065-B. In figuring the partnership's net farm profit (loss), include any section 179 expense deduction. Do not include on this line any farm profit or (loss) from other partnerships. Report those amounts on line 6.

For a special rule concerning the method of accounting for a farming partnership with a corporate partner and for other tax information on farms, see Pub. 225, Farmer's Tax Guide.

Line 9. Net Gain (Loss) From Form 4797

Include only the ordinary gains or (losses) from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are not reported on line 9. Instead, report them on line 19 of Form 8825 or line 5 of Form 1065-B, Part I.

An ELP that is a partner in another partnership must include on Form 4797, Sales of Business Property, its share of ordinary gains or (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the other partnership's trade or business assets.

Line 10. Other Income (Loss)

Enter trade or business income or (loss) that is not included on lines 1a through 9. Examples of such income include the following.

Interest income derived in the ordinary course of the partnership's trade or business, such as interest charged on receivable balances.
Recoveries of bad debts deducted in prior years under the specific charge-off method.
Taxable income from insurance proceeds.
The amount included in income from line 4 of Form 6478, Credit for Alcohol Used as Fuel.
The amount included in income from line 8 of Form 8864, Biodiesel and Renewable Diesel Fuels Credit.
All section 481 income adjustments resulting from changes in accounting methods. Show the computation of the section 481 adjustments on an attached schedule.
The amount of any deduction previously taken under section 179A that is subject to recapture. See Regulations section 1.179A-1 for details, including how to figure the recapture.
The recapture amount for section 280F if the business use of listed property drops to 50% or less. To figure the recapture amount, the partnership must complete Part IV of Form 4797.

Do not include items requiring separate computations that must be reported on Schedules K and K-1. See the instructions for Schedules K and K-1 beginning on page 24.

Do not report portfolio or rental activity income (loss) on this line.

Deductions

Report only trade or business activity deductions on lines 12 through 24.

Do not report the following expenses on lines 12 through 24.

Rental activity expenses. Report these expenses on Form 8825 or on an attached schedule for line 5 of Form 1065-B, Part I.
Deductions allocable to portfolio income. Report these deductions on page 2, Part II.
Nondeductible expenses (for example, expenses connected with the production of tax-exempt income). Report nondeductible expenses on an attachment to line 15 of Schedule K and in box 9 of Schedules K-1.
Items the partnership must state separately that require separate computations by the partners. An example is foreign taxes paid. The distributive share of this expense is reported separately to each partner on Schedule K-1, box 9.

Limitations on Deductions

Section 263A uniform capitalization rules. The uniform capitalization rules of section 263A require partnerships to capitalize or include in inventory costs, certain costs incurred in connection with the following.

The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business. Tangible personal property produced by a partnership includes a film, sound recording, videotape, book, or similar property.
Real property or personal property (tangible and intangible) acquired for resale.
The production of real property and tangible personal property by a partnership for use in its trade or business or in an activity engaged in for profit.

The costs required to be capitalized under section 263A are not deductible until the property to which the costs relate is sold, used, or otherwise disposed of by the ELP.

Exceptions. Section 263A does not apply to the following.

Inventoriable items accounted for in the same manner as material and supplies that are not incidental. See Schedule A. Cost of Goods Sold, for details.
Personal property acquired for resale if the partnership's average annual gross receipts for the 3 prior tax years were $10 million or less.
Timber.
Most property produced under a long-term contract.
Certain property produced in a farming business.
Geological and geophysical costs amortized under section 167(h).
Research and experimental costs under section 174.
Intangible drilling costs for oil, gas, and geothermal property.
Mining exploration and development costs.

Indirect costs. ELPs subject to the uniform capitalization rules are required to capitalize not only direct costs but an allocable part of most indirect costs (including taxes) that benefit the assets produced or acquired for resale, or are incurred by reason of the performance of production or resale activities.

For inventory, some of the indirect costs that must be capitalized are the following.

Administration expenses.
Taxes.
Depreciation.
Insurance.
Compensation paid to officers attributable to services.
Rework labor.
Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.

Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.

Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1.263A-8 through 1.263A-15.

For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.

Transactions between related taxpayers. Generally, an accrual basis partnership can deduct business expenses and interest owed to a related party (including any partner) only in the tax year of the partnership that includes the day on which the payment is includible in the income of the related party. See section 267 for details.

Business start-up and organizational costs. Business start-up and organizational costs must be capitalized unless an election is made to deduct or amortize them. The ELP can elect to amortize costs paid or incurred before October 23, 2004, over a period of 60 months or more. For costs paid or incurred after October 22, 2004, the following rules apply separately to each category of costs.

The ELP can elect to deduct up to $5,000 of such costs for the year the partnership begins business operations.
The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.
If the election is made, any costs that are not deducted must be amortized ratably over a 180-month period.

The amortization period begins the month the partnership begins business operations. For more details on the election for business start-up and organizational costs, see Pub. 535.

To make the election for business start-up expenses, attach the statement required by Regulations section 1.195-1(b) to Form 1065-B. To make the election for organizational costs, attach the statement required by Regulations section 1.248-1(c). Report the deductible amount of these costs and any amortization on line 23. For amortization that begins during the tax year, complete and attach Form 4562.

Syndication costs. Costs for issuing and marketing interests in the partnership, such as commissions, professional fees, and printing costs, must be capitalized. They cannot be depreciated or amortized. See the instructions for line 13 for the treatment of syndication fees paid to a partner.

Reducing certain expenses for which credits are allowable. For each of the following credits, the partnership may need to reduce the otherwise allowable deductions for expenses used to figure the credit. Do not reduce the amount of the allowable deduction for any portion of the credit that was passed through to the ELP from another pass-through entity.

The work opportunity credit.
The welfare-to-work credit.
The credit for increasing research activities.
The enhanced oil recovery credit.
The disabled access credit.
The empowerment zone and renewal community employment credit.
The Indian employment credit.
The credit for employer social security and Medicare taxes paid on certain employee tips.
The orphan drug credit.
Credit for small employer pension plan startup costs.
Credit for employer-provided childcare facilities and services.
The low sulfur diesel fuel production credit.
Hurricane Katrina housing credit.
Mine rescue team training credit.

If the ELP has any of these credits, be sure to figure each current year credit before figuring the deductions for expenses on which the credit is based.

Film and television production expenses. The partnership can elect to deduct certain costs of qualified film and television productions that begin after October 22, 2004. See section 181 and Notice 2006-47, 2006-20 I.R.B. 892 for details.

Reforestation expenditures. The ELP can elect to amortize over 84 months up to $10,000 of qualified reforestation expenditures paid or incurred before October 23, 2004, from all qualified timber properties.

For qualified reforestation expenditures paid or incurred after October 22, 2004, the partnership can elect to deduct up to $10,000 for each qualifying timber property. If the partnership makes this election, it must amortize over 84 months any amount not deducted. See Notice 2006-47, 2006-20 I.R.B. 892, for details on making this election. Provide a description of the qualified timber property on an attached statement to Form 1065-B. If the partnership is electing to deduct amounts for more than one qualified timber property, provide a description and the amount for each property on the statement.

Increased deduction for qualified timber property located in the Gulf Opportunity Zones (GO Zones). For qualified timber property located in the GO Zones for Hurricanes Katrina, Rita, and Wilma, the $10,000 limitation for each property is increased by the lesser of $10,000 or the amount of qualified reforestation expenses paid or incurred by the partnership during the tax year for qualified timber property located in the GO Zones. The increased limitation does not apply to partnerships that held more than 500 acres of qualified timber property at any time during the tax year. See section 1400N(i) for details.

Report the deductible amount of these expenditures and any amortization deduction on line 23. For amortization that begins during the tax year, complete and attach Form 4562. See section 194 and Pub. 535 for more information.

Line 12. Salaries and Wages

Enter the salaries and wages paid or incurred for the tax year, reduced by the current year credits claimed on:

Form 5884, Work Opportunity Credit;
Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma;
Form 8844, Empowerment Zone and Renewal Community Employment Credit;
Form 8845, Indian Employment Credit;
Form 8861, Welfare-to-Work Credit; and
Form 8923, Mine Rescue Team Training Credit.

Do not reduce the amount of the affordable deduction for any portion of the credit that was passed through to the ELP from another pass-through entity. See the instructions for these forms for more information.

Do not include salaries and wages reported elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction simplified employee plan (SEP) agreement or a SIMPLE IRA plan.

Line 13. Guaranteed Payments to Partners

Deduct payments or credits to a partner for services or for the use of capital if the payments or credits are determined without regard to partnership income and are allocable to a trade or business activity. Also, include amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner's spouse, or a partner's dependents.

For information on how to treat the ELP's contribution to a partner's Health Savings Account (HSA), see Notice 2005-8, 2005-4 I.R.B. 368.

Do not include any payments and credits that should be capitalized. For example, although payments or credits to a partner for services rendered in syndicating a partnership may be guaranteed payments, they are not deductible as an expense. Instead they should be charged to a capital account. They are capital expenditures. However, they should be separately reported on Schedule K, line 7, and Schedules K-1, box 9.

Do not include distributive shares of partnership profits.

Report the guaranteed payments to the appropriate partners on Schedules K-1, box 9.

Line 14. Repairs and Maintenance

Enter the costs of incidental repairs and maintenance that do not add to the value of the property or appreciably prolong its life, but only to the extent that such costs relate to a trade or business activity and are not claimed elsewhere on the return.

The cost of new buildings, machinery, or permanent improvements that increase the value of the property are not deductible. They are chargeable to capital accounts and can be depreciated or amortized.

Line 15. Bad Debts

Enter the total debts that became worthless in whole or in part during the year, but only to the extent such debts relate to a trade or business activity. Report deductible nonbusiness bad debts as a short-term capital loss on Schedule D.

Cash method ELPs cannot take a bad debt deduction unless the amount was previously included in income.

Line 16. Rent

Enter rent paid on business property used in a trade or business activity. Do not deduct rent for a dwelling unit occupied by any partner for personal use.

If the partnership rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred in the trade or business activities of the partnership. Also complete Part V of Form 4562, Depreciation and Amortization. If the partnership leased a vehicle for a term of 30 days or more, the deduction for vehicle lease expense may have to be reduced by an amount called the inclusion amount. You may have an inclusion amount if:

The lease term began:	And the vehicle's FMV on the first day of the lease exceeded:
After 12/31/04 but before 1/1/07		$15,200
After 12/31/03 but before 1/1/05		$17,500
After 12/31/02 but before 1/1/04		$18,000
After 12/31/98 but before 1/1/03		$15,500
If the lease term began before January 1, 1999, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses, to find out if the ELP has an inclusion amount. The inclusion amount for lease terms beginning in 2007 will be published in the Internal Revenue Bulletin in early 2007.

See Pub. 463 for instructions on figuring the inclusion amount.

Line 17. Taxes and Licenses

Enter taxes and licenses paid or incurred in the trade or business activities of the partnership if not reflected elsewhere on the return. Federal import duties and federal excise and stamp taxes are deductible only if paid or incurred in carrying on the trade or business of the partnership.

Do not deduct the following taxes on line 17.

Taxes not imposed on the partnership.
Federal income taxes or taxes reported elsewhere on the return.
Section 901 foreign taxes. Report these taxes separately on Schedule K, line 14g, and Schedules K-1, box 9.
Taxes allocable to a rental activity. Taxes allocable to a rental real estate activity are reported on Form 8825. Taxes allocable to a rental activity other than a rental real estate activity are reported on Form 1065-B on an attachment to Part I, line 5.
Taxes allocable to portfolio income. These taxes are reported on Form 1065-B in Part II, line 8 or 11.
Taxes paid or incurred for the production or collection of income, or for the management, conservation, or maintenance of property held to produce income. Also report these taxes on Form 1065-B in Part II, line 8 or 11.

See section 263A(a) for rules on capitalization of allocable costs (including taxes) for any property.
Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).

See section 164(d) for apportionment of taxes on real property between seller and purchaser.

Line 18. Interest

Include only interest incurred in the trade or business activities of the ELP that is not claimed elsewhere on the return.

Do not deduct interest expense on the following.

Debt required to be allocated to the production of designated property. Designated property includes real property, personal property that has a class life of 20 years or more, and other tangible property requiring more than 2 years (1 year in the case of property with a cost of more than $1 million) to produce or construct. Interest that is allocable to designated property produced by a partnership for its own use or for sale must be capitalized. In addition, a partnership must also capitalize any interest on debt that is allocable to an asset used to produce designated property. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15.
Debt used to purchase rental property or debt used in a rental activity. Interest allocable to a rental real estate activity is reported on Form 8825 and is used in arriving at net income or (loss) from rental real estate activities on line 4. Interest allocable to a rental activity other than a rental real estate activity is used in arriving at net income or (loss) from a rental activity (other than a rental real estate activity). This net amount is reported on line 5.
Debt used to buy property held for investment. Do not include interest expense that is clearly and directly allocable to interest, dividend, royalty, or annuity income not derived in the ordinary course of a trade or business. Interest paid or incurred on debt used to purchase or carry investment property is reported on line 7 of Part II. See the instructions for Form 4952, Investment Interest Expense Deduction, for more information on investment property.

Temporary Regulations section 1.163-8T gives rules for allocating interest expense among activities so that the limitations on passive activity losses, investment interest, and personal interest can be properly figured. Generally, interest expense is allocated in the same manner that debt is allocated. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, as provided in the regulations.

Interest paid by an ELP to a partner for the use of capital should be entered on line 13 as guaranteed payments.

Prepaid interest can only be deducted over the period to which the prepayment applies.

Additional limitations on interest deductions apply when the ELP is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264. Attach a statement showing the computation of the deduction disallowed under section 264.

Line 19. Depreciation and Section 179 Expense Deduction

Enter only the depreciation (including section 179 expense deduction) claimed on assets used in a trade or business activity. Enter on line 19b the depreciation (including section 179 expense deduction) reported elsewhere on the return (for example, on Schedule A) that is attributable to assets used in trade or business activities. See the Instructions for Form 4562 or Pub. 946, How To Depreciate Property, to figure the amount of depreciation (including section 179 expense deduction) to enter on this line.

Complete and attach Form 4562 only if the ELP placed property in service during the tax year or claims depreciation on any car or other listed property. There is different treatment for property located in a Gulf Opportunity Zone. See the Instructions for Form 4562 for details.

Line 20. Depletion

An ELP computes the deduction for oil and gas depletion at the partnership level. The deduction is computed under the assumptions that the partnership is the taxpayer and that it qualifies for the percentage depletion deduction. In computing the depletion deduction, the 1,000-barrel-per-day limitation and the 65-percent-of-taxable-income limitation do not apply.

The amount of the depletion deduction is generally reported to each partner as a component of that partner's distributive share of taxable income or loss from passive loss limitation activities. However, the ELP must report information related to oil and gas activities to a partner who is a disqualified person in the same manner that it reports the information under the regular partnership tax law. See Partnerships Holding Oil and Gas Properties on page 12 for more details.

If the ELP claims a deduction for timber depletion, complete and attach Form T (Timber), Forest Activities Schedule.

Line 21. Retirement Plans, etc.

Enter the deductible contributions not claimed elsewhere on the return made by the partnership for its common-law employees under a qualified pension, profit-sharing, annuity, or SEP or SIMPLE IRA plan, and under any other deferred compensation plan.

If the ELP contributes to an individual retirement arrangement (IRA) for employees, include the contribution in salaries and wages on Part I, line 12, or Schedule A, line 3, and not on line 21.

Employers who maintain a pension, profit-sharing, or other funded deferred compensation plan (other than a SEP or SIMPLE IRA), whether or not the plan is qualified under the Internal Revenue Code and whether or not a deduction is claimed for the current year, generally must file the applicable form listed below.

Form 5500, Annual Return/Report of Employee Benefit Plan. File this form for a plan that is not a one-participant plan (see below).
Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan. File this form for a plan that only covers one or more partners (or partners and their spouses).

Penalties may be assessed for failure to file these forms on time.

Line 22. Employee Benefit Programs

Enter the ELP's contributions to employee benefit programs not claimed elsewhere on the return (for example, insurance, health, and welfare programs) that are not part of a pension, profit-sharing, etc., plan included on line 21.

Do not include amounts paid during the tax year for insurance that constitutes medical care for a partner, a partner's spouse, or a partner's dependents. Instead, include these amounts on line 13 as guaranteed payments and on Schedule K, line 7, and Schedule K-1, box 9, of each partner on whose behalf the amounts were paid.

Line 23. Other Deductions

Enter the total allowable trade or business deductions that are not deductible elsewhere in Part I of Form 1065-B. Attach a schedule listing by type and amount each deduction included on this line. Examples of other deductions include the following.

Amortization. See the Instructions for Form 4562 for more information. Complete and attach Form 4562 if the partnership is claiming amortization of costs that began during the tax year.
Insurance premiums.
Legal and professional fees.
Supplies used and consumed in the business.
Utilities.
Certain business start-up expenditures and organizational expenditures that the partnership has elected to amortize or deduct. See Limitations on Deductions for more details.
Film and television production expenses. See Limitations on Deductions for details.
Reforestation expense deduction. See Limitations on Deductions for details.
Deduction for certain energy efficient commercial building property placed in service after December 31, 2005. See section 179D.
Any negative net 481(a) adjustment.

Include on line 23 the deduction taken for amortization. Complete and attach Form 4562 if the ELP is claiming amortization of costs that begins during the tax year. The election to deduct intangible drilling costs under section 263(c) is made at the partnership level. An ELP also has the responsibility with respect to its partners who are not disqualified persons for making an election under section 59(e) to capitalize and amortize certain specified intangible drilling costs. However, disqualified persons make their own separate section 59(e) elections. See Partnerships Holding Oil and Gas Properties on page 12 for more information. See Pub. 535 for more information on amortization.

Also, see Special Rules below for limits on certain other deductions.

Do not deduct the following on line 23.

Items that must be reported separately on Schedules K and K-1.
Qualified expenditures to which an election under section 59(e) may apply.
Fines or penalties paid to a government for violating any law. Report these expenses on Schedule K, line 15.
Expenses allocable to tax-exempt income. Report these expenses on Schedule K, line 15.
Any amount that is allocable to a class of exempt income. See section 265(b) for exceptions.
Net operating losses. Only individuals and corporations may claim a net operating loss deduction.
Amounts paid or incurred to participate or intervene in any political campaign on behalf of a candidate for public office, or to influence the general public regarding legislative matters, elections, or referendums.
Expenses paid or incurred to influence federal or state legislation, or to influence the actions or positions of certain federal executive branch officials. However, certain in-house lobbying expenditures that do not exceed $2,000 are deductible. See section 162(e) for more details.

Special Rules

Commercial revitalization deduction. If the ELP constructs, purchases, or substantially rehabilitates a qualified building in a renewal community it may qualify for a deduction of either (a) 50% of qualified capital expenditures in the year the building is placed in service or (b) amortization of 100% of the qualified capital expenditures over a 120-month period beginning with the month the building is placed in service. If the partnership elects to amortize these expenditures, complete and attach Form 4562. To qualify, the building must be nonresidential (as defined in section 168(e)(2)) and placed in service by the partnership. The partnership must be the original user of the building unless it is substantially rehabilitated. The amount of the qualified expenditures cannot exceed the lesser of $10 million or the amount allocated to the building by the commercial revitalization agency of the state in which the building is located. Any remaining expenditures are depreciated over the regular depreciation recovery period. See Pub. 954, Tax Incentives for Distressed Communities, and section 1400I for details.

Rental real estate. Do not report this deduction on line 23 if the building is placed in service as rental real estate. A commercial revitalization deduction for rental real estate is not deducted by the partnership but is passed through to the partners. Report this deduction on an attachment to line 16 of Schedule K and in box 9 of Schedule K-1 using Code Q.

Travel, meals, and entertainment. Subject to limitations and restrictions discussed below, a partnership can deduct ordinary and necessary travel, meals, and entertainment expenses paid or incurred in its trade or business. Also, special rules apply to deductions for gifts, skybox rentals, luxury water travel, convention expenses, and entertainment tickets. See section 274 and Pub. 463 for more details.

Travel. The partnership cannot deduct travel expenses of any individual accompanying a partner or partnership employee, including a spouse or dependent of the partner or employee, unless:

That individual is an employee of the partnership and
His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals and entertainment. Generally, the partnership can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

Meals must not be lavish or extravagant,
A bona fide business discussion must occur during, immediately before, or immediately after the meal, and
A partner or employee of the partnership must be present at the meal.

See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Membership dues. The ELP can deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations, business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. In addition, the partnership cannot deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities. The ELP cannot deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Generally, the ELP may be able to deduct otherwise nondeductible meals, travel, and entertainment expenses if the amounts are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

Line 26. Tax

Net recapture taxes. Recapture of the low-income housing credit and investment credit is imposed at the partnership level, and the amount of recapture is determined by assuming that the credit was fully utilized to reduce tax. Credit recapture does not result from any transfer of an interest in an ELP. Report recapture of low-income housing and investment credit as follows.

Apply the recapture to reduce any current year credit of the same type (low-income housing or investment credit).
Report any remaining recapture on line 26. The partnership is liable to pay any unapplied recapture amount. Complete Form 4255 for recapture of investment credit and Form 8611 for recapture of low-income housing credit and check the appropriate box on line 26.

Report recapture of any other credit as a separately stated item.

Interest on deferred tax attributable to installment sales of certain timeshares and residential lots. For sales of timeshares and residential lots reported under the installment method, the ELP's income tax is increased by the interest payable under section 453(l)(3). In determining the amount of interest payable, the partnership is treated as subject to tax at a 35% rate. Report this amount on line 26 with the notation “Section 453(l)(3) interest.” Attach a schedule showing the computation.

Interest on tax deferred under the installment method for certain nondealer real property installment obligations. If an obligation arising from the disposition of real property to which section 453A applies is outstanding at the close of the year, the partnership must include the interest due under section 453A(c). In determining the amount of interest payable, the partnership is treated as subject to tax at a 35% rate. Report this amount on line 26 with the notation “Section 453A(c) interest.” Attach a schedule showing the computation.

Line 27

Credit for federal telephone excise tax paid. If the partnership was billed after February 28, 2003, and before August 1, 2006, for the federal telephone excise tax on long distance or bundled service, the partnership may be able to request a credit for the tax paid. The partnership had bundled service if its local and long distance service was provided under a plan that does not separately state the charge for local service. The partnership cannot request the credit if it has already received a credit or refund from its service provider. If the partnership requests the credit, it cannot ask its service provider for a credit or refund and must withdraw any request previously submitted to its provider.

The partnership can request the credit by attaching Form 8913, Credit for Federal Telephone Excise Tax Paid, showing the actual amount the partnership paid. The partnership also may be able to request the credit based on an estimate of the amount paid. See Form 8913 for details. In either case, the partnership must keep records to substantiate the amount of the credit requested.

Line 28

Enter the total amounts from line 2 of Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, and line 20 of Form 4136, Credit for Federal Tax Paid on Fuels. The credit for tax paid on undistributed capital gains of a RIC or a REIT and the refundable credit for fuel used for certain purposes are allowed to the ELP. They are not separately reported to partners.

Line 30

Attach a check or money order payable to the “United States Treasury.” Write “2006 Form 1065-B,” and the ELP's name, address, phone number, and EIN on the payment.

You can e-file Form 1065-B and e-pay the balance due in a single step by authorizing an electronic funds withdrawal from your bank account when filing.

If you are enrolled in the Electronic Federal Tax Payment System (EFTPS), you can pay your balance due online or by phone. EFTPS is a free service provided by the U.S. Department of Treasury. If you are not required to use EFTPS, you may still participate voluntarily. To get more information or to enroll in EFTPS, call 1-800-555-4477, or visit www.eftps.gov.

Part II. Taxable Income or Loss From Other Activities

Report in Part II only income or (loss) and deductions from activities not included in Part I (for example, portfolio income and deductions). See Other Activities on page 11 for a definition of portfolio income.

Line 1

Enter only taxable interest (not from passive loss limitation activities) on line 1.

Include interest income from the clean renewable energy bond credit and the gulf bond credit if applicable. See the instructions for Form 8912, Credit for Clean Renewable Energy and Gulf Tax Credit Bonds, to determine if the ELP must include the amount of the credit in interest income.

Lines 2a Through 2c

Enter only taxable ordinary dividends on line 2a. On line 2b enter all qualified dividends from line 2a.

Qualified dividends. Except as provided below, qualified dividends are dividends received after December 31, 2002, from domestic corporations and qualified foreign corporations.

Exceptions. The following dividends are not qualified dividends.

Dividends the ELP received on any share of stock held for less than 61 days during the 121-day period that began 60 days before the ex-dividend date. When determining the number of days the partnership held the stock, it cannot count certain days during which the partnership's risk of loss was diminished. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. When counting the number of days the ELP held the stock, include the day the ELP disposed of the stock but not the day the ELP acquired it.
Dividends attributable to periods totaling more than 366 days that the partnership received on any share of preferred stock held for less than 91 days during the 181-day period that began 90 days before the ex-dividend date. When determining the number of days the partnership held the stock, do not count certain days during which the partnership's risk of loss was diminished. Preferred dividends attributable to periods totaling less than 367 days are subject to the 61-day holding period rule above.
Dividends that relate to payments that the partnership is obligated to make with respect to short sales or positions in substantially similar or related property.
Dividends paid by a regulated investment company that are not treated as qualified dividend income under section 854.
Dividends paid by a real estate investment trust that are not treated as qualified dividend income under section 857(c).

See Pub. 550 for more details.

Qualified foreign corporation. A foreign corporation is a qualified foreign corporation if it is:

Incorporated in a possession of the United States or
Eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary determines is satisfactory for this purpose and that includes an exchange of information program. See Notice 2006-101, 2006-47. I.R.B. 930, for details.

If the foreign corporation does not meet either 1 or 2, then it can be treated as a qualified foreign corporation for any dividend paid by the corporation if the stock associated with the dividend paid is readily tradable on an established securities market in the United States.

However, qualified dividends do not include dividends paid by a passive foreign investment company (defined in section 1297).

Report the qualified dividend on line 3 of Schedule K. See Pub. 550 and Notice 2004-71, 2004-45 I.R.B. 793, for more details.

Line 5

Report and identify other income or (loss) on an attachment for line 5.

Line 7

Investment interest is interest paid or accrued on debt properly allocable to property held for investment. Property held for investment includes property that produces income (unless derived in the ordinary course of a trade or business) from interest, dividends, annuities, or royalties; and gains from the disposition of property that produces those types of income or is held for investment. Investment interest does not include interest expense allocable to passive loss limitation activities.

To figure the deductible amount of investment interest, complete Form 4952. Enter the amount from line 8 of Form 4952.

Line 8

Include state and local income taxes paid by the ELP that would be allowed as itemized deductions on any partners' income tax returns if they were paid directly by the partner for the same purpose.

Line 9

Enter contributions or gifts actually paid during the tax year to or for the use of charitable and governmental organizations described in section 170(c). The total amount claimed may not be more than 10% of the ELP's taxable income (total income minus deductions) figured without regard to the deduction for charitable contributions. The deduction for certain contributions of ordinary income and capital gain property is reduced under section 170(e).

Substantiation requirements. Generally, no deduction is allowed for any contribution of $250 or more unless the partnership obtains a written acknowledgment from the charitable organization that shows the amount of cash contributed, describes any property contributed, and gives an estimate of the value of any goods or services provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the ELP's return or, if earlier, the date the partnership files its return. Do not attach the acknowledgment to the tax return, but keep it with the partnership's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, discussed below.

Contributions of property. If the deduction claimed for noncash contributions exceeds $500, complete Form 8283 and attach to Form 1065-B. See Pub. 526, Charitable Contributions, and Form 8283 for more information.

If the ELP made a qualified conservation contribution, under section 170(h), include the FMV of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose furthered by the donation.

Conservation contributions of agricultural or livestock production property. Generally, conservation contributions of property used in (or available for) agricultural or livestock production that an electing large partnership that is a qualified farmer or rancher (as defined in Section 170(b)(1)(E)(v) makes after May 17, 2006, are not subject to the 10% taxable income limit. Instead, the deduction for these contributions is allowed to the extent it does not exceed the excess of the partnership's taxable income over the amount of allowable charitable contributions. The carryover period for conservation contributions of agricultural or livestock production property exceeding the taxable income limitation is increased from 5 years to 15 years. These provisions do not apply to contributions made after 2007.

Charitable contributions of food inventory. The enhanced deduction for the charitable contribution under section 170(e)(3) of qualified food inventory has been extended to partnerships under the Katrina Emergency Tax Relief Act of 2005. The deduction is for qualified food inventory that was donated for the care of the ill, needy, and infants during the period beginning on August 28, 2005, and ending on December 31, 2007. The food must meet all the quality and labeling standards imposed by federal, state, and local laws and regulations. The amount of the charitable contribution for donated food inventory is the lesser of (a) the basis of the donated food plus one-half of the appreciation (gain if the donated food were sold at fair market value on the date of the gift) or (b) twice the amount of basis of the donated food.

Contributions of used vehicles. Special rules apply to contributions of used motor vehicles, boats, or airplanes with a claimed value of more than $500. See section 170(f)(12).

Reduced deduction for contributions of certain property. For a charitable contribution of property, the ELP must reduce the contribution by the sum of:

The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.

The reduction for the long-term capital gain applies to:

Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption,
Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available (section 170(e)(5)), and
Any patent or certain other intellectual property contributed after June 3, 2004. See section 170(e)(1)(B). However, the partnership can deduct certain qualified donee income from this property. See section 170(m).

Nondeductible contributions. Certain contributions made to an organization conducting lobbying activities are not deductible. See section 170(f)(9) for more details.

Lines 10a and 10b

Enter on line 10a miscellaneous itemized deductions as defined in section 67(b). These deductions include expenses for the production or collection of income under section 212, such as investment advisory fees, subscriptions to investment advisory publications, and the cost of safe deposit boxes. Multiply line 10a by 30% (.30) and enter the result on line 10b. The remaining 70% of the amount on line 10a is not allowed as a deduction to the partnership or its partners.

Line 11

Other allowable deductions include items such as:

Real estate taxes and personal property taxes on investment property,
Casualty and theft losses on income-producing property, and
Any penalty on the early withdrawal of savings.

Attach a schedule for line 11 listing the type and amount of each allowable deduction for which there is no separate line in Part II of Form 1065-B.

Schedule A. Cost of Goods Sold

Generally, inventories are required at the beginning and end of each tax year if the production, purchase, or sale of merchandise is an income-producing factor. See Regulations section 1.471-1.

However, if the partnership is a qualifying taxpayer or a qualifying small business taxpayer, it can adopt or change its accounting method to account for inventoriable items in the same manner as materials and supplies that are not incidental (unless its business is a tax shelter (as defined in section 448(d)(3))).

A qualifying taxpayer is a taxpayer that, with respect to each prior tax year ending after December 16, 1998, has average annual gross receipts of $1 million or less for the 3-tax-year period ending with that prior tax year. See Rev. Proc. 2001-10, 2001-2 I.R.B. 272 for details.

A qualifying small business taxpayer is a taxpayer (a) that, with respect to each prior tax year ending on or after December 31, 2000, has average annual gross receipts of $10 million or less for the 3-tax-year period ending with that prior tax year and (b) whose principal business activity is not an ineligible activity. See Rev. Proc. 2002-28, 2002-18 I.R.B. 815 for details.

Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the year the partnership paid for the raw materials or merchandise if it is also using the cash method). For additional guidance on this method of accounting for inventoriable items, see Pub. 538.

Enter amounts paid for all raw materials and merchandise during the tax year on line 2. The amount the partnership can deduct for the tax year is figured on line 8.

ELP's that have not elected to treat inventoriable items as materials and supplies that are not incidental should see Section 263A uniform capitalization rules on page 15 before completing Schedule A.

Line 1. Inventory at Beginning of Year

If the ELP is changing its method of accounting for the current tax year, it must refigure last year's closing inventory using its new method of accounting and enter the result on line 1. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation and take it into account when figuring the partnership's section 481(a) adjustment (explained on page 4).

Line 2. Purchases

Reduce purchases by items withdrawn for personal use. The cost of items withdrawn for personal use should be shown as property distributions on an attachment to line 15 of Schedule K and in box 9 of Schedule K-1.

Line 4. Additional Section 263A Costs

An entry is required on this line only for partnerships that have elected a simplified method.

For ELPs that have elected the simplified production method, additional section 263A costs are generally those costs, other than interest, that were not capitalized under the partnership's method of accounting immediately prior to the effective date of section 263A that are required to be capitalized under section 263A. Interest must be accounted for separately. For new partnerships, additional section 263A costs are the costs, other than interest, that must be capitalized under section 263A, but which the partnership would not have been required to capitalize if it had existed before the effective date of section 263A. For more details, see Regulations section 1.263A-2(b).

For ELPs that have elected the simplified resale method, additional section 263A costs are generally those costs incurred with respect to the following categories.

Off-site storage or warehousing.
Purchasing.
Handling, such as processing, assembly, repackaging, and transporting.
General and administrative costs (mixed service costs).

For details, see Regulations section 1.263A-3(d).

Enter the balance of section 263A costs paid or incurred during the tax year not includible on lines 2, 3, and 5. Attach a schedule listing these costs.

Line 5. Other Costs

Enter any other inventoriable costs paid or incurred during the tax year not entered on lines 2 through 4. Attach a schedule.

Line 7. Inventory at End of Year

See Regulations sections 1.263A-1 through 1.263A-3 for details on figuring the amount of additional section 263A costs to be included in ending inventory.

If the ELP accounts for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 7 the portion of its raw materials and merchandise purchased for resale that is included on line 6 and was not sold during the year.

Lines 9a Through 9e. Inventory Valuation Methods

Inventories can be valued at:

Cost,
Cost or market value (whichever is lower), or
Any other method approved by the IRS that conforms to the requirements of the applicable regulations cited below.

However, if the partnership is using the cash method of accounting, it is required to use cost.

ELPs that account for inventoriable items in the same manner as materials and supplies that are not incidental can currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See Rev. Proc. 2001-10 and Rev. Proc. 2002-28 for more information.

The average cost (rolling average) method of valuing inventories generally does not conform to the requirements of the regulations. See Rev. Rul. 71-234, 1971-1 C.B. 148.

Partnerships that use erroneous valuation methods must change to a method permitted for federal tax purposes. To make this change, use Form 3115.

On line 9a, check the methods used for valuing inventories. Under lower of cost or market, the term “market” (for normal goods) means the current bid price prevailing on the inventory valuation date for the particular merchandise in the volume usually purchased by the taxpayer. For a manufacturer, market applies to the basic elements of cost—raw materials, labor, and burden. If section 263A applies to the taxpayer, the basic elements of cost must reflect the current bid price of all direct costs and all indirect costs properly allocable to goods on hand at the inventory date.

Inventory can be valued below cost when the merchandise is unsalable at normal prices or unusable in the normal way because the goods are subnormal due to damage, imperfections, shopwear, etc., within the meaning of Regulations section 1.471-2(c). These goods can be valued at the current bona fide selling price, minus the direct cost of disposition (but not less than scrap value) if such a price can be established.

If this is the first year the Last-in First-out (LIFO) inventory method was either adopted or extended to inventory goods not previously valued under the LIFO method, attach Form 970, Application To Use LIFO Inventory Method, or a statement with the information required by Form 970. Also check the box on line 9c.

If the partnership has changed or extended its inventory method to LIFO and has had to write up its opening inventory to cost in the year of election, report the effect of this write-up as income (line 10, Part I, Form 1065-B) proportionately over a 3-year period that begins in the tax year of the LIFO election.

For more information on inventory valuation methods, see Pub. 538, Accounting Periods and Methods.

Schedule B. Other Information

Question 1

Check box 1f for any other type of entity and state the type.

Question 3

The partnership must answer “Yes” if during the tax year:

It owned an interest in another partnership (foreign or domestic) or
It was the “tax owner” of a foreign disregarded entity (FDE) under Regulations sections 301.7701-2 and 301.7701-3. The tax owner of an FDE is the person that is treated as owning the assets and liabilities of the FDE for purposes of U.S. income tax law.

If the partnership answered “Yes” to this question, it must do the following.

Show each partnership's name, EIN (if any), and the country under whose laws the partnership was organized, on an attached schedule if the partnership directly or indirectly owned at least a 10% interest in any other foreign or domestic partnership (other than any partnership for which a Form 8865 is attached to the tax return).
Complete and attach Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities, for each FDE. For more information, see the instructions for Form 8858.

Clearly indicate whether each entity in the attached schedule is a partnership or a disregarded entity.

Question 4. Foreign Partners

Answer “Yes” if the ELP had any foreign partners (for purposes of section 1446) at any time during the tax year. Otherwise, answer “No.”

If the ELP had gross income effectively connected with a trade or business in the United States and foreign partners, it may be required to withhold tax under section 1446 on income allocable to foreign partners (without regard to distributions) and file Forms 8804, 8805, and 8813. See Regulations sections 1.1446-1 through 7 for more information.

Question 5

Answer “Yes” if interests in the partnership are traded on an established securities market or are readily tradable on a secondary market (or its substantial equivalent).

Question 6

Answer “Yes” if the ELP filed, or is required to file, a return under section 6111 to provide information on any reportable transaction by a material advisor. Until Form 8264, Application for Registration of a Tax Shelter, is revised or a successor form is issued, this disclosure must be filed using Form 8264 in accordance with Notice 2004-80, 2004-50 I.R.B. 963; Notice 2005-17, 2005-81 I.R.B. 606; and Notice 2005-22, 2005-12 I.R.B. 756.

Question 7. Foreign Accounts

Answer “Yes” if either 1 or 2 below applies to the ELP. Otherwise, check the “No” box.

At any time during the 2006 calendar year, the partnership had an interest in or signature or other authority over a bank account, securities account, or other financial account in a foreign country (see Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts); and
- The combined value of the accounts was more than $10,000 at any time during the calendar year and
- The accounts were not with a U.S. military banking facility operated by a U.S. financial institution.
The ELP owns more than 50% of the stock in any corporation that would answer the question “Yes” based on item 1 above.

If you checked the “Yes” box for the question:

Enter the name of the foreign country or countries. Attach a separate sheet if more space is needed.
File Form TD F 90-22.1 by June 30, 2007, with the Department of the Treasury at the address shown on the form. Because Form TD F 90-22.1 is not a tax return, do not file it with Form 1065-B. You can order Form TD F 90-22.1 by calling 1-800-TAX-FORM (1-800-829-3676) or you can download it from the IRS website at www.irs.gov.

Question 8

The ELP may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, if:

It directly or indirectly transferred property or money to a foreign trust. For this purpose, any U.S. person who created a foreign trust is considered a transferor.
It is treated as the owner of any part of the assets of a foreign trust under the grantor trust rules.
It received a distribution from a foreign trust.

For more information, see the Instructions for Form 3520.

An owner of a foreign trust must ensure that the trust files an annual information return on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

Schedule D. Capital Gains and Losses

Purpose of Schedule

Use Schedule D (Form 1065-B) to report sales or exchanges of capital assets, capital gain distributions, and nonbusiness bad debts.

Do not report on Schedule D capital gains (losses) specially allocated to any partners. Enter specially allocated capital gains (losses) directly on line 3 or 4 of Schedule K, or on an attachment to line 15 of Schedule K and in box 3, 4, or 9 of Schedule K-1, whichever applies. See How Income Is Shared Among Partners on page 24.

What are Capital Assets?

Each item of property the partnership held (whether or not connected with its trade or business) is a capital asset except the following.

Stock in trade or other property included in inventory or held mainly for sale to customers.
Accounts or notes receivable acquired in the ordinary course of the trade or business for services rendered or from the sale of stock in trade or other property held mainly for sale to customers.
Depreciable or real property used in the trade or business, even if it is fully depreciated.
Certain copyrights; literary, musical, or artistic compositions; letters or memoranda; or similar property. See section 1221(a)(3).
U.S. Government publications, including the Congressional Record, that the partnership received from the Government, other than by purchase at the normal sales price, or that the partnership got from another taxpayer who had received it in a similar way, if the partnership's basis is determined by reference to the previous owner.
Certain commodities derivative financial instruments held by a dealer. See section 1221(a)(6).
Certain hedging transactions entered into in the normal course of the trade or business. See section 1221(a)(7).
Supplies regularly used in the trade or business.

Overview of Large Partnership Provisions

For ELPs, capital gains and losses generally are netted at the partnership level. A partner in a large partnership takes into account separately his distributive share of the partnership's net capital gain or net capital loss. Such net capital gain (loss) is treated as long-term capital gain (loss). The 28% rate gain (loss) is treated in the same manner.

Any excess of net short-term capital gain over net long-term capital loss is not separately stated. Instead, it is consolidated with the partnership's other taxable income.

A partner's distributive share is divided between passive loss limitation activities and other activities. Capital gain (loss) is allocated to passive loss limitation activities to the extent that it is from sales and exchanges of property used in connection with a trade or business or rental activity. Any excess is allocated to other activities (that is, portfolio income).

Section 1231 gains are also netted at the partnership level. The net gain is generally treated as long-term capital gain. The net loss is treated as an ordinary loss and is included in computing the partnership's taxable income.

Items for Special Treatment

Use Form 4797, Sales of Business Property, to report (a) sales or exchanges of property used in a trade or business, (b) sales or exchanges of depreciable or amortizable property, (c) sales or other dispositions of securities or commodities held in connection with a trading business, if the partnership made a mark-to-market election (see page 4), (d) involuntary conversions (other than from casualties or thefts), and (e) the disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of a trade or business).
Use Form 4684, Casualties and Thefts, to report involuntary conversions of property due to a casualty or theft.
Gains and losses from section 1256 contracts and straddles are reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles.
An exchange of business or investment property for property of a like kind is reported on Form 8824, Like-Kind Exchanges.
Transactions by a securities dealer. See section 1236.
See Pub. 550, Investment Income and Expenses, for information on bonds and other debt instruments.
For certain real estate subdivided for sale that may be considered a capital asset, see section 1237.
Gain on the sale of depreciable property to a more than 50%-owned entity, or to a trust in which the partnership is a beneficiary, is treated as ordinary gain.
For liquidating distributions from a corporation, see Pub. 550.
See section 1248 for gain on the sale or exchange of stock in certain foreign corporations.
For gain or loss on options to buy or sell, including closing transactions, see Pub. 550.
Gain or loss from a short sale of property. See Pub. 550 for details.
For undistributed capital gains from a RIC or a REIT, the partnership will receive information on Form 2439.
See section 84 for the transfer of property to a political organization if the FMV of the property exceeds the partnership's adjusted basis in such property.
Any loss on the disposition of converted wetland or highly erodible cropland that is first used for farming after March 1, 1986, is reported as a long-term capital loss on Schedule D, but any gain on such a disposition is reported as ordinary income on Form 4797. See section 1257 for details.
See Rev. Rul. 84-111, 1984-2 C.B. 88, for the transfer of partnership assets and liabilities to a newly formed corporation in exchange for all of its stock.
See section 897 for the disposition of foreign investment in a U.S. real property interest.
Any loss from a sale or exchange of property between the partnership and certain related persons is not allowed, except for distributions in complete liquidation of a corporation. See sections 267 and 707(b) for details.
Any loss from securities that are capital assets that become worthless during the year is treated as a loss from the sale or exchange of a capital asset on the last day of the tax year.
Nonrecognition of gain on sale of stock to an employee stock ownership plan (ESOP) or an eligible cooperative. See section 1042 and Temporary Regulations section 1.1042-1T for rules under which the partnership can elect not to recognize gain from the sale of certain stock to an ESOP or an eligible cooperative.
A nonbusiness bad debt must be treated as a short-term capital loss and can be deducted only in the year the debt becomes totally worthless. For each bad debt, enter the name of the debtor and “Schedule Attached” in column (a) of line 1 and the amount of the bad debt as a loss in column (f). Also attach a statement of facts to support each bad debt deduction.
Any loss from a wash sale of stock or securities (including contracts or options to acquire or sell stock or securities) cannot be deducted unless the partnership is a dealer in stock or securities and the loss was sustained in a transaction made in the ordinary course of the partnership's trade or business. A wash sale occurs if the partnership acquires (by purchase or exchange), or has a contract or option to acquire, substantially identical stock or securities within 30 days before or after the date of the sale or exchange. See section 1091.
Gain from installment sales. If the partnership sold property at a gain and it will receive a payment in a tax year after the year of sale, it generally must report the sale on the installment method unless it elects not to. However, the installment method cannot be used to report sales of stock or securities traded on an established securities market. Use Form 6252, Installment Sale Income, to report the sale on the installment method. Also use Form 6252 to report any payment received during the tax year from a sale made in an earlier year that was reported on the installment method.

If the ELP wants to elect out of the installment method, it must report the full amount of the gain on a timely filed return (including extensions). If the partnership filed Form 1065-B on time, the election can be made on an amended return filed no later than six months after the due date (excluding extensions) of the original return. Write “See attached Form 8082 for AAR per IRC section 6251; Filed pursuant to section 301.9100-2” in the top margin of the amended return, and file it at the same address the original return was filed. See Administrative Adjustment Requests on page 5 for details.
A sale or other disposition of an interest in a partnership owning unrealized receivables or inventory items may result in ordinary gain or loss. See Pub. 541, Partnerships, for more details.
Certain constructive ownership transactions. Gain in excess of the gain that would have been recognized if the partnership had held a financial asset directly during the term of a derivative contract must be treated as ordinary income. See section 1260 for details.

Constructive sale treatment for certain appreciated positions. Generally, the ELP must recognize gain (but not loss) on the date it enters into a constructive sale of any appreciated position in stock, a partnership interest, or certain debt instruments as if the position were disposed of at FMV on that date.

The ELP is treated as making a constructive sale of an appreciated position when it (or a related person, in some cases) does one of the following.

Enters into a short sale of the same or substantially identical property (that is, a “short sale against the box”).
Enters into an offsetting notional principal contract relating to the same or substantially identical property.
Enters into a futures or forward contract to deliver the same or substantially identical property.
Acquires the same or substantially identical property (if the appreciated position is a short sale, offsetting notional principal contract, or a futures or forward contract).

Exception. Generally, constructive sale treatment does not apply if:

The partnership closed the transaction before the end of the 30th day after the end of the year in which it was entered into,
The partnership held the appreciated position to which the transaction relates throughout the 60-day period starting on the date the transaction was closed, and
At no time during that 60-day period was the partnership's risk of loss reduced by holding certain other positions.

For details and other exceptions to these rules, see Pub. 550.

Special rules for traders in securities. Traders in securities are engaged in the business of buying and selling securities for their own account. To be engaged in business as a trader in securities you must meet all the following conditions.

The ELP must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
The ELP's trading activity must be substantial.
The partnership must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if a partnership's activity is a business.

Typical holding periods for securities bought and sold.
The frequency and dollar amount of the partnership's trades during the year.
The extent to which the partners pursue the activity to produce income for a livelihood.
The amount of time devoted to the activity.

Like an investor, a trader must report each sale of securities (taking into account commissions and any other costs of acquiring or disposing of the securities) on Schedule D or on an attached statement containing all the same information for each sale in a similar format. However, if a trader made the mark-to-market election, each transaction is reported in Part II of Form 4797 instead of Schedule D. Regardless of whether a trader reports its gains and losses on Schedule D or Form 4797, the gain or loss from the disposition of securities is not taken into account when figuring net earnings from self-employment on Schedules K and K-1. See section 1402(i) for an exception that applies to section 1256 contracts.

The limitation on investment interest expense that applies to investors does not apply to interest paid or incurred in a trading business. A trader reports interest expense and other expenses (excluding commissions and other costs of acquiring or disposing of securities) from a trading business in Part I of Form 1065-B.

A trader also can hold securities for investment. The rules for investors generally will apply to those securities. Allocate interest and other expenses between the partnership's trading business and its investment securities. Investment interest expense is reported on line 7 of Part II, Form 1065-B.

Rollover of gain from qualified stock. If the partnership sold qualified small business stock (defined later) it held for more than 6 months, it can postpone gain if it purchased other qualified small business stock during the 60-day period that began on the date of the sale. The partnership must recognize gain to the extent the sale proceeds exceed the cost of the replacement stock. Reduce the basis of the replacement stock by any postponed gain.

If the partnership chooses to postpone gain, report the entire gain realized on the sale on line 1 or 5. Directly below the line on which the partnership reported the gain, enter in column (a) “Section 1045 Rollover” and enter as a (loss) in column (f) the amount of the postponed gain.

The ELP also must separately state the amount of the gain rolled over on qualified stock under section 1045 on an attachment to Form 1065-B, Schedule K, line 15, because each partner must determine if he or she qualifies for the rollover at the partner level. Also, the partnership must separately state on that line (and not on Schedule D) any gain that would qualify for the section 1045 rollover at the partner level instead of the partnership level (because a partner was entitled to purchase replacement stock) and any gain on qualified stock that could qualify for the partial exclusion under section 1202.

To be qualified small business stock, the stock must meet all of the following tests.

It must be stock in a C corporation (that is, not S corporation stock).
It must have been originally issued after August 10, 1993.
As of the date the stock was issued, the corporation was a qualified small business. A qualified small business is a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation.
The partnership must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property or as pay for services (other than as an underwriter) to the corporation. In certain cases, the partnership can meet the test if it acquired the stock from another person who met this test (such as by gift or inheritance) or through a conversion or exchange of qualified small business stock held by the partnership.
During substantially all the time the partnership held the stock:
1. The corporation was a C corporation,
2. At least 80% of the value of the corporation's assets were used in the active conduct of one or more qualified businesses (defined below), and
3. The issuing corporation was not a foreign corporation, domestic international sales corporation (DISC), former DISC, interest charge domestic international sales corporation (IC-DISC), former IC-DISC, corporation that has made (or that has a subsidiary that has made) a section 936 election, regulated investment company (RIC), real estate investment trust (REIT), real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT), or cooperative.

A specialized small business investment company (SSBIC) is treated as having met test 2 above.

A qualified business is any business other than the following.

One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.
One whose principal asset is the reputation or skill of one or more employees.
Any banking, insurance, financing, leasing, investing, or similar business.
Any farming business (including raising or harvesting of trees).
Any business involving the production of products for which percentage depletion can be claimed.
Any business of operating a hotel, motel, restaurant, or similar business.

Rollover of gain from empowerment zone assets. If the partnership sold a qualified empowerment zone asset it held for more than 1 year, it may be able to elect to postpone part or all of the gain. For details, see Pub. 954, Tax Incentives for Distressed Communities, and section 1397B.

Exclusion of gain from DC Zone assets. If the ELP sold or exchanged a District of Columbia Enterprise Zone (DC Zone) asset that it held for more than 5 years, it may be able to exclude the qualified capital gain. The sale or exchange of DC Zone capital assets reported on Schedule D include the following.

Stock in a domestic corporation that was a DC Zone Business.
Interest in a partnership that was a DC Zone Business.

Report the sale or exchange of property used in the partnership's DC Zone business on Form 4797.

Gains not qualified for exclusion. The following gains do not qualify for the exclusion of gain from DC Zone assets.

Gain on the sale of an interest in a partnership which is a DC Zone business attributable to unrecaptured section 1250 gain. See the instructions for line 15 of Schedule K for information on how to report unrecaptured section 1250 gain.
Gain on the sale of an interest in a partnership or S corporation, which is a DC Zone business, attributable to real property or an intangible asset which is not an integral part of the DC Zone business.
Gain from a related-party transaction. See Sales and Exchanges Between Related Persons in Pub. 544.

See Pub. 954 and section 1400B for more details on DC Zone assets and special rules.

How to report. Report the entire gain realized from the sale or exchange on Schedule D, Part II, line 5, as the ELP otherwise would without regard to the exclusion. To report the exclusion, enter “DC Zone Asset Exclusion” on a separate entry on Schedule D, line 5, column (a) and enter as a (loss) in column (f) the amount of the exclusion.

Specific Instructions

Columns (b) and (c). Date Acquired and Date Sold

Use the trade dates for date acquired and date sold for stocks and bonds traded on an exchange or over-the-counter market. The acquisition date for an asset the partnership held on January 1, 2001, for which it made an election to recognize any gain on a deemed sale, is the date of the deemed sale.

Column (d). Sales Price

Enter either the gross sales price or the net sales price from the sale. On sales of stocks and bonds, report the gross amount as reported to the partnership by the partnership's broker on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or similar statement. However, if the broker advised the partnership that gross proceeds (gross sales price) less commissions and option premiums were reported to the IRS, enter that net amount in column (d).

Column (e). Cost or Other Basis

In general, the cost or other basis is the cost of the property plus purchase commissions and improvements and less depreciation, amortization, and depletion. If the partnership got the property in a tax-free exchange, involuntary conversion, or wash sale of stock, it may not be able to use the actual cash cost as the basis. If the partnership does not use cash cost, attach an explanation of the basis.

If the ELP sold stock, adjust the basis by subtracting all the stock-related nontaxable distributions received before the sale. This includes nontaxable distributions from utility company stock and mutual funds. Also adjust the basis for any stock splits or stock dividends.

If the ELP elected to recognize gain on an asset held on January 1, 2001, its basis in the asset is its closing market price or FMV, whichever applies, on the date of the deemed sale, whether the deemed sale resulted in a gain or an unallowed loss.

If a charitable contribution deduction is allowed because of a bargain sale of property to a charitable organization, the adjusted basis for purposes of determining gain from the sale is the amount which has the same ratio to the adjusted basis as the amount realized has to the FMV.

See section 852(f) for the treatment of certain load charges incurred in acquiring stock in a mutual fund with a reinvestment right.

If the gross sales price is reported in column (d), increase the cost or other basis by any expense of sale, such as broker's fees, commissions, or option premiums, before making an entry in column (e).

For more details, see Pub. 551, Basis of Assets.

Column (f). Gain or (Loss)

Make a separate entry in this column for each transaction reported on lines 1 and 5 and any other lines that apply to the partnership. For lines 1 and 5, subtract the amount in column (e) from the amount in column (d). Enter negative amounts in parentheses.

Part IV-Net Capital Gain (Loss) From Passive Loss Limitation Activities

Line 15. Redetermine the amount on line 12 by taking into account only gains and losses from passive loss limitation activities.

Capital Gains and Losses From Other Partnerships, Estates, and Trusts

See the Schedule K-1 or other information supplied to you by the other partnership, estate, or trust. Enter the gains (losses) on line 1 or 5, whichever applies. Do not complete columns (a) through (e). Instead, write “From Schedule K-1 (Form 1065, 1065-B, or 1041)” across these columns.

Specific Instructions

Name, Address, and Employer Identification Number

Items A and C

Item F. Total Assets

Item J. Schedule M-3

Part I. Taxable Income or Loss from Passive Loss Limitation Activities

Income

Line 1a. Gross Receipts or Sales

Line 2. Cost of Goods Sold

Line 4. Net Rental Real Estate Income (Loss)

Line 5. Net Income (Loss) From Other Rental Activities

Line 6. Ordinary Income (Loss) From Other Partnerships, Estates, and Trusts

Line 7. Net Farm Profit (Loss)

Line 9. Net Gain (Loss) From Form 4797

Line 10. Other Income (Loss)

Deductions

Limitations on Deductions

Line 12. Salaries and Wages

Line 13. Guaranteed Payments to Partners

Line 14. Repairs and Maintenance

Line 15. Bad Debts

Line 16. Rent

Line 17. Taxes and Licenses

Line 18. Interest

Note.

Line 19. Depreciation and Section 179 Expense Deduction

Line 20. Depletion

Line 21. Retirement Plans, etc.

Line 22. Employee Benefit Programs

Line 23. Other Deductions

Special Rules

Line 26. Tax

Line 27

Line 28

Line 30

Part II. Taxable Income or Loss From Other Activities

Line 1

Lines 2a Through 2c

Line 5

Line 7

Line 8

Line 9

Lines 10a and 10b

Line 11

Schedule A. Cost of Goods Sold

Line 1. Inventory at Beginning of Year

Line 2. Purchases

Line 4. Additional Section 263A Costs

Line 5. Other Costs

Line 7. Inventory at End of Year

Lines 9a Through 9e. Inventory Valuation Methods

Schedule B. Other Information

Question 1

Question 3

Note.

Question 4. Foreign Partners

Question 5

Question 6

Question 7. Foreign Accounts

Question 8

Note.

Schedule D. Capital Gains and Losses

Purpose of Schedule

What are Capital Assets?

Overview of Large Partnership Provisions

Items for Special Treatment

Note.

Specific Instructions

Columns (b) and (c). Date Acquired and Date Sold

Column (d). Sales Price

Column (e). Cost or Other Basis

Column (f). Gain or (Loss)

Part IV-Net Capital Gain (Loss) From Passive Loss Limitation Activities

Capital Gains and Losses From Other Partnerships, Estates, and Trusts