CHAPTER 10

PARTNERSHIPS

The law provides for the taxation of individuals and corporations. Partnerships, as such are not taxable, but persons carrying on business in partnership are liable for the income tax, in their individual capacity, on the share of the profits of the partnership to which they are or would be entitled as partners, whether the profits are divided or kept in the business.1 Section 10 of the 1916 Law, imposing the tax on corporations, expressly excludes partnerships. This, however, has been held by the Treasury Department to mean only general partnerships such as were known to and existed under the common law. All other forms of partnerships are taxed in the same manner as corporations. For the purpose of the discussion in this and the following chapter, general partnerships are divided into two classes, domestic and foreign. A domestic partnership is defined as one which has its principal place of business in this country and directs all or the greater part of its business from its office or offices in this country, whether or not the partners are citizens or aliens, residents or nonresidents. The definition of "foreign partnership" is found in the following chapter.

Limited Partnerships. Limited partnerships are held to be in the same category as corporations or associa

1 Act of September 8, 1916, as amended, § 8, Subdivision (e); T. D. 1957.

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tions and subject to the income tax imposed on such entities. The profits of limited partnerships so reporting are treated as dividends and are not subject to the normal tax in the hands of the partners receiving them.2 A limited partnership is a form of business organization created by statute in many of the United States, wherein the liability of certain special partners, who contribute a specific amount of capital, is limited to the amount so contributed, while the general partners of the same partnership are jointly and severally responsible as in ordinary partnerships. The purpose of a limited partnership is to protect the special partner and to enable him to employ his wealth in trade without risking more than he originally contributed. As thus defined, a limited partnership has always one or more partners who have contributed the capital to the firm, and are therefore entitled to receive a portion of the profit, yet who are unknown in the management, and, so far as the conduct of the business is concerned, may be said to occupy a position analogous to that of stockholders in corporations. In such limited partnerships there exists no element of principal or joint agency so far as the special partner or partners is concerned and the only element of agency found in the business is among the general partners. The Treasury Department therefore holds that a limited partnership may very properly be classed as a quasi-corporation or association within the meaning of the law.3

2 Reg. 33, Art. 86; T. D. 2137. Under the 1909 Law it was held that a limited partnership was liable for the tax, if organized for profit and having a capital stock represented by shares, although no "certificates of stock'' were issued. (Op. Atty. Gen. Feb. 14, 1910.)

3 In a letter dated January 19, 1916, written with particular reference to limited partnerships of the type created under the

DIVIDENDS FROM LIMITED PARTNERSHIPS. Since a limited partnership is treated as a corporation and is required to make returns in the same manner as corporations, its profits should be treated by the members of the partnership the same as dividends of corporations. Members of limited partnerships should therefore ascertain if the partnership is paying a tax according to this requirement and if so the normal tax should not again be paid on their shares of the profits.

PARTNERSHIP ASSOCIATIONS. Under the Corporation Excise Tax Law of August 5, 1909, the Attorney General held that partnership associations organized under the laws of Pennsylvania, possessing every privilege and

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New York Statute, Laws of 1897, Ch. 427, § 3D, the Treasury Department gives its reasons for classing limited partnerships with corporations. After quoting the language of what is now § 10 (a) of the Act, which imposes a tax on 'every corporation, joint stock company or organization or insurance company but not including partnerships" the letter states that the term "partnership'' as there used is a common law term and applies only to such partnerships as were known to the common law. A limited partnership is a distinct creature of the statutes of the several states and while it possesses some of the characteristics of the common law partnership, it possesses other distinct characteristics which render it more in the nature of an association—that is a corporation in form, without a specific charter. Corporations, joint stock companies, associations and limited partnerships are all held to be entities and only those entities which are specifically enumerated in the Act as exempt from its requirements can be relieved from liability under the law. Since Congress had in mind, evidently, only common law partnerships in providing for the exemption of this class of business organizations it follows that any other organization, particularly such an entity as exists by reason of statutory provision, does not come within the exemption provided.

4 T. D. 2137.

power essential to a corporation were properly taxable as corporations.5 Such associations have capital contributed by the partners, who are not individually liable beyond the unpaid capital subscribed by each. The other characteristics which are more in the nature of a corporation than of a partnership are that the word "Limited" must be a suffix to the name, the interest of a partner may be transferred and new partners may be taken in by vote of a majority of the partners, and the association may sue or be sued in the association

name.

PRIVATE BANKS. Private banks which transact business not in the name of the bank but in the name of individuals who compose the firm are held to be copartnerships and as such are not required to make returns. If, however, the bank has the form of a corporate organization, elects officers and a board of managers, has a distinct name, a fixed situs, and distributes its net earnings upon the basis of the amount of capital invested by the members or owners, it is held to be an association within the meaning of the law and is required to make returns as such, unless the bank is owned entirely by one man, in which case it is treated as the business of an individual.6

General Partnerships. A general partnership, or what is known as a common law partnership, which Congress clearly intended to be exempt from the requirements of the income tax law, is one which does not have a separate entity, but is composed of two or more individuals associated together for the purpose of carrying

528 Op. Atty. Gen. 189 (1910).

6 T. D. 2137.

on a given business or transaction. Such a partnership has been defined by the courts as "a business organization in which every partner possesses full power and absolute authority to bind all the partners by his acts or contracts in relation to the business of the firm, in the same manner and to the same extent as if he held full power of attorney from them." Among the principal elements of a general partnership are community of ownership of the partnership property, mutual responsibility and powers in the conduct of the partnership business, mutual liability, joint and several, for the debts of the partnership and mutual interest in the profits of the same. Such partnerships are not subject to the tax, but the partners are taxed on their respective shares of the profits."

Partnerships Operating Abroad. No distinction is made in the law or regulations between domestic partnerships which operate entirely within this country and those which operate partly abroad. A partner's share of the net profits of the partnership is in all cases taxable in full if the partner is a resident or citizen of this country. If a partner is a non-resident alien many questions arise as to the extent to which he is properly taxable on the gains from business of the partnership conducted abroad. If the partnership is a limited partnership association under the provisions of some statute, the Government will undoubtedly hold that the partner is taxable to the same extent as though it were a corporation, but if it is a general partnership operating partly in a foreign country, the entire income therefrom can scarcely be considered as income arising within the United States even though the partnership has an 7 Reg. 33, Art. 94.