Contents Introduction  ........................................ 1 Important Change for 1999  ............... 2 Forming a Partnership  ....................... 2 Terminating a Partnership   ................ 3 Exclusion From Partnership Rules  .. 3 Tax Year  .............................................. 3 Partnership Return (Form 1065)  ....... 4 Penalties .............................................. 4 Partnership Income or Loss  ............. 5 Partner's Distributive Share  .............. 6 Partnership Distributions  .................. 8 Transactions Between Partnership and Partners  ................................ 11 Basis of Partner's Interest  ................ 13 Disposition of Partner's Interest   ...... 14 Adjusting the Basis of Partnership Property ........................................ 17 Form 1065 Example  ........................... 17 How To Get More Information  .......... 19 Index  .................................................... 26 Introduction This publication explains how the tax law ap- plies to partnerships and to partners. A part- nership does not pay tax on its income but “passes through” any profits or losses to its partners. Partners must include partnership items on their tax returns. For a discussion of business expenses a partnership can deduct, see Publication 535. Members of oil and gas partnerships should read   about   the   deduction   for   depletion   in chapter 13 of that publication. Certain   partnerships   must   have   a   tax matters partner (TMP) who is also a general partner. For information on the rules for des- ignating   a   TMP,   see   the   instructions   for Schedule   B   of   Form   1065   and   section 301.6231(a)(7)–1 of the regulations. Withholding on foreign partner or firm.   If a partnership acquires a U.S. real property interest  from  a  foreign  person  or  firm,  the partnership may have to withhold tax on the amount  it  pays  for  the  property  (including cash, the fair market value of other property, and any assumed liability). If a partnership has income effectively connected with a trade or  business  in  the  United  States,  it  must withhold on the income allocable to its foreign partners. A partnership may have to withhold tax on a foreign partner's distributive share of fixed or determinable income not effectively connected with a U.S. trade or business. A partnership that fails to withhold may be held liable for the tax, applicable penalties, and interest. For more information, see Publica- tion 515,  Withholding of Tax on Nonresident Aliens and Foreign Corporations. Department of the Treasury Internal Revenue Service Publication 541 Cat. No. 15071D Partnerships For use in preparing 1999  Returns