[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.702-1]

[Page 354-357]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Determination of Tax Liability--Table of Contents
 
Sec. 1.702-1  Income and credits of partner.

    (a) General rule. Each partner is required to take into account 
separately in his return his distributive share, whether or not 
distributed, of each class or item of partnership income, gain, loss, 
deduction, or credit described in subparagraphs (1) through (9) of this 
paragraph. (For the taxable year in which a partner includes his 
distributive share of partnership taxable income, see section 706(a) and 
Sec. 1.706-1(a). Such distributive share shall be determined as 
provided in section 704 and Sec. 1.704-1.) Accordingly, in determining 
his income tax:
    (1) Each partner shall take into account, as part of his gains and 
losses from sales or exchanges of capital assets held for not more than 
1 year (6 months for taxable years beginning before 1977; 9 months for 
taxable years beginning in 1977), his distributive share of the combined 
net amount of such gains and losses of the partnership.
    (2) Each partner shall take into account, as part of his gains and 
losses from sales or exchanges of capital assets held for more than 1 
year (6 months for taxable years beginning before 1977; 9 months for 
taxable years beginning in 1977), his distributive share of the combined 
net amount of such gains and losses of the partnership.
    (3) Each partner shall take into account, as part of his gains and 
losses from sales or exchanges of property described in section 1231 
(relating to property used in the trade or business and involuntary 
conversions), his distributive share of the combined net amount of such 
gains and losses of the partnership. The partnership shall not combine 
such items with items set forth in subparagraph (1) or (2) of this 
paragraph.
    (4) Each partner shall take into account, as part of the charitable 
contributions paid by him, his distributive share of each class of 
charitable contributions paid by the partnership within the 
partnership's taxable year. Section 170 determines the extent to which 
such amount may be allowed as a deduction to the partner. For the 
definition of the term ``charitable contribution'', see section 170(c).
    (5) Each partner shall take into account, as part of the dividends 
received by him from domestic corporations, his distributive share of 
dividends received by the partnership, with respect to which the partner 
is entitled to a credit under section 34 (for dividends received on or 
before December 31, 1964), an exclusion under section 116, or a 
deduction under part VIII, subchapter B, chapter 1 of the Code.
    (6) Each partner shall take into account, as part of his taxes 
described in section 901 which have been paid or accrued to foreign 
countries or to possessions of the United States, his distributive share 
of such taxes which have been paid or accrued by the partnership, 
according to its method of treating such taxes. A partner may elect to 
treat his total amount of such taxes, including his distributive share 
of such taxes of the partnership, as a deduction under section 164 or as 
a credit under section 901, subject to the provisions of sections 901 
through 905.
    (7) Each partner shall take into account, as part of the partially 
tax-exempt interest received by him on obligations of the United States 
or on obligations of instrumentalities of the United States, as 
described in section 35 or section 242, his distributive share of such 
partially tax-exempt interest received by the partnership. However, if 
the partnership elects to amortize

[[Page 355]]

premiums on bonds as provided in section 171, the amount received on 
such obligations by the partnership shall be reduced by the amortizable 
bond premium applicable to such obligations as provided in section 
171(a)(3).
    (8)(i) Each partner shall take into account separately, as part of 
any class of income, gain, loss, deduction, or credit, his distributive 
share of the following items: Recoveries of bad debts, prior taxes, and 
delinquency amounts (section 111); gains and losses from wagering 
transactions (section 165(d)); soil and water conservation expenditures 
(section 175); nonbusiness expenses as described in section 212; 
medical, dental, etc., expenses (section 213); expenses for care of 
certain dependents (section 214); alimony, etc., payments (section 215); 
amounts representing taxes and interest paid to cooperative housing 
corporations (section 216); intangible drilling and developments costs 
(section 263(c)); pre-1970 exploration expenditures (section 615); 
certain mining exploration expenditures (section 617); income, gain, or 
loss to the partnership under section 751(b); and any items of income, 
gain, loss, deduction, or credit subject to a special allocation under 
the partnership agreement which differs from the allocation of 
partnership taxable income or loss generally.
    (ii) Each partner must also take into account separately the 
partner's distributive share of any partnership item which, if 
separately taken into account by any partner, would result in an income 
tax liability for that partner, or for any other person, different from 
that which would result if that partner did not take the item into 
account separately. Thus, if any partner is a controlled foreign 
corporation, as defined in section 957, items of income that would be 
gross subpart F income if separately taken into account by the 
controlled foreign corporation must be separately stated for all 
partners. Under section 911(a), if any partner is a bona fide resident 
of a foreign country who may exclude from gross income the part of the 
partner's distributive share which qualifies as earned income, as 
defined in section 911(b), the earned income of the partnership for all 
partners must be separately stated. Similarly, all relevant items of 
income or deduction of the partnership must be separately stated for all 
partners in determining the applicability of section 183 (relating to 
activities not engaged in for profit) and the recomputation of tax 
thereunder for any partner. This paragraph (a)(8)(ii) applies to taxable 
years beginning on or after July 23, 2002.
    (iii) Each partner shall aggregate the amount of his separate 
deductions or exclusions and his distributive share of partnership 
deductions or exclusions separately stated in determining the amount 
allowable to him of any deduction or exclusion under subtitle A of the 
Code as to which a limitation is imposed. For example, partner A has 
individual domestic exploration expenditures of $300,000. He is also a 
member of the AB partnership which in 1971 in its first year of 
operation has foreign exploration expenditures of $400,000. A's 
distributable share of this item is $200,000. However, the total amount 
of his distributable share that A can deduct as exploration expenditures 
under section 617(a) is limited to $100,000 in view of the limitation 
provided in section 617(h). Therefore, the excess of $100,000 ($200,000 
minus $100,000) is not deductible by A.
    (9) Each partner shall also take into account separately his 
distributive share of the taxable income or loss of the partnership, 
exclusive of items requiring separate computations under subparagraphs 
(1) through (8) of this paragraph. For limitation on allowance of a 
partner's distributive share of partnership losses, see section 704(d) 
and paragraph (d) of Sec. 1.704-1.
    (b) Character of items constituting distributive share. The 
character in the hands of a partner of any item of income, gain, loss, 
deduction, or credit described in section 702(a)(1) through (8) shall be 
determined as if such item were realized directly from the source from 
which realized by the partnership or incurred in the same manner as 
incurred by the partnership. For example, a partner's distributive share 
of gain from the sale of depreciable property used in the trade or 
business of the partnership shall be considered as gain from the sale of 
such depreciable property in the hands of the partner.

[[Page 356]]

Similarly, a partner's distributive share of partnership ``hobby 
losses'' (section 270) or his distributive share of partnership 
charitable contributions to organizations qualifying under section 
170(b)(1)(A) retains such character in the hands of the partner.
    (c) Gross income of a partner. (1) Where it is necessary to 
determine the amount or character of the gross income of a partner, his 
gross income shall include the partner's distributive share of the gross 
income of the partnership, that is, the amount of gross income of the 
partnership from which was derived the partner's distributive share of 
partnership taxable income or loss (including items described in section 
702(a)(1) through (8)). For example, a partner is required to include 
his distributive share of partnership gross income:
    (i) In computing his gross income for the purpose of determining the 
necessity of filing a return (section 6012 (a));
    (ii) In determining the application of the provisions permitting the 
spreading of income for services rendered over a 36-month period 
(section 1301, as in effect for taxable years beginning before January 
1, 1964);
    (iii) In computing the amount of gross income received from sources 
within possessions of the United States (section 931);
    (iv) In determining a partner's ``gross income from farming'' 
(sections 175 and 6073); and
    (v) In determining whether the de minimis or full inclusion rules of 
section 954(b)(3) apply.
    (2) In determining the applicability of the 6-year period of 
limitation on assessment and collection provided in section 6501(e) 
(relating to omission of more than 25 percent of gross income), a 
partner's gross income includes his distributive share of partnership 
gross income (as described in section 6501(e)(1)(A)(i)). In this 
respect, the amount of partnership gross income from which was derived 
the partner's distributive share of any item of partnership income, 
gain, loss, deduction, or credit (as included or disclosed in the 
partner's return) is considered as an amount of gross income stated in 
the partner's return for the purposes of section 6501(e). For example, 
A, who is entitled to one-fourth of the profits of the ABCD partnership, 
which has $10,000 gross income and $2,000 taxable income, reports only 
$300 as his distributive share of partnership profits. A should have 
shown $500 as his distributive share of profits, which amount was 
derived from $2,500 of partnership gross income. However, since A 
included only $300 on his return without explaining in the return the 
difference of $200, he is regarded as having stated in his return only 
$1,500 ($300/$500 of $2,500) as gross income from the partnership.
    (d) Partners in community property States. If separate returns are 
made by a husband and wife domiciled in a community property State, and 
only one spouse is a member of the partnership, the part of his or her 
distributive share of any item or items listed in paragraph (a) (1) 
through (9) of this section which is community property, or which is 
derived from community property, should be reported by the husband and 
wife in equal proportions.
    (e) Special rules on requirement to separately state meal, travel, 
and entertainment expenses. Each partner shall take into account 
separately his or her distributive share of meal, travel, and 
entertainment expenses paid or incurred after December 31, 1986, by 
partnerships that have taxable years beginning before January 1, 1987, 
and ending with or within partner's taxable years beginning on or after 
January 1, 1987. In addition, with respect to skybox rentals under 
section 274 (1) (2), each partner shall take into account separately his 
or her distributive share of rents paid or incurred after December 31, 
1986, by partnerships that have taxable years beginning before January 
1, 1989, and ending with or within partners' taxable years beginning on 
or after January 1, 1987.
    (f) Cross--references. For special rules in accordance with the 
principles of section 702 applicable solely for the purpose of the tax 
imposed by section 56 (relating to the minimum tax for tax preferences) 
see Sec. 1.58-2(a). In the case of a disposition of an oil or gas 
property by the partnership, see the rules

[[Page 357]]

contained in section 613A(c)(7)(D) and Sec. 1.613A-3(e).

[T.D. 6500, 25 FR 11814, Nov. 26, 1960, as amended by T.D. 6605, 27 FR 
8097, Aug. 15, 1962; T.D. 6777, 29 FR 17809, Dec. 16, 1964; T.D. 6885, 
31 FR 7803, June 2, 1966; T.D. 7192, 37 FR 12949, June 30, 1972; T.D. 
7564, 43 FR 40496, Sept. 12, 1978; T.D. 7728, 45 FR 72650, Nov. 3, 1980; 
T.D. 8247, 54 FR 13680, Apr. 5, 1989; T.D. 8348, 56 FR 21952, May 13, 
1991; 57 FR 4913, Feb. 10, 1992; T.D. 9008, 67 FR 48023, July 23, 2002]