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Aggregate Tax Approach

Section 701 Partners, not partnership, subject to tax.
A partnership as such shall not be subject to the income tax imposed by this chapter. Persons carrying on business as partners shall be liable for income tax only in their separate or individual capacities.

Section 702 Income and credits of partner.
General Rule- In determining his income tax, each partner shall take into account separately his distributive share of the partnership’s –

(1) gains and losses from sales or exchanges or capital assets held for not
     more than 1 year.
(2) gains and losses from sales or exchanges or capital assets held for
     more than 1 year.
(3) gains and losses from sales or exchanges of property described in
     section 1231 (relating to certain property used in a trade or business
     and involuntary conversions).
(4) charitable contributions (as defined in section 170(c)).
(5) dividends.
(6) foreign taxes.
(7) other items of income, gain, loss, deduction, or credit, to the extent
     provided by the regulations.
(8) taxable income or loss, exclusive of items requiring separate
     computation under other paragraphs of this subsection.

In sum, Section 702(a) requires each partner to take into account his or her share of different types of partnership income, deductions and credits, as “separately stated” items. These items, because of each partners’ particular tax circumstances, could impact each partner differently. For example, charitable contributions made by the partnership may provide a tax benefit to a partner who itemizes his deductions, but would not benefit a partner who takes the standard deduction. All income and deductions that are not required to be separately stated flow through to the partners under Section 702(a)(8).

- Peter A. Dufour, JD, MBA & Constance Bingham, CPA, MST
  Macdonald Page & Co LLC

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