investment club elect out of partnership

Jul 15, 2008 2 Replies
M

I have researched the archives of this group, the general web, and Treas. Reg. 1.761-2.



Background:



Investment clubs (with exceptions) are treated as partnerships by default. An election out of partnership treatment is available under the right circumstances, Pub 541 has more info on the exclusion, Pub 550 more info on investment clubs in general.



Posts to this group from a number of years ago mention what is now the

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(National Association of Investors Corporation, aka NAIC) web site as an authority. Reportedly this organization has reversed its historical position on the election for a club: from formerly recommending the exclusion election, to now recommending a partnership return. Today, I cannot find any of this material at the site, at least not in the "free" portion.



Question:



I'm trying to figure the pros and cons of the partnership filing approach.



Pro: Preparing an annual Form 1065 and K-1's to the club members seems more "official", and since most of the calculations have to be done anyway, why not follow the path of least resistance? Might eliminate the need for nominee 1099's to be issued as well.



Con: fees for preparing the tax forms can be high if done professionally, although it looks like there is specialized club software out there that would help with this. And if partnership returns were not timely filed in prior years, the potential penalties can be significant. (Under other "right circumstances", the election out of partnership treatment can be considered to have been made in a prior year).



Any other comments about the taxation of investment clubs invited.


-Mark Bole


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R

As one of the people who posted in those past threads, from what I can remember, something in the IRC or Regs changed in 1997 that caused NAIC to believe that not filing a full partnership return for the club each year could jeopardize the club's status as a partnership. Before that, NAIC recommended that clubs organize and be taxed as a partnership, but make the election to not have to file a partnership return each year. After that, NAIC still recommended clubs organize and be taxed as a partnership, but now recommended that the return be filled out and filed each year.

I leave it to the tax pros to ponder what might have changed in 1997 to make the NAIC change its view. An institution of or change to "check the box" rules, maybe?

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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M

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Thank you, that was helpful since this same material is not (easily?) available at the current NAIC website.

Regarding whether or not to elect out of partnership treatment:

In a former career, I coined a phrase "pull is easier, push is better". I think I can twist it to this situation thusly: explicitly "pushing" the pass-through tax information to each member of the investment club (via partnership tax return and Sched K-1) is better than each member "pulling" the tax info ("the partners must be able to compute their own taxable income without computing the partnership's income"), even though "pulling" might be easier (read: cheaper).

-Mark Bole

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