Subchapter K is unique in that it does not view partnerships as
taxable entities specifically Section 701 states that,
"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".
In other words, the income or loss of a partnership
instead flows through to the partners at the end of the tax year,
who report their proportionate share on their tax returns.
As a result, the partnership itself pays no entity level federal income tax.
This tax treatment occurs whether or not the partnership
distributed any profits to the partners during the year.
The past of tax treatment of partnerships and partners stems from
two legal concepts that shape virtually every partnership tax rule.
First the aggregate concept views a partnership as a conduit through which income,
credits, deductions and other items flow through to the partners.
With this concept, the partnership is viewed as a collection
of taxpayers joined in an agency relationship.
An example of this concept in practice is the fact
that the partnership incurs no entity level income tax.
Second, the end of the concept treats partners and partnerships as
separate elements and gives the partnership its own tax identity.
Under this concept, the partnership is an entity with a legal identity.
As an example of this concept,
partnerships file an information return form and 65 with
the IRS that summarizes its business activities for the tax year. More on this later.
As mentioned, these concepts shape most partnership tax rules.
In particular, the aggregate concept tends to guide many of
the general rules while the entity concept
guides many of the exceptions to the general rules.
However, as you have come to expect from tax law,
some rules are shaped by both of these concepts.
Nevertheless, keeping these concepts in mind as the course progresses will help you
conceptualize the overarching objectives of many key partnership tax rules.