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Hi and welcome to Just Answer!Because the partnership doesn't pay income taxes - it is not file the form 982. If the partnership has a cancelled debt - it is passed to partners. On the schedule K-1 - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf the partnership reports pro-rata share of cancelled debt to each partner - line 11 Other income (loss) - use code "E" The partner will report his/her share of the cancelled debt on the form 1040 line 21 or will use the form 982 if he/she qualifies for exclusion.
I also thought that partnerships do NOT file form 982. However, my software, CCH Prosystem, which is very expensive and sophisticated tax software, includes form 982 in the partnership return software, which leads me to believe that there are at least some circumstances under which partnerships would file this form. It is your feeling that there are no circumstances under which a partnership would file 982??
Insolvency exception is tested at the partner level, not the partnership level, thus one partner maybe insolvent while another is not insolvent. So - the form 982 is filed by each partner - not by partnership.The partnership should also include in the Supplemental Information that is necessary for the partner to correctly report the income on the partner's income tax return.See IRS publication 908 page 25 - http://www.irs.gov/pub/irs-pdf/p908.pdf
If a partnership's debt is canceled because of bankruptcy or insolvency, the rules for the exclusion of the canceled amount from gross income and for tax attribute reduction are applied at the individual partner level. Thus, each partner's share of debt cancellation income must be reported on the partner's return unless the partner meets the bankruptcy or insolvency exclusions explained earlier. Then all choices, such as the choices to reduce the basis of depreciable property before reducing other tax attributes, to treat real property inventory as depreciable property, and to end the tax year on the day before filing the bankruptcy case, must be made by the individual partners, not the partnership.
OK, I understand, and I agree, except that I still cannot seem to figure out why Prosystem includes this form in its partnership package. I suppose I will have to ask them. Thanks for your help, and I will accept your response.