Exactly What is a ‘Partnership’?

Generally speaking, an unincorporated joint venture or other contractual or co-ownership arrangement under which several participants conduct a business or investment activity and split the profits is treated as a partnership for federal tax purposes.

Consider the following eight factors which the courts have looked to relative to the question as to whether a “partnership” literally exists:

  • Agreement of the parties and their conduct in executing its terms
  • Contributions by the parties
  • Control over income and capital and right to take withdrawals
  • Whether parties were co-proprietors with mutual obligations to share losses
  • Whether a venture has been conducted in the joint names of the parties
  • Whether the parties filed partnership returns or otherwise represented to IRS or others that the parties were joint venturers
  • Whether separate books were maintained for the venture
  • Whether the parties exercised mutual control over and assumed mutual responsibilities for the venture

No single factor is conclusive in and of itself, but if more than half the factors indicate partnership status, it may generally be more difficult to defend the proposition that the activity in question is not a partnership for federal tax purposes.