partnership returns, 1991 - internal revenue servicepartnership returns, 1991 by timothy d. wheeler...
TRANSCRIPT
Partnership Returns, 1991by Timothy D. Wheeler
For 1991, partnerships reported $21.4 billion in netincome Oess deficit), a 29 percent increase (thelargest in 3 years) over the $16.6 billion reported for
1990. This increase continued the recent trend that beganafter enactment of the Tax Reform Act of 1986 (TRA).Previously, partnerships were characterized by annual netlosses, due mostly to their use as "tax shelters." The 1986Act curtailed these activities.
The 1991 increase was different from the prior 2 years,when increases were caused by increases in positive netincome. For 1991, it was the net deficit that declined,something which had occurred only three times in the.previous 15 years and only.five times in the previous 25years. The 1991 decline reflected the continuing phaseoutof activities that formerly generated tax losses -forpartnerships. Positive net income also declined, but onlyslightly, for the first time in more than 25 years. Tax Year109 I'al§6 marked the first time in more than 25 years thatboth declined for the same year: the deficit,decreased 8percehtj kom $99.7 billion for 1990 to $92.0 billion for
-1991Twhiie-(po'gitive)-net-incom'e-declined-only-2-percent,-ftbm $1163 billion for 1990 to $113.4 billion. Slightlyover 92 percent of the $7.7 billion decline in the deficitWas in the real, estate operators and lessors of buildingsindustrial group [1].
The number of partnerships (1.5 million) declined forthe third straight year and the number of partners (15.8million) also declined for the second straight year. Whilethe number of "limit*e_d-"' -partnerships (the main vehiclethat had been used for "tax shelter" activities) declined 5percent, the overall net losses reported by these partner-ships declined 21 percent, from -$21.1 billion for 1990 to-$16.7 billion for 1991. The number of "general" partner-ships declined 2 percent, but their overall profits wereabout the same a's 1990 at $38.1 billion (see Partners inthe Explanation of Selected Tenns section f6i'a discus-sion of general and limited partnershi -ps).
.The decline in positive net income and in the number ofpartne~ships and partners and average number of partnersmay -be indicative of the slowdown in the U.S., economy,as weli as other economic factors, such as the changes inthe real estate market, plus the conti'ui.ng effects of the1986 Tax Reform Act. The recession that began in thethird quarter of 1990 continued into 1991 [2,3].
One of the major provisions of TRA N%ias,the* limitationon "passive losses" [4-8]. A "passive" activity occurswhen'the taxpayer does not materially participate in the
Timothy D. Wheeler is a statistician with the Corporation~peeial Projects Section. This article wa~ prepared under
go the direction ofJames R Hobbs, Acting Chief.
active conduct of a trade or business on a regular, continu-ous and substantial basis. TRA, removed most (if. theincentives for individual income taxpayers to u
'se partner-
ships for tax reduction purposes by limiting the "passivelosses" they.could deduct from other forms of income ontheir income tax returns. TRA contained phase-in provi-sions which limited the amount of allowable passivelosses to 65 percent of passive losses from pre-TRAinvestments for 1987; 40 percent for 1988; 20 percent for
,1989; and 10 percent for 1990. For 1991, no passivelosses could be deducted [9].
Number of PartnershipsFiguie A shows the total number of partnerships, generalor limited, by profit status, for Tax Years 1981-1991.Profit statiis' refers to returns that had either a'net income(gain) or a net deficit (loss).
For the 1981-1985 period, the number of partnershipsgrew raoidlyj but'declined every year thereafter (exceptfor 1988). T116 numbei of both-gain and loss partnerships
-grew-rapidi'y-foi-th6-1981--1985-Verib-d.-VA-ulCthe-numberof gain partnerships remamied somewhat constant after1985, starting-with 1986 the number of loss partnershipsdeclined steadily at approximately the, same rate, as thedecline in the total humber of partnerships-. The niuniber ofgeheral and limited partnerships -increased 14.0 and 31.3percent, respectively, from 1981 to 1086, and decreased.12.9 and almost 1 percent, respectivelyj from 1986 to1991.
A comparison of the number of partnerships by typeand profit status for Tax Years 1.981-1991 shows that,generally.through 1985, the number of returns for all fourof the partnership categories increased, with limitedpartnership's growing more rapidly than general, partner-ships (Figure B). However, after 1985, the number ofpartnerships declined itf all of the groups, except gain-gen
.erating,limited partnerships..For the 1485-1991
-period, gami-generating limited partnerships increased by,21 percent,frorn 107,000 to 130,000, while loss-generat-ing limitid'partnerships gradually declined by 18 percent,from 17~' to 14 1,000, after reaching an all-time highIQOOfor 1986 (18 1,000). During the'same period, gain-generating general partnerships also declined, by 6percent, from 774,000 to 726,000, while loss-generatinggeneral partnerships decreased by. ~ 1 percent, from660,000 to 519,000.
The number of partnerships declined 3 percent, from1,554,000 for 1990 to 1,515,000 for 1991. Generalpartnerships declined only 2 percent, from 1,268,000~tb,,,l1,245,000, while limited partnerships declined 5 percent,from 286,9W to 27 1,000. The decrease in limited partner~ships tended to be concentrated in five industry groups~
Partnership Returns, 1991
Figure A
Number of Partnerships, Tax Years 1981-1991Millions of returns
2.0 r-
1.5
1.0 P
0.5 ~
Total partnerships
Gain partnerships
Loss partnerships
General partnerships -A
Limited partnerships
0 L__
1981 1983 1985 1987
Tax Year
Figure B
Number of Partnerships, by Type of Partnershipand Profit Status, Tax Years 1981-1991[Number of partnerships are in thousands]
Tax year
1981 ..........
1982 ..........
1983 ..........
1984 ..........
1985 ..........
1986 ..........
1987 ..........
1988 ........ :.
1989 ..........
1990 ..........
1991 ..........
Totalpartnerships
11)
1,4611,5141,5421,6441,7141,7031,6481,6541,6351,5541,515
General
Gain
(2)
677707707750774766769782770739726
Type of partnership
Lose
(3)
576581
601
636660
663617
587571
528
519
Lim
Gain
(4)
758782
101107
9296
119128114130
NOTE: Detail may not add to totals because of rounding.
ited
Loss
(5)
133
139
152157
173
181166
166166
171
141
real estate operators and lessors of buildings (30 percentof the decrease); and, to a lesser extent, agriculture,forestry and fishing, especially farming; mining, espe-cially oil and gas extraction; construction, especially
1989 1991
special trade contractors; and several industry groupswithin the services division (Table 1).
A comparison of 1990 and 1991 data only, for generaland limited partnerships, indicates that the number ofgain-producing and loss-producing general partnershipseach declined by only 2 percent. However, this was notthe case for limited partnerships; gain-generating limitedpartnerships increased by 14 percent, from 1 14,000 for1990 to 130,000 for 199 1, while loss-generating limitedpartnerships declined 18 percent, from 17 1,000 to141,000. This was the largest reduction in the number oflimited partnerships reporting a loss in more than adecade. If partnerships continue to grow at the same ratesas those evidenced by the 1991 data, for 1992 the numberof gain-generating limited partnerships may exceed thenumber of loss-generating limited partnerships for thefirst time in more than a decade.
Number of PartnersFigure C shows the total number of partners in generaland limited partnerships for Tax Years 1981-199 1.(General partnerships have only general partners, whilelimited partnerships have at least one general partner andone or more limited partners.) Figure C also shows theaverage number of partners per partnership.
81
Total and Average Number of Partners, by Type of Partnership,Tax Years 1981-1991Millions of partnem
0 0
1981 1983 1985 1987 1989 1991
For 199 1, the total and average number of partnersdeclined, for the second consecutive year. The total andaverage number had increased every year between 1981and 1989. The number of partners in limited partnershipsdisplayed substantial and uninterrupted growth for the1981-1989 period, and then declined for the 1990-1991 -period. The number of partners in general partnershipsranged between 4.5 and 5.7 million during the 1981-1991period. The 4.5 million partners for 1991 represented an11 percent decrease from 1990.
A "snapshot" of the trends in the number of partners,for Tax Years 1981-1991, can be brought into clearerfocus by Figure D, which presents the number. of partnersby the same four categories of partnerships used in FigureB. Between 1990 and 1991, the number of partnersdeclined in all four categories, something which had nothappened in more than a decade. The number of partnersfor both general and limited gain partnerships eachdeclined 14 percent, while those in
'general and limited
loss partnerships declined 11 and 16 percent, respectively.With the exception of the limited gain-producing partner-ships, the decrease in the number of partners reflects thedecrease in the number of partnerships. The number of
limited gain partnerships actually increased; as discussed inthe previous section, even though the number of partners inthem declined.
.Number of Partners, by Type of Partnershipand Partnership Profit Status, Tax Years1981-1991
[Number of partners are In thousands]
1981 ......1982 ......1983 ......
184 ......
1:85 ......1986 ......1987 ...
*..
1988 ......1989 ......1990 ......1991 ......
Totalpartners
(1)
9,0959,765
10,58912,42713,24615,30116,96317,29118,43217,09615,801
Type of partnership
General
Gain
.112)
2,8832,8862,9393,6272,9903,0613,1853,4213,1603,1022,714
Loss
(3)
2,0362,1672,2162,2162,3402,4262,2552,1972,0682,0071,822
Lim
Gain
14)
1,6282,0272,4883,0823,6804,7096,0646,6647,6567,1806,606
ited
F L_0s r.
(5)
2,5482,6842;9473,6034,2345,1055,4695,0095,6684,8064,661
NOTE: Detail may not add to totals because of rounding.
Partnership Returns, 1991
Net Inceme Less DeficitFor the 1981-1991 period, Figure E shows the overall netincome Oess; deficit), gains (positive net income) andlosses (negative net income or net deficit) separately,while Figure F presents data for gains and losses by typeof partnership (see Partnership Net Income (Less Deficit)in the Explanation of Selected Terms section).
For 199 1, partnership net income less deficit showedthe largest increase in 3 years, rising to $21.4 billion, a 29percent increase from the $16.6 billion recorded for 1990.The increase was due to a larger decrease ($7.7 billion) inpartnership losses than to the decrease ($2.9 billion) inpartnership gains. (For prior years, the increase in netincome less deficit was usually due to an increase ingains, rather than a decrease in losses.) The decrease inlosses (from $99.7 billion for 1990 to $92.0 billion for1991) had previously occurred only three times in theprior 15 years and only five times in the prior 25 years.Also, the decline in gains (from $116.3 billion to $113.4billion) was the first such decline in more than 25 years.
For 1991, the $7.7 billion decline in overall losses (ofwhich $7.1 billion was due to real estate operators andlessors of buildings) was about equally divided between
Figure E
general and limited partnerships ($3.9 billion and $3.8billion, respectively). For 1991, general partnership gainsdecreased by $3.6 billion to $78.3 billion; limited partner-ship gains increased by $0.7 billion, to $35.1 billion.
The slowdown ofthe U.S. economy and other eco-nomic changes, such as those that occurred in the realestate market, had a significant impact in 1991 onpartnerships, especially those within the real estateoperators and lessors of buildings industrial group. This isevidenced by the decrease in gains and especially inlosses. With the disappearance of the tax incentives thatencouraged "tax losses," particularly in real estate,partnership investments seemed to continue movingtowards profit-seeking alternatives. Thus, while thenumber of partnerships and partners decreased for 1991,the net income (less deficit) of partnerships increased, andwhile the gains dropped slightly, possibly in response tothe economic recession, losses dropped sharply, mainlydue to real estate activities.
The net income (less deficit) for all partnerships, $21.4billion, is a result of adding together the several profitcomponents shown on the partnership return: net income(less deficit) from trade or business ($25.0 billion); net
Partnership Net Income (or Deficit), Tax Years 1981-1991Billions of dollars150 r
100
50
Gains Q.e., not Income)
Not Income (lose deficit)
0
-50Losses (i.e., deficiQ
-100
1981 1983 1985
Tax Year
1987 1989 1991
83
84
Partnership Returns, 1991
Figure F
Partnership Gain or Loss, by Type ofPartnership and Partnership Profit Status,Tax Years 1981-1991[Money amounts are In billions of dollars]
Tax year
Totalgain
or lose
11)
-2.7-7.3-2.6-3.5-8.9
-17.4-5.4
14.514.116.621.4
Type of partnership
General
Gain12)
42.8"A48.655.760.563.566.281.280.981.978.3
Lose
(3)
-29.8-34.2-32.5.-30.6-42.4-45.3-43.4-42.7
-44.1-40.2
Lim
Gain ~(4)
7.89.2
11.714.016.616.821.530.133.034.435.1
E: Detail may not add to totals because of rounding.
ited
LOSS
15)
-23.5-26.7-30.4-36.6-43.5-52.3-49.6-54.2-54.6-55.6-51.8
income (less deficit) from rental real estate (-$28.6billion); net income Oess deficit) from rentals other than-real estate ($0.5 billion); and portfolio net income lessdeficit ($24.5 billion, excluding net short-term and netlong-term capital gains and- losses), Portfolio income wascomprised of interest ($19.9 billion); dividends ($2.9billion); royalties ($ 1.1 billion); and other portfolioincome ($0.6 billion). (Portfolio income, includingannuities, refers to investment-type income not realized inthe ordinary course of conducting a specific trade orbusiness.)
Industrial Profiles and ActivitiesDuring the period 1981-1991 there were only threeindustrial divisions which exhibited major changes in themimber of partnerships. First, the number-cif partnerships,in finance, insurance and real estate, as a percentage of allpartnerships, increased from-47 percent of the total for.1981 to 53 percent for 1991; slightly over 70 percent ofthis increase was in operators and lessors of buildings.Second, the number of partnerships in wholesale and retailtrade dropped from 15 percent of the total for 1981 to I Ipercent for 1991. This percentage remained at I I in thepost-TRA years. Third, the services division increased itsshare ofpartnership returns from 18 percent for 1981 to20 percent for 1985, and then gradually. decreased itsshare during the following years to 17.,percent for 1991.Each of the remaining industrial divisions included lessthan 10 percent of the total returns for,each year duringthe 198171991 period, and none, including oil and gasextraction, showed any major shifts in industrial activityduring this period.
table 5 show's the changes in the number of partner'--ships, number of partners, net income (less deficit), 'netincome (i.e., gains) and net deficit (i.e., losses) by' indus-~trial division and selected industrial groups-for Tax Years1985-199 1. For 199 1, the number of partnerships declined3 percent from the previous year. This decline -was mostlycontained in three industrial groups: 49 percent in realestate operators and lessors of buildings; 18 percent inservices; and 13 percent in wholesale and retail trade.Agriculture, forestry and fishing; and transportation andpublic utilities were the only industrial divisions to showincreases (2 percent and 4 percent, respectively). Manufac-turing showed the largest decrease (15 percent); however,this group only accounted for 2 percent of total partnershipreturns for both 1990 and 199 i, and has never been amajor source of partnership activity.
Although the number of partners steadily increasedduring the 1981-1989 period, the number dropped thereaf-ter. An analysis of the more recent years shows that thenumber of partners increased in seven-of the eight indus-
-trial-divisioTts-frorTt-1988-tci-1989;-however.-the~-ziumber-of-industrial divisions for which there was an increaseOropped.to, two for 1989 to 1990,
'and then increased to
three for 1990 to 1991. During the period 1985 throu h_g1991-
'- the largest percentage decreases- m- number of
partners were for manufacturing and mining (principally.for oil and gas services), 67, and 36 percent, respectively.The largest percent increase (179 percent) in the number. ofpartners was for transportation and public utilities.
For 199 1, the number ofpartners declined by 1,294,000,or 8 percent compared to 1990. Most -of this decline was inmining and finance, insurance and real estatei 734,000 and.530,00.0, respectively. Within mining, oil . and gas servicesdeclined by 755,000 partners. Ninety-one percent of thedecrease in finance, insurance and real estate from 1990 to199.1,-was contained in three industrial groups: insuranceagents, brokers and services (50 percent); "other holdingand investment companies" (22 percent); and real estateagents,_brokers and managers (19 percent). The number ofpartners actually increased for three industrial divisions:agriculture, forestry and fishing (10 percent); transporta-tion and public utilities (3 percent); and services (3percent).
For 199 1, partnership financial activity continued to bedominated by limited partnerships in finance, insurance.and real estate and general. partnershipsin services(figures G and H). The finance, insurance and re
'al estate
division accounted for 74 percent (202,000) of. all -limitedpartnerships, 68 percent (7,674,000) of the partners inlimited partnerships and 82 percent (-$13.8 billion) of theoverall net deficit of limited partnerships. Within this
Partnership Returns, 1991
Figure G
Selected Items, by Type of Partnership and Industrial Group, Tax Years 1990 and 1991[Money amounts are in thousands of dollars]
Limited partnerships
Tax year, industrial group
1991
AN industries' .......................
Agriculture, forestry and fishing.....Mining .......................................
Oil and gas extraction.................
Construction ...............................Manufacturing .............................Transportation and public utilities ....Whollesale and retail trade .............Finance, insurance and real estate..Real estate................................
Operators and lessors ofbuildings
Services .....................................
1990
AN indlustdoe. .......................Agriculture, forestry and fishing.....Mining .......................................Oil and gas extraction .................
Construction ...............................Manufacturing .............................Transportation and public utilities ....Wholesale and retail trade .............Finance, insurance and real estate..Real estate................................
Operators and lessors ofbuildings .............................
Services .....................................
Numberof returns
11)270,681
9,78016,29515,149
1,4061,9463,797
13,640201,502182,890
134,48122,232
285,76912,25419,16218,7263,6811,6904,113
12,303205,379168,440
139,70426,617
Numberof partners
(2)
11,265,537219,931
1,198,2401,162,041
28,003126,"7439,268
96,7797,674,1675,218,011
4,736,7831,481,968
11,986,642200,912
1,962,3641,927,732
37,282188,248426,583117,067
7,728,0495,244,646
4,693,7841,331,082
I Includes partnerships whose business activity could not be determined.
Not incomeliess deficit)
P)-16,702,278
.242,2521,790,2791,840,527-312,608-614,965
-2,177,849378,997
-13,769,218-22,224,989
-17,978,664-1,754,293
-21,161,231-33,760
2,760,3362,837,506-150,609292,205
-1,834,462117,164
.18,965,697-26,260,425
-21,783,296-3,340,855
Numberof returns
(4)
1,2","S117,293
22,72819,03166,78922,02822,309
157,342602,335506,077
410,722238,217
1,267,760112,776
21,75219,87666,78926,69521,068
163,636616,875513,991
424,190241,718
General partnerships
Number ofpartners
(5)
4,535,511331,784216,247197,487123,68948,71079,874
351,0562,642,3481,883,482
Not income(less deficit)
16)38,108,885
1,981,930-1,010,792-1,201,3811,806,3801,519,294
746,5092,249,053
982,822-3,395,851
1,489,667724,631
5,108,423301,827196,390187,056124,25667,96276,828
363,8613,118,1361,901,356
1,565,677822,087
-619,36829,790,360
37,770,7711,700,697-576,942-823,136
2,058,426873,733
1,717,5242,492,697
-247,270-5,333,304
-3,614,37029,793,848
division, the real estate industrial group alone accountedfor 81 percent of the limited partnerships, 68 percent ofthe partners in limited partnerships and a larger deficitamount (-$22.2 billion) than that for the entire division(-$13.8 billion). The services division accounted for 19percent (238,000) of the general partnerships, 16 percent(725,000) of the partners in general partnerships and 78percent ($29.8 billion) of the total net income (lessdeficit) of general partnerships. The services division wasdriven by legal, and medical and health services, whichtogether, for 1991, reported $24.8 billion ($17.0 billionand $7.8 billion, respectively), or 22 percent of the totalgains reported by partnerships.
During the 1985-1991 period, the number of industrialdivisions showing a profit, that is, a positive net income(less deficit), increased substantially (Table 5). For 1985,only four of the eight divisions showed an overall profit:
mining, construction, wholesale and retail trade andservices. By 1991, only two divisions did not show anoverall profit: transportation and public utilities andfinance, insurance and real estate. However, even thesetwo divisions evidenced an improved overall profitpicture from 1985 to 1991, but it was characterized bydeclining losses, rather than increasing gains.
The slowdown in the economy is further evidenced bythe fact that, from 1989 to 1990, five of the eight indus-trial divisions showed increased overall profits (netincome less deficit); only construction, manufacturing andthe services showed increased overall losses. However,from 1990 to 1991, only two divisions (finance, insuranceand real estate and services) showed increased profits.
Total Assets and Total RewiptsTable 2 presents balance sheet data by industrial group
85
Figurt H
Partnership Net Income and Deficit, by Industrial Groupings, Tax Year 1991
Real estate,operators, and
lessors ofbuildings
(24%)
Real estate,operators,and
lessors ofbuildings
(44%)
Not Deficit
Construction I
(2%)
Manufacturing(4%)
Transportation andpublic utilities (4%)
-Oth-e-r finance-,Insurance
and real estate(18%)
Manufacturing(4%)
Transportation andpublic utilities
(7%)
Wholesale and retail trade(2%)
I Includes "Nature of business not allocable," which Is not shown sepsirstely.
Partnership Returns, 1991
and net income status for the two-thirds of all partnershipsrequired to report this information. (In general, partner-ships with total receipts and total assets each less than$250,000 were not required to report balance sheetinformation on their tax returns.) For the 1981-1991period, total assets experienced double-digit growth for 7of the 11 years; however, they increased only 2 percentfrom 1990 to 1991 (and less than 1 percent from 1989 to1990). Since balance sheets reflect book values, theslowdown in growth for the more recent years may reflectthe increased effect of "older" depreciable, more-costly-to-replace, assets, further confirming the slowdown ineconomic activity.
Figure I displays total assets and total receipts byindustrial division for 1991. The finance, insurance andreal estate division comprised 76 percent ($1.4 trillion) ofthe total assets ($1.8 trillion), yet only 25 percent ($0.15trillion) of the receipts. Its share of total assets remainedfairly constant (between 74 and 78 percent) during the1981-1991 period. However, the services division, whichshowed the second largest concentration of total assets (9percent, $0.2 trillion), comprised the largest amount ofreceipts (30 percent, $0.18 trillion).
For 1991 and other recent prior years, the largest assetaccount was net depreciable assets which comprised 38percent ($696 billion) of total assets. "Other investments"(which includes land and buildings owned by real estateoperators and lessors of buildings, bank certificates andcommon stock) and land were also significant assetholdings for 1991 and other recent prior years.
Total receipts, for this article, is defined as the positiveincome (negative amounts or losses are not included)received by partnerships for the specific items listedbelow [10]. For 1991, total receipts of partnerships($611.0 billion) consisted of gross receipts or sales("business receipts" in the statistics [$483.2 billion]);ordinary income from other partnerships and fromfiduciaries ($5.4 billion); net farm profit ($2.8 billion); netordinary gain from sales of business property ($2.0billion); other income from trade or business ($22.1billion); net income from rental real estate activities($20.2 billion); net income from other rental activities($2.6 billion); portfolio interest income ($19.9 billion);portfolio dividend income ($2.9 billion); portfolio royaltyincome ($1. 1 billion); net short-term capital gain ($4.2billion); net long-term capital gain ($10.6 billion); otherportfolio income ($0.7 billion); net gain from sales orexchanges of property used in trade or business (InternalRevenue Code section 1231) ($18.7 billion); and otherincome except that from trade or business ($14.8 billion).
Real Estate Operators and Lessors of Buildingsand Rental Real EstateAlmost 68 percent of the partnerships classified infinance, insurance and real estate were real estate opera-tors and lessors of buildings, an industrial groupcharacterized by tax shelter activity in the years precedingthe 1986 tax reform. The number of partnerships in thisindustry group declined 3 percent, from 564,000 for 1990,to 545,000 for 199 1. While these partnerships accountedfor 36 percent of all partnerships for 1991, they reportedonly 19 percent of total net income, but 44 percent of totalnet deficit. Net income (less deficit) for this group hadbeen negative for many years, but improved 42 percentfor the period 1989-1991; from -$30.1 billion for 1989, to-$25.4 billion for 1990, to -$18.6 billion for 1991. Thisimprovement in net income (less deficit) for real estateoperators and lessors of buildings is, perhaps, the singlemost significant change in partnership data from 1989 to1991 (Table 3).
The number of partnerships reporting rental real estateincome on Form 8825, Rental Real Estate Income andExpenses ofa Partnership or an S Corporation, declined3 percent, from 652,000 for 1990, to 634,000 for 199 1.Real estate operators and lessors of buildings accountedfor 87 percent of the number for 1991; the remaining 13percent represented other partnerships, with rental realestate as a secondary activity. These latter partnershipswere classified in other industrial groups, based on theirprimary business activity. While the number of partner-ships with rental real estate income declined 3 percent for1991, the rental net income (less deficit) they reportedimproved (became more profitable) by nearly one-fifth(from -$35.2 billion to -$28.6 billion), continuing thetrend that began after the 1986 tax reform. The increasefrom 1990 to 1991 was entirely accounted for by realestate operators and lessors of buildings (with rental realestate as the primary activity). However, for thosepartnerships with rental real estate income as a secondaryactivity the reverse occurred; that is, rental net income(less deficit) actually decreased (became less profitable).
Distributions to PartnersDistributions (or allocations) of partnership income (orloss) to limited and general partners by industrial divisionare presented in Table 4. For 1991, the total amount ofincome (less loss) available for distribution (withoutregard to deductions, which were separately allocatedamong partners) was $68.6 billion. This was the sum ofpartnership total net income (less deficit), ($21.4 billion);
87
Partnership Reftmis, 1991
Figure I
Partnership Total Assets and Receipts, by Industrial Groupings, Tax Year 1991
Real estate,operators, and
lessors ofbuildings
(40%)
_. TotalAssets
88 il
Real estate,-operators, and
lessors obuildings
(14%) -
Total Receipts
Includes."Nature of business not allocable;" which Is not shown separately.NOTE: Percentages may not add to total due to rounding.
Manufacturing (4%)Yransportation andpublic utilities (4%)
Transportation andpublic utilities (7%)
Wholesale andretail trade
(17%)Other finance,
Insuranceand real estate
Partnership Returns, 1991
net short-term and long-term capital gains or losses ($2.9billion and $6.8 billion, respectively); guaranteed pay-ments to partners ($11.2 billion); net gain or loss fromasset sales under Code section 1231 (generally, businessreal estate or depreciable business property) ($13.7billion); and other reported income or loss ($12.7 billion).(Only the net distributions were tabulated; therefore,income distributions and loss allocations are not availableseparately.)
With the exception of guaranteed payments to partners,amounts distributed or allocated reflect the ownershipshares of partnership income (or loss) by various types ofpartners. Guaranteed payments, which is one componentof total income distributed or allocated, are deducted inthe calculation of partnership net income or loss from atrade or business. (Guaranteed payments to partners aremade for services provided by the partners, or for the useof their capital, and are made without regard to thepartnership's net income or the amount the partners have"at risk" in the business.)
Schedule K of the partnership return reports thepartners' share of the partnership's distributive income,deductions and tax credits as totals for each item. Thesetotals are also reported by type of partner. The amounts bytype of partner were revised on the 1991 Schedule K toinclude certain deductions separately allocated to partners,in addition to the distributive shares of income or loss.Those deductions ($22.4 billion, for 199 1) includecharitable contributions, Code section 179 expensedeductions (generally, the expensed cost of certaindepreciable business assets, limited to $10,000 perpartner), deductions from portfolio income, interestexpense on investment debts, total foreign taxes, certainexpenditures for which an election under Code section59(e) (partner's distributive share of the partnership'sdeductible expenses) applied and other deductions [ 11].(These deduction items are included in Table 4.)
For 199 1, approximately $68.6 billion of total income(less loss) was reduced by $22.4 billion of deductions,resulting in a net amount of $46.2 billion available to beallocated to partners. Of this amount, $38.8 billion, or 84percent,was actually reported by type of partner. Thedifference between the total amounts available forallocation and the amounts reported by type of partnerwas primarily due to partnerships that failed to reportallocations by type of partner on their returns as originallyfiled.
As Table 4 shows, of the $38.8 billion of income inexcess of losses identified by type of partner, allocationsto individuals who were general partners were predomi-nant in the following industrial divisions: agriculture,
forestry and fishing; construction; wholesale and retailtrade; finance, insurance and real estate; and services.Allocations of net losses (i.e., losses in excess of income)were predominant in the remaining industrial divisions:mining (corporate general partners); and manufacturingand transportation and public utilities (corporate limitedpartners).
The real estate industry grouping accounted for 45percent (7.1 million) of the partners and 39 percent (0.6million) of the partnerships which reported distributableor allocable income (less loss) on Schedule K. With theexception of those that were individual general partners,tax-exempt organizations and general nominees or otherpartners not identifiable by type, allocations by type ofpartner for the real estate group were predominately in theform of overall net losses rather than of overall netincome. However, individual general partners stood outfor 1991 with gains from partnerships of over $2.5 billion.Individual limited partners, a group which was targeted byTRA, was still dominated by losses.
For 1991, most of the net distributions to individualgeneral partners ($27.3 billion) were reported by partner-ships classified in the services division. Over half of thisamount, $15.3 billion, was reported by partnerships in thelegal services subgroup. Other significant amounts werereported by medical and health services, $4.5 billion; andaccounting, auditing and bookkeeping services, $4.1billion.
Padnemh1p and Mer Businew ReturnsPartnerships and other business entities have varyinglevels of influence on the different industrial groups.Figure J shows the number and percentage ofreturns filedby partnerships, nonfarm sole proprietorships, S Corpora-tions and "other corporations" for each industrial division[12]. An S Corporation has to have 35 or less sharehold-ers (all of them either individuals, estates or trusts) andcannot be a member of an "affiliated group" of compa-nies. Generally, for tax purposes, the S Corporation'sincome (loss) is passed through to the shareholders on apro-rata basis, in a manner somewhat similar to that usedfor partnerships.
The number of partnership returns (1.5 million for1991) filed annually is somewhat similar to those for SCorporations (1.6 million for 1990) and "other corpora-tions" (2.1 million for 1990), but is substantially less thanthe number ofnonfarm sole proprietorship returns (15.1million for 199 1). However, a comparison by legal formshows that partnership returns account for large portionsof the total business returns in certain industrial groups.Partnerships filed more returns for the mining division
89
Partnership Reftims, 1991
Number of Business Returns, by Industrial Division, 1990 and 1991Partners 1 1991 sales proprivet hips, 1991 S Corporations, 1990 Other corporations, 1990
Industrial division Number of Number o Number of: Number ofreturns Percent returns Percent returns Percent returns Percent
11) (2) (3) (4) (6) (6) (7) (8)AD industrias .......................... 1,615,345 100.0
_14,782,738 100.0 1,572,092 100.0 2,141,568 100.0
Agriculture, forestry and fishing ....... 127,073 8.4 362,740 2.5 64,971 3.5 71,452 3.3Mining ........................................ 39,02.2 2.6 132,139 0.9 16,030 1.0 23,644 1.1Construction ................................ 57,195 3.8 1,782,125 12.1 168,045 10.0 248,829 11.6Manufacturing .............................. 23,974 1.6 379,903 2.6 113,289 7.2 188,380 8.8Transportation and public utilities ..... 26,107 1.7 614,639 4.2 63,967 4.1 96,396 4.6Wholesale and retail trade .............. 170,983 11.3 2,650,196 17.9 419,833 26.7 603,224 28.2Finance, insurance and real estate ... 803,838 53.0 1,330,638 9.0 241,630 15.3 387,608 17;2Services ...................................... 260,449 17.2 7,334,996 49.6 501,733 31.9 527,714 24.6Nature of business not allocable ....... . 6,706 0.4 195,361 1.3 5,705 0.4 1 14,310
Excludes farming.NOTE: Detail may not add to totals because of rounding.
than did either the S Corporation or "other corporation"group; sole proprietors filed only slightly less than fourtimes as many returns-classified in mining as did partner-
- ships,-even-diough,-in-fact,-there-were-slightly-more-than-ten times as many sole proprietorships as there werepartnerships.. . For the finance, insurance and real estate division,partnerships also filed more returns than did either SCorporations or "other corporations," and nonfarm soleproprietors filed only 60.6 percent more returns than didpartnerships.The majority of partnership retums,(53.0percent) were classified in the finance, insurance and-realestate industrial'division. By comparison, this division ,comprised much smaller portions of total returns for theother three groups: S corporations (15.3 percent); "othercorporations" (17.2 percent) and sole proprietorships (8.5percent).
The predominant group for nonfarm sole proprietor-ships, in terms of their numbers, was services (50.3percent). The predominant groups for both S Corporationsand "other corporations" were the services and wholesaleand retail trade divisions, which, combined, accounted forover half of the total number of returns in each group. Forpartnerships, by comparison, the services and tradedivisions accounted for only 17.2 percent and 11.3percent, respectively.
-SummaryVarious economic conditions, including ~he economicrecession that began in 1990, and the changing real estatemarket, as well as the Tax Reform Act of 1986, continuedto have a significant effect on partnership activity for1991. Economic conditions, rather than the creation of"tax.losses," increasingly dominated partnership activity.This was evidenced, for 1991, by the largest increase (29
percent) in net income (less loss) in 3 years, caused mainlyby a decrease in net losses (8 percent). Real estate opera-tors and lessors of buildings, the industry group usually
-considered-to-be-the-leader-"x-shelter-activity, was-largely responsible for the decline in net losses; the net lossfor this industry group declined by almost 27 percent from1990.
The number of partnerships declied for the thirdstraight year and the number ofpartners declined for thesecond straight year. The decline in. the number of partner-ships was driven by a decline in businesses that were realestate operators and lessors ofbuildings. The decline in thenumber of partners was driven by declines in both themining and finance, insurance and real estate divisions.
Most of the pre-TRA tax shelter activity occurredthrough the use of limited partnerships. For 1991, thenumber-of gain-generating limited partnerships increased14 percent, while loss-generating limited partnershipsdeclined by 18 percent. If this patte~n continues, thenumber of.gain-generating limited partnerships for 1992will exceed the number of loss-generating partnerships forthe fast time in more than a decade.
For -199 1, of the $46.2 billion of partnership income (lessloss) available for distribution to partners, $38.8 billionwas identified on the partnership return by type of partner.Individuals who were partners received $41.2 billion of theoverall net gains, while corporations and partnerships thatwere partners received the overall net losses of $2.0 billionand $5.2 billion, respectively.
Sample SelectionTax Year 1991 statistics are estimates based'on a stratifiedprobability sample of almost 29,000 returns selected.froma popul
'ation of approximately 1.5 million partnerships.'
Tax Year 1991 covers returns processed by the Inteffial
Partnership Returns, 1991
Revenue Service during Calendar Year 1992. All partner-ships engaged in business in, or having income fromsources within, the United States were required to file aForm 1065, U.S. Partnership Return ofIncome, to reportincome or loss, deductions, tax credits and other tax-related items generated by the partnership. The statisticsare only for active partnerships, which are defined asthose that reported any items of income or deductionderived from a trade or business, or from rental orportfolio income.
The sample was stratified into classes based on size oftotal assets, receipts, net income (or deficit) and industry.Returns were selected from these classes at variousprobabilities ranging from 0. 12 percent to 100 percent,and were weighted to represent the total population.Approximately 2 percent (600 returns) of the returnsselected for this sample were not included in the tabula-tions because they represented inactive partnerships orbecause multiple returns had been filed by the samepartnership.
Because the data presented in this article are based on asample of returns, they are subject to sampling error. Toproperly use the data presented, the magnitude of thepotential sampling error needs to be known; coefficientsof variation (CV's) are used to measure this magnitude.Figure K presents the coefficients of variation for certainmoney amounts and for selected industrial groups. Thesmaller the coefficient of variation, the more reliable theestimate is judged to be.
Explanation of Selected TennsAssets and Liabilities. -Balance sheet information had tobe filed, in general, only if the partnership had totalreceipts and total assets of $250,000 or more. No attemptwas made to estimate the assets and liabilities of those notrequired to file. Although efforts were made to overcomethe effects of nonuniform reporting, especially by firmsthat used balance sheets of their own design instead of thetax return balance sheet, certain anomalies were accepted,e.g., when a negative amount was reported for an asset orliability account.
Partners.-Partners can be individuals, corporations,other partnerships or any other legal entity. Partners canbe classified as either general or limited. General partnersare those that assume liability for the partnership's debtsand losses. Limited partners are those whose liability inthe partnership does not exceed their investment in it, theso-called amount "at-risk." By definition, a partnershipmust have at least two partners, at least one of which mustbe a general partner. A general partnership is composedentirely of partners that are general partners. A limited
Figure K
Partnership Coefficients of Variation for SelectedIndustrial Groups and Items,Tax Year 1991
Coefficients ofvariation
Industrial group Total Salariesassets and wages
11) (2)
All Industrial divisions ........ 0.007
- -
0.008
Agriculture, forestry andfishing ............................. 0.052 0.092
Mining ................................. 0.022 0.074Construction .. ..................... 0.074Manufacturing ...................... 0.010 0.019Transportation and
public utilities ................... 0.016 0.026nd retail trade ......Wholesale 0.017 0.023:
Finance, in uranceand real estate(except operatorsand lessors ofbuildings) ......................... 0.017 0.028
Real estateOperators and lessors
of buildings ................... 0.009 0.082Services ............................... 0.011 0.011
~oefficients ofItem vanation-- continued
(3)
Number of partnerships.......... 0.006
Number of partners ............... 0.019
Receipts .............................. 0.004
Portfolio interest income ........ 0.014
Cost of sales and operations.. 0.005
Depreciation ......................... 0.009
Taxes paid ........................... 0.008
Net income .......................... 0.018
Not deficit........................... 0.010
partnership has at least one general partner and one ormore limited partners.
Partnerships.-A partnership is the relationshipbetween two or more persons (partners) who join to carryon a trade or business, with each person contributingmoney, property, labor or skill and each expecting toshare in the profits and losses. Every partnership thatengages in a trade or business or has income from sourcesin the United States must file an annual informationreturn, Form 1065, U.S. Partnership Return of Income,with the Internal Revenue Service, which shows thepartnership's taxable income or loss for the year. Apartnership must file even if its principal place of businessis outside the United States or all its members are nonresi-
91
Partnership Returns, 1991
dent aliens. The partnership files a Schedule K- 1,.. ,Partner's Share ofIncome, Credits and Deductions, etc.,which reports each partner's share of the total * '.partnership's business activity. The Schedule K- 1 data areaggregated on the Schedule K (Form 1065), which is asummary of distributions or allocations to partners. Inturn, the partners compute their own income tax liabilityby adding together their share of the partnership's income(loss) and deductions with income and deductions from.other sources; however, in the case of partners who areindividuals, losses from partnership investments aresubject to a "passive loss" limitation. ,
Partnership Net Income (Less Deficit). - Through TaxYear 1986, partnership net income (less deficit) representsordinary income Ooss) on page 1 of the Form 1065partnership return. Beginning with Tax Year 1987(because of tax law and form revisions), a similar netincome (less deficit) figure has been computed forStatistics
'of Income as the sum of. ordinary income or
loss from trade or business, portfolio income distributed-dife-c-tly-fo-p-a-rffe-rs-(6x-clU-diiig-n-et-sKo-r-t--fe-n-n-and_l6_n-g--
term capital gains and losses), net income or loss fromrental real estate activities, and net income or loss fromother rental activities. The sum of these compopents is areliable nieas-ure of overall par'ther-ship lWofits 26d alsoenables comparisons to be made with amounts of netincome (less deficit) reported for years prior to 1987.Certain income and deduction items are distributed orallocated directly to partners and are therefore excludedfrom net income or deficit. The profit status of partner-ships is determined as the sum of the gains or losses fromthese four activities. Partnerships with a breakevenbetween gains and losses are included with loss partner-ships.
Notes and ReferencesIll
[21
For information about partnerships for other recentyears, see Shekhter, Elaina, "Partnership Returns,1990;" Petska, Tom, "Partnerships, Partners, and TaxShelters after Tax Reform, 1987-1989," Statistics ofIncome Bulletin, Summer, 1992, Volume 12, Number1; and Zempel, Alan, "Partnership Returns, 1989,"Statistics ofIncom~*Bulletin, Fall 199 1 'Volume 11,Number 2.
Economic Report of the President, February 1992.
[3] U.S. Department of Cornmerce, Economic andStatistics Administiation, Bureau of EconomicAnalysis, Survey ofCurrent Business, April 1992,Volume 72, Number 4, page L'
[41 U.S. Congress, Joint Committee on Taxatior~, TaxReform Proposab: Tax Shelters and Minimum'*Tax(JCS-34-85), August 7,1985, page Z
[5] Nelson, Susan, -Taxes Paidby fligh-Incpme Taxpay-ers and the Growth of Partnerships, 1983,- StatisticsofIncome Bulletin, Fall 1985, Volume 5, Number 2.
[6] Dworin, Lowell, "An Analysis of Partnership Activrit~, 1981- 83,- Statistics ofIncome Bulletin, Spring:'-!!~86, Volume 5, Number 4.
17] Congress, Joint-Committee on Taxation, GeneralExplanation of the Tax Reform Act of 1986 (H.R.3838,99th Congress; Public Law 99-514), May.4,1987.
[8] Nelson, Susan, "Noncorporate Business Taxation..Before and After the Tax Reform Act of 1986,- OTAfaPer 59, Office ofTax Analysis, U.S. Department ofthe Treasury, May 1988
1
-[9]-Fo~-further-inforination~about-p'assive-16sses-and-the~effects of the Tax Reform Act, see Petska, Tom,.Further Examinations of Tax, Shelters in the Post-,
Reform World," 1991 Proceedi, pf the AmericanStatistical Association, Section -on Survey ResearchMethods; Nelson, Susan and Petska, Tom, "Partner-ships, Passive Losses, and Tax Reform, 1981-1987,"St~atistics ofIncome Bulletin, Winter 1989-1990,Volume 9, Number 3; and Petska, Tom and Nelson,§u~san, "Partnerships and Tax Shelter: An Analysis ofthe Impact of the 1986 Tax Reform," 1990 Proceed-ings of the American Statistical Association, Sectionon Survey Research Methods.
[10] Therefore, total receipts differs from the total receiptspresented in Table 11 in the Selected Historical and'Other Data section of this, issue. In Table 11, certainincome and deductions distributed or allocateddirectly to partners is excluded.
[11] The election under Internal Revenue Code Section50(e) allowed partners to deduct their share of certainpartnership expenses ratably over a specified numberofyears, instead of deducting the full amountscurrently. Qualifying expenses include research andexperimental expenditures, mining and developmentalcosts and intangible drilling and development costs.
[12] Partnership data for 1991 are compared to soleproprietorship data for 1991 and corporation data for1990, the most recently available information.Partnership data for 1991 include returns processed .,
92
Partnership Returns, 1991
by IRS during Calendar Year 1992; corporation datafor 1990 include returns with accounting periodswhich ended between July 1990 and June 1991; andsole proprietorship data for 1991 include returnsprocessed by ERS during Calendar Year 1992. Sole
proprietorship statistics exclude farms. While eachpartnership return is classified into a predominantindustry based on assets, each corporation isclassified on the basis of receipts and each soleproprietorship on the basis of receipts.
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1991
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1991
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1991
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1991
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1991
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1991
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1991
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1991
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1991
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1991
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1991
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