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PROCEDURALLY TAXING tax notes federal Here We Go Again: What Is a Partnership Item?

Jenni Black is a managing director in Citrin Cooperman’s national tax office and the practice leader of the tax procedure and controversy practice. She is also a contributing author for Procedurally Taxing. In this post, Black examines factors that affect what qualifies as a partnership item. This post reflects the author’s personal views and not necessarily those of Citrin Cooperman. Recently there has been a lot of focus on what a partnership item is under the unified partnership audit regime enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (for example, Denham Capital,1 Soroban2), especially when it comes to something like net earnings from self-employment (NESE). And to be clear, I am referring to NESE reported by a partnership on Schedule K, line 14a, not the ultimate amount a partner pays self-employment tax on (these are two entirely different things).3 This is nothing new. I don’t know where we’re going, but I sure know where we’ve been. And where we’ve been is fighting about what a partnership item is since the ink dried on the law. So, what is a partnership item? In part 1 of this post, I lay the groundwork

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for factors that may impact whether something is a partnership item and, in part 2, I look at how the courts have ruled on those factors in the past. We keep searching for an answer; we never seem to find what we’re looking for. Here we go again.4 As with all things, we start with the statute. The term “partnership item” is defined in section 6231(a)(3) (prior to repeal by the Bipartisan Budget Act) as “with respect to the partnership, any item required to be taken into account for the partnership’s taxable year under any provision of subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level.” Breaking it down you get: (1) with respect to the partnership5 any item required to be taken into account for the partnership’s tax year under any provision of subtitle A, and (2) the regulations provide that it’s more appropriately determined at the partnership level. It’s the first one that’s getting all the attention right now. Let’s look at that one. What’s “any item required to be taken into account for the partnership taxable year?” Does it mean the partnership must take the item into account under subtitle A? That’s not what it says. It’s written in the passive voice. It doesn’t say who has to take it into account under subtitle A, it just says it has to be taken into account under subtitle A for the partnership tax year. When a partnership files a return for its tax year, it reports each partner’s allocable share of the items on the partnership

Denham Capital Management v. Commissioner, T.C. Memo. 2024-114. Soroban Capital Partners v. Commissioner, T.C. Memo. 2025-52.

The determination as to the amount of income the ultimate taxpayer pays self-employment tax on (and the amount of the self-employment tax) requires accounting for self-employment income and expenses from sources other than the partnership at issue and whether certain payroll tax limits have been met by the individual.

I picked the pop culture reference for this post (“Here I Go Again” by Whitesnake in case you didn’t recognize it) before I realized it came out in 1982, the year TEFRA was enacted. It was a happy coincidence. 5

I went back and forth on whether “with respect to the partnership” is a separate element from “required to be taken into account for the partnership taxable year.” Courts usually consider them as a single item, so I did as well. It’s a “no duh” requirement. To be a partnership item, it has to relate in some way to the partnership at issue.

TAX NOTES FEDERAL, VOLUME 192, AUGUST 24, 2026 For more Tax Notes Federal content, visit www.taxnotes.com.

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by Jenni Black

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See, e.g., Petaluma FX Partners LLC v. Commissioner, 591 F.3d 649, 653 (D.C. Cir. 2010).

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“required to be taken into account for the partnership taxable year.” This is consistent with case law, which holds that it’s the partners who take into account the item under subtitle A and they take into account an item related to a partnership when the partners apply subtitle A to their tax liability based on items determinable at the partnership level.7 In other words, an item is required to be taken into account under subtitle A (for purposes of determining what’s a partnership item) if a partner uses that item to determine their potential tax liability under subtitle A. And, if the 8 item is included in the regulations, it’s a partnership item. If the partnership isn’t the one that’s required to take into account the item, won’t that make things that are not on the partnership return partnership items? Yes, and there are items that are not on the Form 1065 that are partnership items (see part 2 of this post discussing the period of limitations). Whether something is a partnership item or not largely turns on whether the partnership makes a determination (including 9 how to report it) about the item. So what’s not a partnership item? At the risk of sounding snarky, something that is not required to be taken into account for the partnership tax year or that is not included in the regulations as something more appropriately determined at the partnership level. What’s an example of that? Well, outside basis.

See id.

Reg. section 301.6231(a)(3)-1 is very broad. If you try hard enough, you can fit every item on a Form 1065 into one of those categories. 9

Reg. section 301.6231(a)(3)-1(c)(1); see also Soroban Capital Partners LP v. Commissioner, 161 T.C. No. 12, at 15 (2023); Olsen-Smith Ltd. v. Commissioner, T.C. Memo. 2005-174 (holding that “the amount that would be NESE in the hands of the ultimate recipients” (i.e., Schedule K, line 14) is a partnership item because the partnership determines and reports it although the actual amount of NESE an individual pays tax on is not). Some have argued that nothing “requires” the partnership to take NESE (partnership-level version) into account so, therefore, it can’t be “required” to take it into account and, thus, is not a partnership item. The forms and instructions issued by the IRS require its reporting. I am unaware of any case holding that something has to be required to be reported by something other than forms and instructions to be a partnership item.

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return for that partnership’s tax year. The presentation on the Schedule K-1 isn’t based on the partner’s tax year; it’s based on the partnership’s tax year. How about an example? In this first iteration, let’s assume the partnership is a calendar-year taxpayer. On its Form 1065 for the 2016 tax year (need to make it TEFRA), the partnership reports it has $200 of ordinary income and two equal partners. When the partnership issues each partner a Schedule K-1 reporting $100 of ordinary income, it’s telling the partners “for the period beginning January 1, 2016, and ended December 31, 2016, your share of partnership income is $100.” That’s how much income from the partnership the partners do something with (that is, take into account) for income tax purposes (subtitle A) for that period. Now let’s change the facts a bit. Instead of being a calendar-year taxpayer, the partnership uses a fiscal year beginning September 1, 2016, and ended August 31, 2017 (but the partners are still calendar year). On its Form 1065 for the fiscal year ending August 31, 2017, the partnership reports that same $200 of ordinary income and issues Schedules K-1 to its partners telling each partner their share of the partnership’s ordinary income for the period beginning September 1, 2016, and ended August 31, 2017, is $100. Just as before, it’s based on the partnership’s tax year, not the partners’ tax year. As both partners are calendar-year taxpayers, both report their $100 on their 2017 return even though some of it was “earned” in 2016. As you can see from the second example, the income reported to the partners and the amount the partners must take into account on their 2017 tax returns is the amount for the partnership’s tax year that ends August 31, 2017. It doesn’t matter that part of the income was in 2016 and some in 2017, even though the partners’ tax under subtitle A is based on the calendar year. For the period beginning September 1, 2016, and ending August 31, 2017 (that is, for the partnership’s tax year), the partners must take into account (for purposes of subtitle A) their allocable share of the income from the partnership’s tax year. The income is

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Think about it this way — under section 701, a partnership “as such” (another “as such”!) isn’t liable for income tax imposed by chapter 1; partners are. If the partnership has to take into account an item for purposes of subtitle A (which includes chapter 1), how does it do that if it’s not subject to tax under subtitle A (except for withholding under chapters 3 and 4,11 which it is liable for)? As the partners are the ones liable for any tax under subtitle A, the partners are taking into account the item for purposes of subtitle A. After all, TEFRA determines the “tax treatment” 12 of partnership items. The tax treatment for whom? The partners. Partner Facts and Circumstances Is there another way to look at this? Does the item have to go into the determination of the partnership’s net income to be a partnership item? There are lots of partnership items that do not go into the partnership’s net income, like contributions and distributions, partnership liabilities, and half the crap on Schedule K.13 But regardless of whether the item goes into the determination of the partnership’s net income, can it be a partnership item if it doesn’t affect the partnership “as a whole” (more than one partner?) or requires partner-level factual determination? As an initial matter, whether something is relevant to or affects the partnership “as a whole” doesn’t mean it impacts all the partners or even most of the partners. After all, items can be specially allocated to a single partner. Under the rationale that, to affect the partnership as a whole, it must impact more than one partner, if the IRS adjusted the specially allocated item but did not adjust its allocation, it wouldn’t be a partnership item. Under this theory, for example, a capital gain would be a partnership item of Partnership 1 because the capital gain was allocated to all its partners, but it wouldn’t be a partnership item for Partnership 2 because the capital gain was 11

For fun with TEFRA and withholding under chapters 3 and 4, check out YA Global Investments LP v. Commissioner, 151 T.C. 11 (2018). 12

Section 6221 (prior to repeal by the BBA).

See, e.g., United States v. Woods, 571 U.S. 31, 41 (2013) (holding outside basis as a “non-partnership item”). An affected item is an item, which is not a partnership item, that is affected by a partnership item.

Reg. section 301.6231(a)(3)-1; see, e.g., Cemco Investors LLC v. United States, 515 F.3d 749, 752-753 (7th Cir. 2008). The cases on this are legion. All the son-of-BOSS cases were about contributions and distributions from partnerships.

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Whether outside basis is a partnership item often confuses people, but this is not a partnership 10 item; it’s an affected item. After all, isn’t outside basis made up of partnership items (for example, partnership income, liabilities, contributions, distributions, etc.)? In most cases it’s almost entirely made up of partnership items. However, there are still partner-level things that can impact outside basis, such as the amount someone purchases their partnership interest for and whether the partner has written off their partnership interest as worthless. Is the fact that there could be partner-specific things that go into calculating outside basis the reason it’s an affected item and not a partnership item? Well, it certainly helps. But outside basis isn’t required to be taken into account for the partnership’s tax year (it’s also not listed in the regulations even if most of the components are). Think about it — items that are required to be taken account for the partnership tax year go into determining outside basis but outside basis itself relates to the partner’s tax year. Going back to my second example above dealing with a fiscal-year partnership, let’s assume the partner sold a portion of her partnership interest on December 31, 2016. The partner’s outside basis (for purposes of determining any gain or loss on the sale) would be her outside basis as of December 31, 2016, not based on when the partnership’s tax year ends. This is different than how NESE works. For NESE, the partner would include in their calculation of self-employment tax the income based on the partnership’s tax year, not the partner’s tax year. So, if the example partnership reported that the partner had $100 of ordinary income and $100 of NESE for the fiscal year-end, the partner reports the $100 of income and includes the $100 of NESE entirely in 2017. Whether the partner ultimately pays any selfemployment tax on the NESE is entirely based on the partner’s facts and circumstances (which, in all honestly, is true for everything on the partnership return).

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allocated to a single partner. TEFRA does not demand such a partnership-by-partnership determination. It would also be a nightmare to determine, and we ain’t wasting no more time. In part 2 of this post, I look at how the courts have viewed some of these factors (impact more than one partner, partner facts and circumstances) in other areas. 

TAX NOTES FEDERAL, VOLUME 192, AUGUST 24, 2026 For more Tax Notes Federal content, visit www.taxnotes.com.