Partnership liability; inclusions in gross income

# (a)

Individuals carrying on business in partnerships shall be liable for tax under this act only in their individual capacity. Each partner shall include in his gross income his distributive share, whether distributed or not, of the partnership's net income and net loss for the taxable year, or, where his taxable year is different, then for the taxable year of the partner in which ends the taxable year of the partnership.

# (b)

If a partner shall compute his gross income in accordance with section 32 of this act, he shall be entitled to take the deductions set forth in section 35(a) of the act. If such a partner's entire interest is sold, exchanged or liquidated, his distributive share of such income, gain or loss shall be included in his taxable year in which ends the partnership period ending with such transaction. Under this subsection, a partner's death does not constitute such liquidation.

Payments made in liquidation of the interest of a partner who retires or dies shall be taxed as a sale or exchange of such partner's interest in partnership assets, to the extent that they represent such interest, and the balance shall be taxed as the partner's distributive share of partnership income. Under this subsection, amounts paid for unrealized receivables or good will of the partnership shall not be included in payments representing a partner's interest in partnership assets except to the extent that the partnership agreement provides for payment with respect to good will.

# (c)

If a partner shall compute his gross income in accordance with the provisions of section 36 of this act, he shall not be entitled to take the deductions set forth in section 35(a) of this act.

# (d)

In determining the extent to which a partner's distributive share is derived from sources within his source State, no effect shall be given to a provision in the partnership agreement which

# (1)

characterizes payments to the partner as being for services or for the use of capital, or

# (2)

allocates to the partner, as income or gain derived from sources outside his source State, a greater proportion of his distributive share of partnership income or gain than the ratio of partnership income or gain derived from sources outside his source State to partnership income or gain from all sources, except as authorized in subsection (e), or

# (3)

allocates to the partner a greater proportion of a partnership item of loss or deduction derived from sources within his source State than his proportionate share of partnership loss or deduction from all sources, except as authorized in subsection (e).

# (e)

The Division of Taxation may adopt regulations to authorize the use of such other methods of determining a partner's portion of partnership items derived from sources within his source State, and the modifications related thereto, as may be appropriate and equitable to insure that only that portion of a partner's distributive share derived from sources within his source State shall be included within such share.

L.1961, c. 32, p. 141, s. 31, eff. May 29, 1961. Amended by L.1961, c. 129, p. 772, s. 18, eff. Dec. 22, 1961.