Partnership Vs. Qualified Joint Venture
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Partnership Vs. Qualified Joint Venture

Business Entity Selection and the Tax Consequences of Converting

Partnership Vs. Qualified Joint Venture

Under IRC 761 the term partnership essentially includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, a corporation or a trust or estate. It goes on to essentially state that an unincorporated organization may exclude itself from this definition if it is used to their advantage –

(1) for investment purposes only and not for the active conduct of a business,

(2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or extracted, or

(3) by dealers in securities for a short period for the purpose of underwriting, selling, or distributing a particular issue of securities, if the income of the members of the organization may be adequately determined without the computation of partnership taxable income.

A Qualified joint venture means any joint venture involving the conduct of a trade or business if—

(A) the only members of such joint venture are a husband and wife
(B) both spouses materially participate
(C) both spouses elect the application of this subsection.

In the case of a qualified joint venture conducted by a husband and wife who file a joint return for the taxable year –

(A) such joint venture shall not be treated as a partnership,
(B) all items of income, gain, loss, deduction, and credit shall be divided between the spouses in accordance with their respective interests in the venture, and
(C) each spouse shall take into account such spouse’s respective share of such items as if they were attributable to a trade or business conducted by such spouse as a sole proprietor.

I think the key here is understanding that there is a material difference in the tax code between a “joint venture” and a “qualified joint venture.”  Whereas it is normal to think of one’s marriage as a partnership for IRS purposes you may be best served thinking of your union as a qualified joint venture.



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