Ben, Chris, and Daniel each own a one-third interest in unimproved real estate.

Question

Ben, Chris, and Daniel each own a one-third interest in unimproved real estate. They share equally in the expense of maintaining the property. Which of the following is the most important in determining whether a partnership does or does not exist for federal income tax purposes? A. Whether they actively carry on a business or financial venture and divide the profits therefrom. B. Whether their activity is characterized under state law as a joint venture or a partnership. C. Whether they lease the property. D. Whether the partnership agreement is oral rather than written.

Explanation / Answer

Ans A Whether they actively carry on a business or financial venture and divide the profits therefrom.

For federal income tax purpose it is imporatnt to understand the interest in the transaction. If Ben, chris,Daniel are just having share in the real estate and share expenses equally does not constitue a partnership. In order to be a partnership they need to improve the real estate and sale it to earn profits and this gives rise to a joint venture which is been carried out to earn profits. They must have a business or financial intention to carry the activity.So the motive behind thre transaction must be understood.So option A is correct this will tell that it a partnership.

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