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Rev proc 2007-42 Form: What You Should Know

The Tax Cuts and Jobs Act includes a provision to limit the application of income taxes on income from investment in partnerships. This income may be taxed and credited at different rates depending on whether the partnership is active or inactive. IRS Revenue Procedure 2007-56 Rev. Sep. 15, 2007, No. 07-34. IRON 2006-2 and IRON 2006-4 are described in the tax code as active partnerships and IRON 2006-4 is characterized as inactive. IRON 2006-2 is characterized as active because it is operated, managed, and operated in conjunction with nonactive parties. IRN (as defined in IRC §1162, and defined as nonactive on IRS Form 2106) would be considered inactive for purposes of this provision if any of the following conditions exist: (1) the entity is not a qualified partnership on the Form 1065, filed for the year in which the interest income is realized; (2) the entity is a qualified partnership that failed to file Form 1065, filed for the year in which the interest income is realized; (3) the entity is a qualified partnership on Form 2106, filed for the year in which the interest income is realized but was not a qualified partnership on the Form 1065 that was filed for the year in which the interest income is realized. IRON 2006-2's interest income includes interest earned on borrowed funds of the same source and amounts interest paid to a related party. IRON 2006-4's interest income includes: (1) interest earned on loaned funds; and (2) interest paid to a related party. When all the criteria are met, interest income will be taxed at a single rate. Income from IRON 2006-4's interest income will include interest earned on borrowed funds of the same source and amounts interest paid to a related party. To receive a credit for tax paid to a related party, the credit must be determined on Schedule A (Form 1040), line 7a “Interest Deduction from Interest Income, Other Than Bank Account Interest Expense.” For general information on income inclusion on a Form 1040, see Publication 517, Income Tax Guide for United States Individuals. IRON 2006-4 has interest income. IRON 2006-4's interest income includes interest earned on loaned funds of the same source and amounts interest paid to a related party.

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