Part I. Financial — 1123 Inst 1065 (Schedule M-3) (PDF)

Line 1. Questions Regarding the Type of Income Statement Prepared For lines 1 through 11, use only the financial statements of the U.S. partnership filing Form 1065. If the U.S. partnership filing Form 1065 is controlled by another entity, the U.S. partnership must use for its Schedule M-3, Part I, its own financial statements and not the financial statements of the controlling entity.

Non-Tax-Basis Financial Statements and Tax-Basis Financial Statements

A tax-basis income statement is allowed for Schedule M-3 and a tax-basis balance sheet for Schedule L only if neither a non-tax-basis income statement nor a non-tax-basis balance sheet were prepared for any purpose and the books and records of the partnership reflect only tax-basis amounts. The partnership is deemed to have non-tax-basis income statements and the related non-tax-basis balance sheets for the current tax year for purposes of Schedule M-3 and Schedule L if such non-tax-basis financial statements were prepared for and presented to management, creditors, members or partners, government regulators, or any other third parties for a period ending with or within the tax year.

If a Form 10-K is filed with the Securities and Exchange Commission (SEC) for the period ending with or within the tax year, the partnership must check “Yes” for line 1a and use that income statement for Schedule M-3. If Form 10-K isn't filed and a non-tax-basis income statement is prepared that is a certified non-tax-basis income statement for the period ending with or within the tax year, the partnership must check “Yes” for line 1b and use that income statement for Schedule M-3. If Form 10-K isn't filed and no certified non-tax-basis income statement is prepared but an unaudited non-tax-basis income statement is prepared for the period ending with or within the tax year, the partnership must check “Yes” for line 1c and use that income statement for Schedule M-3.

Order of priority in accounting standards. If no Form 10-K is filed and two or more non-tax-basis income statements are both certified non-tax-basis income statements for the period, the income statement prepared according to the following order of priority in accounting standards must be used.

U.S. Generally Accepted Accounting Principles (GAAP).
International Financial Reporting Standards (IFRS).
Any other International Accounting Standards (IAS).
Any regulatory accrual accounting.
Any other accrual accounting standard.
Section 704(b) book accounting.
Any other fair market value reporting standard.
Any cash basis standard.

If no non-tax-basis income statement is certified and two or more non-tax-basis income statements are prepared, the income statement prepared according to the first listed of the accounting standards above must be used.

If no non-tax-basis financial statements are prepared for the U.S. partnership filing Schedule M-3, the U.S. partnership must check “No” on questions 1a, 1b, and 1c, skip lines 2 through 3b, and enter the net income (loss) per the books and records of the U.S. partnership on line 4a.

Consolidated Financial Statements

If a partnership filing a Schedule M-3 (a) is included in the non-tax-basis consolidated financial statements of a group (consolidated financial statement group) with an entity parent filing a U.S tax return and Schedule M-3, (b) has its income (loss) included and removed by the entity parent on that entity parent's Schedule M-3, Part I, and (c) doesn't have a separate non-tax-basis financial statement (certified or otherwise) of its own, the partnership must answer questions 1a, 1b, and 1c, as appropriate, for its own tax return and must report on its own Schedule M-3, as appropriate, the amount for the partnership's net income (loss) that is equal to the

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amount included and removed in the entity parent's Schedule M-3, Part I. However, if in the circumstances described immediately above, the partnership does have separate non-tax-basis financial statements (certified or otherwise) of its own, independent of the amount of the partnership's net income included in the consolidated financial statements with the entity parent, the partnership must answer questions 1a, 1b, and 1c, as appropriate, for its own tax return, based on its own separate non-tax-basis income statement, and must report on line 4a the net income (loss) amounts shown on its separate income statement.

Lines 2 and 3. Questions Regarding Income Statement Period and Restatements Enter the beginning and ending dates on line 2 for the partnership's annual income statement period ending with or within the current tax year.

The questions on lines 3a and 3b, regarding income statement restatements, refer to the worldwide consolidated income statement issued by the partnership filing Form 1065 and used to prepare Schedule M-3. Answer “Yes” on lines 3a and/or 3b if the partnership's annual income statement has been restated for any reason. Attach a short statement of the reasons for the restatement in net income for each annual income statement period that is restated, including the original amount and restated amount of each annual statement period's net income. The attached statement isn't required to report restatements on an entity-by-entity basis.

Line 4. Worldwide Consolidated Net Income (Loss) per Income Statement Report on line 4a the worldwide consolidated net income (loss) per the income statement (or books and records, if applicable) of the partnership.

In completing Schedule M-3, the partnership must use financial statement amounts from the financial statement type checked “Yes” on line 1, or from its books and records if line 1c is checked “No.” If line 1a is checked “Yes,” report on line 4a the net income amount reported in the income statement presented to the SEC on the partnership's Form 10-K.

If a partnership prepares non-tax-basis financial statements, the amount on line 4a must equal the financial statement net income (loss) for the income statement period ending with or within the tax year as indicated on line 2.

If the partnership prepares non-tax-basis financial statements and the income statement period differs from the partnership's tax year, the income statement period indicated on line 2 applies for purposes of lines 4a through 8.

If the partnership doesn't prepare non-tax-basis financial statements and has checked “No” on line 1c, enter the net income (loss) per the books and records of the partnership on line 4a.

Check the appropriate box on line 4b to indicate which of the following accounting standards was used for line 4a.

U.S. Generally Accepted Accounting Principles (GAAP).
International Financial Reporting Standards (IFRS).
Section 704(b).
Tax-basis.
Other (specify).

Report on lines 5a through 10, as instructed below, all adjustment amounts required to adjust worldwide net income (loss) reported on line 4a (whether from financial statements or books and records) to net income (loss) of the partnership that

must be reported on line 11. Report on line 12a the worldwide consolidated total assets and total liabilities amounts for the partnership using the same financial statements (or books and records) used for the worldwide consolidated income (loss) amount reported on line 4a.

Line 5. Net Income (Loss) of Nonincludible Foreign Entities Remove the financial statement net income (line 5a) or loss (line 5b) of each foreign entity that is included on line 4a and isn't the partnership (nonincludible foreign entity). In addition, on line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends between any nonincludible foreign entity and the partnership filing Form 1065. Don't remove in Part I the financial statement net income (loss) of any nonincludible foreign entity accounted for on line 4a using the equity method.

Attach a supporting statement that provides the name, EIN (if applicable), and net income (loss) included on line 4a that is removed on this line 5 for each separate nonincludible foreign entity. Also state the total assets and total liabilities for each such separate nonincludible foreign entity and include those assets and liabilities amounts in the total assets and total liabilities reported on Part I, line 12b. The amounts of income (loss) detailed on the supporting statement should be reported for each separate nonincludible foreign entity without regard to the effect of consolidation or elimination entries. If there are consolidation or elimination entries relating to nonincludible foreign entities whose income (loss) is reported on the attached statement that aren't reportable on line 8, the net amounts of all such consolidation and elimination entries must be reported on a separate line on the attached statement, so that the separate financial accounting income (loss) of each nonincludible foreign entity remains separately stated.

For example, if the net income (after consolidation and elimination entries) of a nonincludible foreign sub-consolidated group is being reported on line 5a, the attached supporting statement should report the income (loss) of each separate nonincludible foreign legal entity from each such entity's own financial accounting net income statement or books and records, and any consolidation or elimination entries (for intercompany dividends, minority interests, etc.) not reportable on line 8 should be reported on the attached supporting statement as a net amount on a line separate and apart from lines that report each nonincludible foreign entity's separate net income (loss).

Line 6. Net Income (Loss) of Nonincludible U.S. Entities Remove the financial statement net income (line 6a) or loss (line 6b) of each U.S. entity that is included on line 4a and isn't an includible entity in the partnership return (nonincludible U.S. entity). In addition, on line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends between any nonincludible U.S. entity and any includible entity. Don't remove in Part I the financial statement net income (loss) of any nonincludible U.S. entity accounted for on line 4a using the equity method.

Attach a supporting statement that provides the name, EIN (if applicable), and net income (loss) included on line 4a that is removed on line 6a or 6b for each separate nonincludible U.S. entity. Also state the total assets and total liabilities for each such separate nonincludible U.S. entity and include those assets and liabilities amounts in the total assets and total liabilities reported on Part I, line 12c. The amounts of income (loss) detailed on the supporting statement should be reported for each separate nonincludible U.S. entity without regard to the effect of consolidation or elimination entries. If there are consolidation or

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elimination entries relating to nonincludible U.S. entities whose income (loss) is reported on the attached statement that aren't reportable on line 8, the net amounts of all such consolidation and elimination entries must be reported on a separate line on the attached statement, so that the separate financial accounting income (loss) of each nonincludible U.S. entity remains separately stated.

For example, if the net income (after consolidation and elimination entries) of a nonincludible U.S. sub-consolidated group is being reported on line 6a, the attached supporting statement should report the income (loss) of each separate nonincludible U.S. legal entity from each such entity's own financial accounting net income statement or books and records, and any consolidation or elimination entries (for intercompany dividends, minority interests, etc.) not reportable on line 8 should be reported on the attached supporting statement as a net amount on a line separate and apart from lines that report each nonincludible U.S. entity's separate net income (loss).

Lines 7a and 7b. Net Income (Loss) of Other Foreign Disregarded Entities and Net Income (Loss) of Other U.S. Disregarded Entities Include on line 7a or 7b the financial net income or (loss) of each disregarded entity in the U.S. tax return that isn't included in the consolidated financial group, and therefore not included in the income reported on line 4a, but that is included on line 11. Include on line 7a the financial income or (loss) of any foreign disregarded entity that isn't included in the income reported on line 4a but that is included on line 11 (other foreign disregarded entities). Include on line 7b the financial income or (loss) of any U.S. disregarded entity that isn't included in the income reported on line 4a but that is included on line 11 (other U.S. disregarded entities). In addition, on line 8, adjust for consolidation eliminations and correct for minority interest and intercompany dividends for any other disregarded entity.

Attach a supporting statement that provides the name, EIN, and net income (loss) per the financial statement or books and records included on line 7a or 7b for each separate foreign or U.S. disregarded entity. Also state the total assets and total liabilities for each such separate included entity and include those assets and liabilities amounts in the total assets and total liabilities reported on Part I, line 12d. The amounts of income (loss) detailed on the supporting statement should be reported for each separate other disregarded entity without regard to the effect of consolidation or elimination entries solely between or among the entities listed. If there are consolidation or elimination entries relating to such separate other disregarded entities whose income (loss) is reported on the attached statement that aren't reportable on line 8, the net amounts of all such consolidation and elimination entries must be reported on a separate line on the attached statement, so that the separate financial accounting income (loss) of each separate other disregarded entity remains separately stated.

For example, if the net income (after consolidation and elimination entries) of a sub-consolidated group of other foreign disregarded entities is being reported on line 7a, the attached supporting statement should report the income (loss) of each separate other foreign disregarded entity from each disregarded entity's own financial accounting net income statement or books and records, and any consolidation or elimination entries (for intercompany dividends, minority interests, etc.) not reportable on line 8 should be reported on the attached supporting statement as a net amount on a line separate and apart from lines that report each other foreign disregarded entity's separate net income (loss).

Line 8. Adjustment to Eliminations of Transactions Between Includible Entities and Nonincludible Entities Adjustments on line 8 to reverse certain financial accounting consolidation or elimination entries are necessary to ensure that transactions between includible entities and nonincludible U.S. or foreign entities aren't eliminated, in order to report the correct total amount on line 11. Also, additional consolidation entries and elimination entries may be necessary on line 8 related to transactions between includible entities that are in the consolidated financial statement group and other includible entities that aren't in the consolidated financial statement group but that are reported on line 7a or 7b in order to report the correct total amount on line 11.

Include on line 8 the total of the following: (a) amounts of any adjustments to consolidation entries and elimination entries that are contained in the amount reported on line 4a, required as a result of removing amounts on line 5 or 6; and (b) amounts of any additional consolidation entries and elimination entries that are required as a result of including amounts on line 7a or 7b. This is necessary in order that the consolidation entries and intercompany elimination entries included in the amount reported on line 11 are only those applicable to the financial net income (loss) of includible entities for the financial statement period. For example, adjustments must be reported on line 8 to remove minority interest and to reverse the elimination of intercompany dividends included on line 4a that relate to the net income of entities removed on line 5 or 6 because the income to which the consolidation or elimination entries relate has been removed. Also, for example, consolidation or elimination entries must be reported on line 8 to eliminate any intercompany dividends between entities whose income is included on line 7a or 7b and other entities included in the U.S. income tax return.

If an entity owner of an interest in another entity (a) accounts for the interest in the other entity in the owner's separate general ledger on the equity method; and (b) fully consolidates the other entity in the owner's consolidated financial statements, but that entity isn't includible in the owner's Form 1065, then, as part of reversing all consolidation and elimination entries for the nonincludible entity, the owner must reverse on line 8 the elimination of the equity income inclusion from the other entity. If the owner doesn't account for the other entity on the equity method on its own general ledger, it won't have eliminated the equity income for consolidated financial statement purposes, and therefore will have no elimination of equity income to reverse.

The attached supporting statement for line 8 must identify the type (for example, minority interest, intercompany dividends, etc.) and amount of consolidation or elimination entries reported, as well as the names of the entities to which they pertain. It isn't necessary, but it is permitted, to report on line 8 intercompany eliminations that net to zero, such as intercompany interest income and expense.

Line 9. Adjustment to Reconcile Income Statement Period to Tax Year Include on line 9 any adjustments necessary to the income (loss) of the partnership to reconcile differences between the partnership's income statement period reported on line 2 and the partnership's tax year. Attach a statement describing the adjustment.

Line 10. Other Adjustments to Reconcile to Amount on Line 11 Include on line 10 any other adjustments to reconcile net income (loss) on line 4a through line 9, with net income (loss) of the partnership reported on line 11.

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For any adjustment reported on line 10, attach a supporting statement with an explanation of each net adjustment included on line 10.

Line 11. Net Income (Loss) per Income Statement of the Partnership Report on line 11 the net income (loss) per the income statement (or books and records, if applicable) of the partnership. Amounts reported in column (a) of Parts II and III must be reported on the same accounting method as is used to report the amount of net income (loss) per income statement of the partnership on line 11.

Don't, in any event, report on line 11 the net income of entities other than the partnership filing Form 1065 for the tax year. For example, it isn't permissible to remove the income of nonincludible entities on lines 5 and/or 6, above, then to add back such income on lines 7 through 10, such that the amount reported on line 11 includes the net income of entities not includible in the U.S. income tax return. A principal purpose of Schedule M-3 is to report on line 11 only the financial accounting net income of only the partnership (including any other includible entities) filing Form 1065.

Whether or not the partnership prepares financial statements, line 11 must include all items that impact the net income (loss) of the partnership even if they aren't recorded in the profit and loss accounts in the partnership's general ledger, including, for example, all post-closing adjusting entries (including work paper adjustments) and dividend income or other income received from nonincludible entities. If the partnership prepares unconsolidated financial statements using the same accounting method used to determine worldwide consolidated net income (loss) for Part I, line 4, and if it uses the equity method for investments, the amount reported on Part I, line 11, will equal the amount of the unconsolidated net income (loss) reported on the unconsolidated financial statements. See Examples 5.3, 5.4, and 5.5 below.

Example 5.

U.S. partnership Palm owns 60% of corporation DS1 which is fully consolidated in Palm's financial statements. Palm doesn't account for DS1 in Palm's separate general ledger on the equity method. DS1 has net income of $100 (before minority interests) and pays dividends of $50, of which Palm receives $30. The dividend is eliminated in the consolidated financial statements. In its financial statements, Palm consolidates DS1 and includes $60 of net income ($100 less the minority interest of $40) on line 4a.

Palm must remove the $100 net income of DS1 on line 6a. Palm must reverse on line 8 the elimination of the $40 minority interest net income of DS1. In addition, Palm reverses its elimination of the $30 intercompany dividend in its financial statements on line 8. The net result is that Palm includes the $30 dividend from DS1 on line 11 and on Part II, line 6, column (a). Palm's dividend income included on the tax return from DS1 must be reported on Part II, line 6, column (d).

U.S. partnership Cedar owns 60% of the capital and profits interests in U.S. LLC Nutmeg. Cedar doesn't account for Nutmeg in Cedar's separate general ledger on the equity method. Nutmeg has net income of $100 (before minority interests) and makes no distributions during the tax year. Cedar treats Nutmeg as a corporation for financial statement purposes and as a partnership for U.S. income tax purposes. In its financial statements, Cedar consolidates Nutmeg and includes $60 of net income ($100 less the minority interest of $40) on line 4a.

Cedar must remove the $100 net income of Nutmeg on line 6a. Cedar must reverse on line 8 the elimination of the $40 minority interest net income of Nutmeg. The result is that Cedar

includes no income for Nutmeg either on line 11 or on Part II, line 7, column (a). Cedar's taxable income from Nutmeg must be reported by Cedar on Part II, line 7, column (d).

U.S. partnership Palm owns 60% of corporation DS1, which is fully consolidated in Palm's financial statements. Palm accounts for DS1 in Palm's separate general ledger on the equity method. DS1 has net income of $100 (before minority interests) and pays dividends of $50, of which Palm receives $30. The dividend reduces Palm's investment in DS1 for equity method reporting on Palm's separate general ledger where Palm includes its 60% equity share of DS1 income, which is $60. In its financial statements, Palm eliminates the DS1 equity method income of $60 and consolidates DS1, including $60 of net income ($100 less the minority interest of $40) on line 4a.

Palm must remove the $100 net income of DS1 on line 6a. Palm must reverse on line 8 the elimination of the $40 minority interest net income of DS1 and the elimination of the $60 of DS1 equity income. The net result is that Palm includes the $60 of equity method income from DS1 on line 11 and on Part II, line 5, column (a). Palm's dividend income on the tax return from its investment in DS1 must be reported on Part II, line 6, column (d).

U.S. partnership Cedar owns 60% of the capital and profits interests in U.S. LLC Nutmeg. Cedar accounts for Nutmeg in Cedar's separate general ledger on the equity method. Nutmeg has net income of $100 (before minority interests) and makes no distributions during the tax year. Cedar treats Nutmeg as a corporation for financial statement purposes and as a partnership for U.S. income tax purposes. For equity method reporting on Cedar's separate general ledger, Cedar includes its 60% equity share of Nutmeg income, which is $60. In its financial statements, Cedar eliminates the $60 of Nutmeg equity method income and consolidates Nutmeg, including $60 of net income ($100 less the minority interest of $40) on line 4a.

Cedar must remove the $100 net income of Nutmeg on line 6a. Cedar must reverse on line 8 the elimination of the $40 minority interest net income of Nutmeg and the elimination of the $60 of Nutmeg equity method income. The result is that Cedar includes the $60 of equity method income for Nutmeg on line 11 and on Part II, line 7, column (a). Cedars's taxable income from Nutmeg must be reported by Cedar on Part II, line 7, column (d).

U.S. partnership Cedar owns 60% of the capital and profits interests in U.S. LLC Nutmeg. Cedar accounts for Nutmeg in Cedar's separate general ledger on the equity method. Nutmeg has net income of $100 (before minority interests) and pays a $50 cash distribution, of which Cedar receives $30. The distribution reduces Cedar's investment in Nutmeg for equity method reporting on Cedar's separate general ledger. Cedar treats Nutmeg as a corporation for financial statement purposes and as a partnership for U.S. income tax purposes. For equity method reporting on Cedar's separate general ledger, Cedar includes its 60% equity share of Nutmeg income, which is $60. In its financial statements, Cedar eliminates the $60 of Nutmeg equity method income, consolidates Nutmeg, and includes $60 of net income ($100 less the minority interest of $40) on line 4a.

Cedar must remove the $100 net income of Nutmeg on line 6a. Cedar must reverse on line 8 the elimination of the $40 minority interest net income of Nutmeg and the elimination of the $60 of Nutmeg equity method income. The result is that Cedar includes the $60 of equity method income for Nutmeg on line 11 and on Part II, line 7, column (a). Cedar's taxable income from Nutmeg must be reported by Cedar on Part II, line 7, column (d).

U.S. partnership Palm owns 100% of the stock of U.S. LLC Redwood, a disregarded entity. Redwood is included in Palm's federal income tax return, even though Redwood isn't included in Palm's consolidated financial statements on either a consolidated basis or on the equity method. Redwood has 2023 net income of $100 after taking into account its $40 interest payment to Palm. Palm has net income of $1,040 after

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recognition of the interest income from Redwood. Because Redwood is a disregarded entity, 100% of the net income of both Palm and Redwood must be reported on Palm's Form 1065 and the intercompany interest income and expense must be removed by consolidation elimination entries.

Palm must report its financial statement net income of $1,040 on line 4a and reports Redwood's net income of $100 on line 7b as a U.S. disregarded entity not included on line 4a, but included on line 11. Then, in order to reflect the full consolidation of the financial accounting net income of Palm and Redwood on line 11, the following consolidation and elimination entry is reported on line 8: offsetting entries to remove the $40 of interest income received from Redwood included by Palm on line 4a, and to remove the $40 of interest expense of Redwood included in line 7b for a net change of zero. The result is that line 11 reports $1,140: $1,040 from line 4a, and $100 from line 7. Stated another way, line 11 includes the entire $1,000 net income of Palm, measured before recognition of the intercompany interest income from Redwood and the consolidation of Redwood operations, plus the entire $140 net income of Redwood, measured before interest expense to Palm. Palm isn't required to include on the attached supporting statement for line 8 the offsetting adjustment to the intercompany elimination of interest income and interest expense (though it is permitted to do so).

Line 12. Total Assets and Liabilities of Entities Included or Removed on Part I, Lines 4, 5, 6, and 7 Line 12 must be completed by all partnerships that file Schedule M-3. Report on lines 12a, 12b, 12c, and 12d the total amounts (not just the partnership's share) of assets and liabilities of entities included or removed on Part I, lines 4, 5, 6, and 7. All assets and liabilities reported on Part I, lines 12a through 12d, must be reported as positive amounts. On line 12a, enter the worldwide consolidated total assets and total liabilities of all of the entities included in completing Part I, line 4. On line 12b, enter the total assets and total liabilities of the entities removed in completing Part I, line 5. On line 12c, enter the total assets and total liabilities of the entities removed in completing Part I, line 6. On line 12d, enter the total assets and total liabilities of the entities included in completing Part I, line 7.