Collaboration Agreement: A Partnership for Tax Purposes

Introduction

A Corp. is conducting business with B Corp. under a “collaboration agreement.” B Corp. is able to promote the widget product and claimS that the trademarks are owned jointly. The agreement specifies that this form of collaboration is not a partnership, which means that Form 1065 is not being filed.

Analysis

The product was owned and promoted by A Corp. and B Corp. in a collaborated and joint manner, which suggests that their operation needs to be treated as a partnership for tax purposes. According to IRS, “A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made.”¹ In other words, A Corp. and B Corp. are contributing financial resources and human resources in order to sell the widget products in both the local and international markets. They are also expecting the fact that the returns from these sales will be shared equally and fairly between them. The statement clearly indicates that such cooperation does not require formal agreement, which is present in this case. Therefore, taking such a position is not allowed under the law because any form of collaboration with shared product and revenue is a partnership for tax purposes. The proper approach would be filing partnership returns through Form 1065.

Moreover, both A Corp. and B Corp. are corporations, which falls under the definition of partnership for tax purposes. According to IRS, “The term “partnership” includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that isn’t, within the meaning of regulations under section 7701, a corporation, trust, estate, or sole proprietorship.”² In other words, both corporations are recognized entities, which means that their collaboration agreement is a partnership, and Form 1065 needs to be filed in accordance with the regulations.

There is a limited set of instances where a partnership for tax purposes is not recognized. According to IRS, “A joint undertaking merely to share expenses isn’t a partnership. Mere co-ownership of property that is maintained and leased or rented isn’t a partnership. However, if the co-owners provide services to the tenants, a partnership exists.”³ Therefore, if two entities solely share profits or maintain/lease/rent a property, then they are not a partnership. However, A Corp. and B Corp. both share the profits and take deliberate steps to promote and sell the widget products. In addition, they claim to co-own the trademark for the product, which means that the non-recognition statement is not applied to the collaborating corporations.

Conclusion

In conclusion, a collaboration agreement between A Corp. and B Corp. is a partnership for tax purposes under the current regulations. The current position is not allowed, because they co-own and promote the widget product and allocate resources in order to do it. The proper position will be to file Form 1065 for partnership returns.

Reference

Instructions for Form 1065. (2019). Web.

Footnotes

1. “Instructions for Form 1065,” 2019.
2. “Instructions for Form 1065,” 2019.
3. “Instructions for Form 1065,” 2019.