Introduction This publication explains how the tax law applies to partnershipsand to partners. A partnership does not pay tax on its income but"passes through" any profits or losses to its partners. Partnersmust include partnership items on their tax returns. For a discussion of business expenses a partnership can deduct, seePublication 535. Members of oil and gas partnerships should read aboutthe deduction for depletion in chapter 13 of that publication. Certain partnerships must have a tax matters partner (TMP) who isalso a general partner. For information on the rules for designating aTMP, see the instructions for Schedule B of Form 1065 and section301.6231(a)(7)-1 of the regulations. Withholding on foreign partner or firm.If a partnership acquires a U.S. real property interest from aforeign person or firm, the partnership may have to withhold tax onthe amount it pays for the property (including cash, the fair marketvalue of other property, and any assumed liability). If a partnershiphas income effectively connected with a trade or business in theUnited States, it must withhold on the income allocable toits foreign partners. A partnership may have to withhold tax on aforeign partner's distributive share of fixed or determinable incomenot effectively connected with a U.S. trade or business. A partnershipthat fails to withhold may be held liable for the tax, applicablepenalties, and interest. For more information, see Publication 515,Withholding of Tax on Nonresident Aliens and ForeignCorporations.