We are looking at a law firm with approximately 80 partners. Income to the partners is distributed via a K-1. The question is for 1% and 5% ownership thresholds for Key and HCE determination, what is the appropriate partner percentage to use for these tests?

The K-1 (2003) shows the partnership percentages under Item D for profit sharing, loss sharing, and Ownership of Capital. Two numbers for each are supplied: before change or termination, and end of year. I am fairly confident that you would use the higher of the two column numbers since the 1% and 5% references "highest percentage" owned during the plan year. The question is do we use the profit sharing/loss sharing (which are identical) or the ownership of capital for testing?

IRC Section 416(i)(1)(B)(i)(II):
if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer.

You need to look at both profits/loss and capital interest.