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Abstract:
The federal definition of tax partnership determines who will be subject to partnership tax law and thereby significantly impacts many taxpayers' tax liability. Despite this, the definition remains uncertain. This Article posits that the uncertainty flows from an uncoordinated effort to define tax partnership in the absence of tax policy considerations. Partnership tax policy first disregards partnerships for tax purposes. Only when partnership tax accounting and reporting become complex and tax administration becomes inconvenient does Congress impose partnership tax rules. Although the definition of tax partnership should consider this, Congress has not explicitly defined tax partnership. Furthermore, courts, Treasury, and the IRS generally have not considered the purposes of partnership tax law in the more than 150 instances they have interpreted and applied the definition of tax partnership. As a result, those efforts have produced ten separate tests for defining tax partnership, perpetuating the definition's uncertainty. This Article identifies and evaluates each of those tests and recommends abandoning tests that do not incorporate the purposes of partnership tax law and consolidating the remaining tests. Based on that consolidation, the Article proposes a new definition of tax partnership. The proposed definition incorporates the purposes of partnership tax law, and, because partnership tax law was intended to govern substantive-law partnerships, it includes some aspects of the substantive-law definition. Nonetheless, by using tax-specific terminology and relying on the purposes of partnership tax law, the proposal clarifies the definition of tax partnership and moves away from the substantive-law definition.

tax partnership, partnership, check-the-box regulations, entity classification

Abstract:
This Article presents a theory of partnership taxation. To provide context for the presentation, the Article examines the history and status of partnerships. That examination reveals humans have a natural tendency to form partnerships and partnerships create a significant challenge for lawmakers. The challenge is determining whether partnerships are entities separate from their members or aggregates of the members. After decades of debate and consideration, many lawmakers and commentators now view partnerships as entities. Tax law has not, however, adopted that view. Partnerships are subject to an aggregate tax regime that contains entity components.

Economic theory justifies tax law deviating from the legal view of partnerships. People join together as partners to increase their collective welfare and use partnership law to apportion economic income to reduce agency costs. Aggregate taxation is uniquely suited to recognize the apportionment of economic items and accurately tax it. That accuracy helps foster economic efficiency. To ensure efficient and accurate tax laws, lawmakers should include entity components in partnership tax law only as needed to guarantee effective tax administration. This Article thus proposes the aggregate-plus theory of partnership taxation, recommending that lawmakers adopt the aggregate concept for all partnership tax laws and add entity components only as needed to facilitate tax administrative. It also demonstrates the theory's utility by applying it to existing and proposed rules.

theory of the firm, agency costs, partnership taxation, aggregate taxation, carried interests, profit interests, subchapter k, partnership history, commenda, compagnia

Abstract:
Profits-only partnership interests grant service-providing partners an interest in the profits of a partnership but not its capital. Such interests are a proverbial double-edged sword: they create economic arrangements needed in business, but provide opportunities for inequitable tax reductions. Business participants make economic decisions to use profits-only partnership interests to reduce agency costs and appropriable rents. The current law, however, empowers business participants to form partnerships that are equivalent to employment arrangements and use profits-only partnership interests to obtain long-term capital gains. Thus, with no economic consequences, they convert ordinary income (taxed at up to thirty-five percent) to long-term capital gain (taxed at fifteen percent). Commentators and lawmakers generally propose partnership disaggregation to eliminate the inequity. Partnership disaggregation changes the character of income (from capital gain to ordinary income) as it flows from the partnership to service-providing partners. It may enhance equity, but it ignores the nature of tax partnerships, threatens the partnership tax regime, and has other negative side effects. The Article suggests that partnership disregard is a better way to address the inequity profits-only partnership interests cause. Partnership disregard uses economic concepts to identify the policy-relevant differences between tax partnerships and disregarded arrangements, such as employment arrangements, leases, and loans. Partnership disregard distinguishes arrangements that should qualify for partnership tax treatment and those that should not. It eliminates inequity while preserving the integrity of partnership tax regime and other areas of the law.

profits-only partnership interest, section 707(a)(2), carried interest, compensation

Abstract:
Qualified tax partnerships are arrangements that come within the definition of tax partnership but elect out of the subchapter K partnership tax rules. Tax entity classification discussions often overlook qualified tax partnerships. This Article, on the other hand, identifies them as a definite part of the tax entity classification spectrum (along with disregarded arrangements, tax partnerships, S corporations, and C corporations). The Article presents a theoretical model that describes the relationship qualified tax partnerships have with other tax arrangements. By illustrating that relationship, the Article dismisses misconceptions about qualified tax partnerships. The Article also demonstrates that tax policy does not support the current definitional construct of qualified tax partnerships. A better classification model would provide a narrower definition of tax partnership, which would eliminate qualified tax partnerships. Lawmakers, however, may never construct that better model. Therefore, qualified tax partnerships will most likely continue to play an important role in the U.S. tax system. That being the case, Treasury should clarify and expand the regulatory definition of qualified tax partnership. Additionally policy suggests that only select provisions of the Internal Revenue Code should apply to qualified tax partnerships. The Article provides direction for such changes and recommends that Congress replace the current elective system with compulsory qualified tax partnership classification.

qualified tax partnership, tax partnership, section 761, section 761 election, interdependence test

Abstract:
The use of limited liability companies and exempt organizations has exploded over recent years. The combination of the two types of entities raise tax issues that deserve close attention. In particular, limited liability companies raise three issues in the exempt organization context. First, can a limited liability company be disregarded if part of an exempt organization? Second, can a limited liability company be an exempt organization? Do contributions to disregarded limited liability companies wholly owned by exempt organizations qualify for the 170 charitable contribution deduction? This article addresses each of those questions based upon the limited guidance in this area. As limited liability companies become a larger part of business operations and property ownership, more guidance will undoubtedly be required to further address the three questions.

tax-exempt organization, limited liability company, choice of entity, section 501(c)(3)

Abstract:
Studies in the theory of the firm help explain partnership attributes and the relationships partners have with each other, which in turn inform the analysis of partnership tax allocation rules. Those studies suggest that partners apportion partnership economic items (such as income and loss) to each other to reduce partner shirking, opportunistic behavior, and agency costs. But partnerships are complex communities of interest, so partners are often unable to determine the specific source of partnership economic items (i.e., they cannot trace partnership output directly from partner input). Therefore, apportioned amounts of partnership items may contain several different and inseparable economic items attributable in indeterminable proportions to contributions from the partners. Furthermore, economic theory implies that partnerships, to reduce transaction costs, internalize transactions that would otherwise occur on the open market. Partnership tax allocation rules should account for such economic principles. Unfortunately, the current discretionary partnership tax allocation rules ignore economic theory and allow partners to separate tax items from economic items and engage in tax-item transactions that are prohibited on the open market. That internalization of tax-item transactions violates fundamental tax principles. Commentators recognize that problem and frequently recommend that partnership tax allocations should follow partner capital accounts. Rigid allocation rules do not, however, account for the economic nature of partnerships. This Article therefore proposes that the partnership tax allocation rules should recognize the partners' economic arrangement as expressed in the partners' apportionment of economic items and require tax partnership items to follow partnership economic items.

partnership allocations, section 704(b), theory of the firm, tax-item transactions

Abstract:
Related-party exchanges under section 1031 raise many technical, theoretical, and policy issues. Unfortunately, this topic has not received attention commensurate with the challenges it presents. This Article fills that void to a significant extent. The Article begins with a discussion of the purpose of section 1031 and then demonstrates how related-party exchanges could frustrate that purpose if not properly governed. The Article then discusses the history of section 1031(f), the related-party exchange rules. Many students of section 1031(f) realize that it derived from section 453(e), which governs installment sales to related parties. The Article therefore discusses the development of section 453(e) and how it informs the analysis of section 1031(f).

After laying that groundwork, the Article describes section 1031(f) and analyzes IRS and court interpretations of its coverage. Following that, the Article explores an enigma within an enigma, the non-tax-avoidance exception in section 1031(f)(2)(C). Despite a 2005 Tax Court decision construing that exception, the scope of section 1031(f)(2)(C) remains unclear. The Article considers several viable interpretations of the scope of the non-tax-avoidance exception. Finally, the Article discusses procedural issues that section 1031(f) raises and presents tax planning considerations involving related-party exchanges.

section 1031, like-kind exchange, tax-free exchange, related-party exchange, section 1031(f), tax-free swap

Abstract:
The tax-free treatment of like-kind exchanges presents one of tax law's most compelling equity conundrums. Tax law generally does not tax property holders on the appreciation in the property's value, but it does tax gain or loss recognized by property sellers and exchangers of non-like-kind property. In its basic Aristotelian form, equity requires that likes be treated alike, but it does not provide criteria for determining what is alike. Depending upon the criteria selected, exchangers of like-kind property can be similar to holders, or similar to sellers and exchangers of non-like-kind property. The equity conundrum is whether tax law should treat exchangers of like-kind property the same as holders of property or the same as sellers and exchangers of non-like-kind property. This Article solves the conundrum using Rawlsian and Hohfeldian concepts, which suggest that holders should not be taxed on property's appreciation. Second, it explains that once law exempts holders' appreciation from taxation, comparative equity dictates that it should also exempt from taxation exchanges of like-kind property.

Equity, Equality, Section 1031, Like-Kind Exchange, Tax-Free Exchange, Like-Kind Property

Abstract:
Property owners often acquire tenancy-in-common (TIC) interests as replacement property in section 1031 exchanges. Generally, TIC interests are sold as securities under federal and state securities laws, and their offering materials include a tax opinion addressing whether the TIC offering is a tax partnership. This Article explains that opinion writers consider whether the TIC offering satisfies the conditions of Rev. Proc. 2002-22 when writing tax opinions. If a TIC offering satisfies all of the Rev. Proc. 2002-22 conditions, the opinion writer will most likely write a should opinion. If the TIC offering does not satisfy all of the conditions, the opinion writer may or may not write a should opinion, depending upon which conditions the offering fails to satisfy. The Article explains the effect failing to satisfy the conditions has on tax opinions.

Several issues arise when an exchanger attempts to acquire a TIC interest as part of a title-parking reverse exchange. The Article explains that a TIC interest's status as a security often makes parking title to the interest difficult. To avoid such difficulties, the Article recommends structuring title-parking reverse exchanges as exchange-first transactions, if the exchanger is attempting to acquire a TIC interest as replacement property.

tenancy-in-common interests, 1031 exchange, TIC offerings

Abstract:
This Article discusses the partnership mergers and divisions rules and provides examples of how tax advisors may use them to plan transactions.

partnerships, mergers, divisions, section 1031

Abstract:
Section 1031 nonrecognition applies only to exchanges of like-kind properties. Although real property generally is not like kind to personal property or intangible property, case law reveals that personal property and intangible property can be combined with certain real property interests and become like kind to real property. The Article distills four basic rules for transforming personal property and intangible property into real property for section 1031 purposes. It also examines untested theories about transforming personal and intangible property into real property and considers the viability of such theories.

section 1031, like-kind exchange, real property exchange, personal property exchange

Abstract:
A myth persists. Many believe that section 1031 treats all real property as like kind and state law determines whether property is real property. This Article examines the many cases and rulings that consider partial real estate interests and reveals that there are many exceptions to this accepted rule.

section 1031, like-kind exchange, real property exchange

Abstract:
The use of interests in syndicated tenancy-in-common arrangements as replacement property for section 1031 exchanges attaches new significance to the question of when a co-ownership arrangement should be treated as partnership for federal tax purposes (the co-ownership-partnership question). This Article examines the history of partnership taxation and the authority that addresses the co-ownership-partnership question. The examination reveals that there is considerable confusion in this area, including an ambiguous overlap between the check-the-box rules and the rules governing when a partnership can elect out of subchapter K. Finally, the Article recommends that the IRS provide guidance that will more clearly define the term separate entity in the section 7701 regulations.

partnership taxation, tax partnership, check-the-box regulations

Abstract:
This Catalogue of Legal Authority presents a summary of 112 statutes, cases, regulations, and rulings that address the federal definition of tax partnership. It also lists 113 additional statutes, cases, regulations, and rulings that the summarized legal authority appears to cite as support for analyeses and conclusions regarding the federal definition of tax partnership. The document summarizes the tax significance of tax partnership classification and the ten tests used to define tax partnerhip.

tax partnership, entity classification, subchapter K

Abstract:
Section 1031 exchanges frequently occur in proximity to business transactions (i.e., entity formations, mergers, divisions, and dissolutions). Although section 1031 exchanges and many business transactions can be tax free, the proximity of such transactions often presents challenging legal and theoretical questions. In fact, depending on the order of the transactions, taxpayers may lose the tax-free treatment of the exchange or of the proximate business transaction. This Article examines the tax consequences and theoretical aspects of section 1031 exchanges and proximate business transactions.

section 1031, like-kind exchanges, partnerships, corporations, mergers, divisions

Abstract:
Even with the Internal Revenue Service's publishing Rev. Proc. 2000-37, there is no authoritative guidance regarding true reverse exchanges. This Article examines the principles and policy supporting nonrecognition treatment of like-kind exchanges. It then describes how courts have interpreted the exchange requirement in light of the continued-investment purpose of section 1031. Extrapolating this interpretation to reverse exchanges, the Article recommends a workable model for structuring true reverse exchanges that should qualify for section 1031 treatment.

section 1031, like-kind exchange, reverse exchange, real estate exchange

Abstract:
Build-to-suit exchanges (also referred to as improvements exchanges and construction exchanges) allow taxpayers to dispose of property tax free under section 1031 and use the proceeds to construct improvements on other property. Orgininally published as Recent Developments in Build-to-Suite Exchanges, this Article discusses the case history of build-to-suit exchanges and describes current structures, including leasehold arrangements, that allow exchangers to reinvest exchange proceeds to construct improvements on property owned by a related party. Build-to-suit exchanges involving related party property raise many issues under the related-party exchange rules. Therefore, the Article also discusses those rules.

section 1031, tax-free exchange, build-to-suit exchange, leasehold improvements exchange, related-party exchange

Abstract:
The law governing section 1031 exchanges of personal-use residences ranges from very explicit, in the case of principal residences, to very vague, in the case of mixed-use second homes. The law excludes from section 1031 nonrecognition exchanges of property used solely for personal use. The IRS has provided guidance regarding exchanges of mixed-use principal residences and has provided an all-or-nothing safe harbor with limited applicability for exchanges of mixed-use second homes. To complete the body of law governing exchanges of personal-use residences, this article suggests that the IRS should provide broader guidance for exchanges of mixed-use second homes.

section 1031, vacation homes, second homes, principal residence, like-kind exchange, tax-free exchange

Abstract:
Tax law (section 1031 in particular) has spawned a new investment vehicle-open tenancies in common. Tax law allows property owners to exchange into like-kind real property tax free, but finding suitable replacement property can be difficult. Real estate syndicators, recognizing a demand for ready-access replacement property, began offering undivided interests in large multi-million-dollar properties to individual investors exchanging out of smaller properties. Those offerings were the first open tenancies in common. Open tenancies in common are distinguished from traditional or close tenancies in common by the size of coowned property, the coowners' mutual lack of acquaintance, and the separation of ownership and management of the property. Open tenancies in common raise issues from several disciplines, including tax; property, business, contract, and, securities law; and economics. To provide the tax benefits investors seek, interests in open tenancies in common must be real property for federal tax purposes. That implicates the tax entity classification rules, which the IRS has addressed with published guidance. Numerous investors coowning a single property raises property law issues, such as rights of possession, rights to revenue, obligations for expenses, and rights to partition. The coowners' lack of acquaintance and disparate background raise business law issues. For example, the coowners may wish to restrict transferability of interests, have governance agreements, and create standards for third-parties who manage the property. Finally, open tenancies in common raise economic concerns and appear to come within the jurisdiction of the securities laws. This Article introduces open tenancies in common to the academic literature, analyzes them, and recommends modifications to the IRS guidance based on property law, business law, and economic and tax theory.

tenancy in common, open corporation, close corporation, section 1031, separation of ownership and management

Abstract:
This Article describes the section 1031 deferred exchange safe harbors. It describes how property owners can structure deferred and multiple-party exchanges to avoid actual and constructive receipt of boot to obtain nonrecognition on the exchange of properties. It demonstrates how property owners can use multiple safe harbors (such as a qualified intermediary and qualified trust) to protect exchange proceeds during the exchange interstice. It also considers the intricacies of the identification rules and the identification and exchange periods. The Article is adapted from Chapter 4 of the forthcoming treatise, Bradley T. Borden, Tax-Free Like-Kind Exchanges (Civic Research Institute 2008).

section 1031, like-kind exchange, qualified intermediary, qualified trust, qualified escrow account, identification period, exchange period, three-property rule, 200% rule, deferred exchanges, multiple-property exchanges, letter of credit

Abstract:
Market forces in a depressed real estate market often lead to foreclosures, which may generate taxable gain to the debtor. Some foreclosure sales may qualify for Section 1031 nonrecognition, if the debtor properly structures the disposition. This Article discusses structures that help foreclosure transactions qualify for Section 1031 nonrecogntion. The Article also discusses the application of Section 1038 to recquisitions of exchanger-financed relinquished property.

foreclosure, section 108, cod income, doi income, section 1031, tax-free exchange, like-kind exchange, section 1038

Abstract:
Perhaps the most controversial income tax question in the real estate industry in 2004 was whether a seller of real estate could use Section 1031 proceeds to construct a new building on land already controlled by that taxpayer. In an earlier major development for the U.S. real estate industry, the IRS, in PLR 200251008, favorably permitted a reinvestment of exchange proceeds into the cost of a new building built on land leased from the seller's affiliate. In Rev. Proc. 2004-51, however, the IRS indicated that it was considering reversing its position so as to no longer permit the outcome in PLR 200251008.

In Rev. Proc. 2004-51, the IRS further announced that it would not permit tax-free reinvestment in the more common situation where the land on which the new building will be constructed is already owned by the same legal entity that is reinvesting. Rev. Proc. 2004-51 relied on Rev. Rul. 67-255, which held that buildings constructed on land already owned by the taxpayer are not like kind to real estate exchanged by the taxpayer.

In this article the authors criticize, on technical and policy grounds, the IRS's application of Rev. Rul. 67-255 in Rev. Proc. 2004-51 to prevent the exchange of real estate for a building to be built on land already owned by the taxpayer and the IRS's possible extension of Rev. Proc. 2004-51 to discontinue the approach allowed in PLR 200251008. The authors suggest that to avoid the application of Rev. Proc. 2004-51, taxpayers with multiple properties should place each parcel of real estate in a separate legal entity.

section 1031, like-kind exchange, improvements exchange

Abstract:
Over the last several years, reverse exchanges have become a fixture of section 1031. A fluid economy and a strained financial industry send a reminder that safe guarding exchange proceeds in reverse exchanges is paramount. This Article reviews reverse exchange structures, both safe harbor and non-safe harbor, and describes how such transactions must be financed to satisfy tax law requirements and safe guard exchange proceeds. The Article is adapted, with permission, from Chapter 5 of Tax-Free Like-Kind Exchanges.

reverse exchange, section 1031, title-parking exchange, exchange proceeds, qualified intermediary, exchange accommodation titleholder

Abstract:
The economic downturn has depressed the real estate market, a significant component of the section 1031 industry. In its wake, the industry witnessed three major qualified intermediary failures. QI failures deprive exchangers of exchange proceeds and also create potential tax and legal liablities for the exchangers. This article analyzes those potential liabilities and also discusses the cause of QI failures and actions that exchangers and QIs may consider to help safeguard exchange proceeds.

section 1031, like-kind exchange, qualified intermediary, qualified trust, qualified escrow account, bankruptcy, QI failure

Abstract:
The proper tax treatment of profits-only partnership interests is an unsolved aspect of tax law. The problem has manifested recently in the debate over the proper tax treatment of carried interests, a subset of profits-only partnership interests. One group of commentators recommends that at least a portion of partnership income allocated to holders of profits-only partnership interests be taxed as compensation. To obtain the desired compensation result, commentators and lawmakers generally propose disaggregating partnerships (that is, changing the character of income as it flows from the partnership to service-providing partners). Another group of commentators express concern that partnership disaggregation threatens the partnership tax regime, finds little support in tax policy, and potentially disrupts the application of other tax law provisions. This report suggests that partnership disregard (that is, ignoring arrangements that should not come within the definition of tax partnership) will help solve the perceived inequity of profits-only partnership interests, will solidify the integrity of partnership taxation, and will not disrupt the application of the rest of the law.

For a more in-depth discussion of the ideas presented in this report, see Bradley T. Borden, Profits-Only Partnership Interests, 74 Brooklyn Law Review, forthcoming 2009, available at http://ssrn.com/abstract=1262493.

Abstract:
Tax law classifies business arrangements as one of three general structures: (1) disregarded arrangements, (2) tax partnerships, or (3) tax corporations. Since the enactment of the income tax in 1913, tax law has struggled unsuccessfully to develop a good model for classifying business arrangements. The current model's sole virtue is its simplicity, derived from formalistic, elective attributes. Its greatest shortcoming may be that it disregards the reasons parties form business arrangements and their use of economic items to reduce rent-seeking behavior and agency costs. That disregard often allows business participants to choose their tax classification and minimize their taxes, which erodes the tax base and shifts tax burdens to others but does not alter the parties' economic relationships. This Article rejects the current model and presents a classification model based on the economic theory of the firm. Economic theory aids classification in three respects. First, it helps explain why parties form business arrangements. Second, it views business arrangements as nexuses of contracts composed of various parties. That view helps identify the economic aspects of business arrangements and the economic rights of business participants, irrespective of legal form. Third, it demonstrates that residual risk (the right to the residual assets of a business) measures the economic interests parties have in business arrangements. In particular, residual risk helps distinguish arrangements that can trace income from its source to the owner of the source or from allocations to the beneficiaries of those allocations from those arrangements that cannot. That knowledge clarifies the appropriate tax regime for all arrangements and leads to the residual-risk model for classifying business arrangements.

entity classification, residual risk, check-the-box regulations, tax corporations, tax partnerships, theory of the firm

Abstract:
Industry estimates indicate that, over the past several years, section 1031 qualified intermediaries have lost as much as $700 million of exchange proceeds. Exchangers and their representatives must take steps to help prevent future losses. This article reviews three recent failures and discusses measures that should help reduce the risk of qualified intermediary failure in the new exchange environment. Lawmakers should also consider measures they can take to help prevent such losses in the future.

section 1031, like-kind exchange, qualified intermediary, qualified trust, qualified escrow account, exchange defalcation

Abstract:
Economies of scale exist if long-run average costs decline as output rises. All else being equal, the decline in average costs should lead to greater profitability, making economies of scale attractive to businesses. Nobel laureate George Stigler recognized that economies of scale should help determine the optimum size of a firm. To obtain economies of scale and optimum firm size, parties may integrate resources or grant access to resources without integrating. Such arrangements create shared economies of scale. Tax law must consider the effects of shared economies of scale and address them. In particular, the varying degrees of scale-sharing raise tax classification issues. Traditional classification analyses focus on the legal definition of tax partnership, which requires a joint-profit motive. The IRS and courts have concluded that sharing economies of scale satisfies the joint-profit-motive test and that arrangements with a joint-profit motive are tax partnerships. Relying on technical analysis and economic theory, this Article argues, however, that if parties integrate resources without integrating all relevant parts of the production process, they often should not come within the definition of tax partnership. By focusing upon shared economies of scale, the IRS and courts have created a slippery slope. Sharing economies of scale is common even in nonintegrated arrangements, which allow parties to benefit from each other’s specialized skills by granting access to resources. If tax law relies upon shared economies of scale to classify business arrangements, its classification system will include arrangements that are not suited for tax partnership classification.

economies of scale, joint-profit, partnership, entity classification