Partnership Exit Strategies and the Failure of the Substantiality Test
Thomas W. Henning
Loyola Law School Los Angeles - Adjunct
December 30, 2010
Tax Lawyer, Vol. 63, No. 1, Spring 2010
The article considers partially taxable dispositions of partnership property with a special allocation of taxable gain to the partner receving the corresponding proceeds. Reviewing the history and purpose of the substantial economic effect standard from the 1954 Code through the 1976 Tax Reform Act demonstrates that Congress did not intend that the "substantial" requirement become a rigid quasi-mathematical test that fails to block a number of tax avoidance shemes while disallowing allocations which have no tax avoidance intent. The 2008 amendment of the regulations only exacerbates the deficiencies of the substantiality rules. In conclusion, the regulations governing partnership allocations should be rewritten to include a tax avoidance and business purpose test.
Number of Pages in PDF File: 56
Keywords: partnership allocation, substantial economic effect, substantiality, disposition, exchange
JEL Classification: H25Accepted Paper Series
Date posted: April 3, 2008 ; Last revised: January 2, 2011
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