Abstract

http://ssrn.com/abstract=2269091
 


 



Taxing Reality: Rethinking Partnership Distributions


Andrea Monroe


Temple University - James E. Beasley School of Law

May 23, 2013

Loyola of Los Angeles Law Review, Vol. 47, 2014, Forthcoming
Temple University Legal Studies Research Paper No. 2013-21

Abstract:     
Partnerships play an increasingly vital role in the federal income tax. Yet partnership taxation is deeply flawed, with complicated provisions that strain the voluntary compliance mechanism on which all federal income tax relies. This article considers one of the most difficult challenges facing partnership taxation: the treatment of distributions.

Distributions are ubiquitous transactions that transfer cash or property from a partnership to a partner. Although distributions vary dramatically in their purpose and the kind of property involved, their tax treatment follows a unitary approach. The principle of “nonrecognition” means that distributions do not produce any immediate tax consequences. This nonrecognition premise has caused great abuse and complexity, as partnerships have used distributions as tax shelter vehicles, and the government has responded with narrow anti-abuse “fixes” that are often counterproductive. Calls to reform these anti-abuse provisions have been a constant presence throughout a half-century of tax scholarship.

This article argues that the existing scholarship largely misconstrues the problem with partnership distributions. The core difficulty is the nonrecognition premise at the system’s foundation, the very problem that particular anti-abuse provisions were designed to combat. Meaningful reform of partnership distributions thus requires a fundamental rethinking of nonrecognition and its role in partnership taxation.

This article offers an alternative vision of partnership distributions, one without the imprint of nonrecognition. It reimagines partnership distributions from a recognition-based perspective, which would ground the tax treatment of these transactions in economic reality. Of particular importance are liquidating distributions that involve the complete or partial termination of a partner’s investment in the partnership. Consistent with their commercial substance, liquidating distributions should be treated as taxable exchanges in which the partner receives cash or property from the partnership in exchange for relinquishing her interest in the partnership and its underlying property. Under a recognition-based approach, partnership distributions would indeed look very different than they do today, simpler, more equitable, and more stable.

Number of Pages in PDF File: 77

Keywords: partnership taxation, subchapter K, tax reform, partnership distributions, partnership liquidations, business entity tax, tax complexity

JEL Classification: K34

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Date posted: May 24, 2013 ; Last revised: July 23, 2014

Suggested Citation

Monroe, Andrea, Taxing Reality: Rethinking Partnership Distributions (May 23, 2013). Loyola of Los Angeles Law Review, Vol. 47, 2014, Forthcoming; Temple University Legal Studies Research Paper No. 2013-21. Available at SSRN: http://ssrn.com/abstract=2269091

Contact Information

Andrea Monroe (Contact Author)
Temple University - James E. Beasley School of Law ( email )
1719 N. Broad Street
Philadelphia, PA 19122
United States
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