A Win-Win Proposal for Analyzing Profits-Only Partnership Interests
15 Pages Posted: 6 Oct 2008 Last revised: 19 Oct 2008
Date Written: October 6, 2008
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.
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