What’s in a Name: Can the Partnership Anti-Abuse Rule Really Stop Partnership Tax Abuse?

Abstract

The partnership taxation rules of subchapter K are uniquely flawed, afflicted by a combination of flexibility, technically complex provisions, and low enforcement resources. As a result, partnerships remain the preferred vehicle for tax shelter activity, with extraordinary costs for the public at large.

Despite ample scholarship concerning tax shelters, little attention has been paid to the interaction between subchapter K and tax shelters. This article supplements the literature by proposing a solution targeted to subchapter K’s peculiar and deepening crisis. More specifically, I suggest that the Treasury revise one of subchapter K’s most infamous and least successful provisions - the partnership anti-abuse rule.

The Treasury promulgated this anti-abuse rule in 1994 amidst unprecedented controversy, and to this day, the regulation generates visceral reactions from scholars and practitioners alike. After tracing the remarkable history of the partnership anti-abuse rule, including its stunning failure, this article recommends that the Treasury revise the rule, returning it to its origins and correcting mistakes made in the six-month interval between the rule’s proposal and its issuance in final form. Doing so would free the partnership anti-abuse rule to more effectively challenge partnership tax shelters. Likewise, a revised partnership anti-abuse rule would provide urgently needed structural support for subchapter K as a whole. Indeed, a revised partnership anti-abuse rule could bring stability to this troubled and often overlooked corner of the federal income tax system.

Keywords: Taxation, Partnership Taxation, Tax Shelters, Tax Abuse, Anti-Abuse Rule, Parntership Anti-Abuse Rule, Regulation 1.701-2

JEL Classification: K34