Partnership Special Allocations Revisited
53 Pages Posted: 12 Aug 2012 Last revised: 10 Jan 2013
Date Written: August 11, 2012
Special allocations of items of partnership income, gain, loss, and deduction have long created difficulties for the tax law. The paper argues that most such allocations should not be respected for tax purposes because they inappropriately separate the character of partnership items from the partners that are economically entitled to them. The paper suggests that special allocations instead ought to be viewed as transactions in partnership interests between or among the partners themselves. A number of consequences follow. The paper also argues that Treasury's rules for establishing the partners' interests in the partnership when an allocation fails the test for substantiality likely are inconsistent with section 704(b) of the Internal Revenue Code.
Keywords: taxation, partnerships
JEL Classification: H25, K34
Suggested Citation: Suggested Citation