A Model for Measuring the Expected Value of Assuming Tax-Partnership Liability
7 Brook. J. Corp. Fin. & Com. L. 361 (2013)
65 Pages Posted: 27 Feb 2013 Last revised: 19 Jul 2013
Date Written: July 19, 2013
To a very large extent, tax law drives the choice property and business owners make regarding the entity they use for ownership and operation of their enterprises. At an ever-increasing rate, property and business owners choose to operate their enterprises with entities that are subject to partnership taxation (i.e., limited liability companies, limited partnerships, and limited liability partnerships). Once in the realm of partnership taxation, those same parties face numerous decisions that require them to balance tax, state-law, and other economic considerations. This Article presents a situation in which members of tax partnerships would have to balance those considerations to make an informed decision. The Article illustrates that the use of expected cost estimates can help a member of a tax partnership decide whether taking a current flow-through deduction from the tax partnership warrants the member assuming a larger share of the tax partnership’s liability. In presenting the model that can assist with such a decision, the Article opens the possibility of analyzing other vexing decisions that the confluence of partnership taxation and state law presents to members of tax partnerships. Although such decisions are often vexing, the Article illustrates that finding the proper tools to assist with the decision-making process enhances the value of forming an entity that qualifies for partnership taxation.
Keywords: section 704(d), basis loss limitation, outside basis loss limitation, expected value, section 752, share of partnership liabilities, tax partnership, limited liability entity
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