The New Revolution in Partnership Tax?
Temple University - James E. Beasley School of Law
November 25, 2013
Virginia Tax Review, Vol. 33, 2013, Forthcoming
Temple University Legal Studies Research Paper No. 2013-37
Partnerships play an increasingly vital role in the federal income tax, as they generate an ever-larger fraction of governmental revenues and also of policy debate. Partnership tax is deeply flawed, with complexity and persistent abuse compromising its ability to regulate modern partnership transactions. This article takes early steps toward comprehensive reform of partnership tax, analyzing intellectual frameworks that have enduring influence on the taxation of partnerships and their partners.
In particular, this article traces the altering intellectual trajectory of partnership tax from its "codification" in 1954 to the present "technocratic era" before proposing a new, holistic approach to taxing partnerships. In doing so, the article draws on aspects of Ronald Dworkin’s principle of integrity to develop an accessible, fair, and functional system of taxation. Although rarely applied in the tax scholarship, integrity has a strong appeal in partnership tax, where discordant values have left the system remarkably fractured and incoherent. This article uses integrity as a guide to create a more principled system of partnership tax in which unified values work to serve systemically common ends.
With intellectual frameworks to anchor the tax reform debate, this article turns to the practical question of particular reforms, beginning with one of the most ubiquitous and troublesome aspects of partnership tax — distributions. To this end, the article evaluates two existing distribution reform proposals: one embodies the codification era and the other reflects technocratic era thinking. The article then proposes a third, integrity-based option for reform, one grounded in the distinctive notion that distributions should generally be treated as taxable transactions. By linking these distribution reform proposals to different intellectual eras in partnership tax, this article offers a novel vantage through which to start thinking about the theoretical tradeoffs and practical challenges that will shape the taxation of twenty-first century partnerships and their partners.
Number of Pages in PDF File: 44
Keywords: partnership tax, subchapter K, tax reform, tax complexity, tax shelters, tax abuse, distributions, liquidations, integrity, business entity tax, pass-through tax, partnership
JEL Classification: K34
Date posted: September 10, 2013 ; Last revised: July 23, 2014