Partnership Basis Seepage: A Charitable Deduction Arbitrage

Abstract

This article examines charitable contributions in the partnership context and the unintended tax arbitrage that occurs under section 704(d) of the Internal Revenue Code of 1986, as amended. Under the current law pursuant to Treas. Reg. § 1.704-1(d)(2) a partner’s distributive share of losses attributable to the partnership’s charitable contributions are not limited by outside basis under section 704(d). Unlike other partnership losses said contributions are never “suspended” at the partner level but rather merely pass-though to the applicable partner’s tax return - unrestricted by outside basis. As a consequence, however, such unlimited pass-through can result in permanent inside/outside tax basis disparity in certain circumstances (with no section 754 adjustment to remedy such). This article suggests several solutions to resolve this unintended disparity and its resultant tax arbitrage.

Keywords: tax, partnerships, charitable deduction, deduction, partners, 704(d)

JEL Classification: M4, M40, M41, M48, M49