Tags: tax | partnership | recourse | debt

IRS Proposes Major Changes in Partnership Tax Regulation

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Monday, 20 Oct 2014 08:08 AM Current | Bio | Archive

Partnership taxation is already one of the most complicated areas of tax law. The IRS is proposing to add another level of intricate regulations that would substantially change how partnerships can be used for investment and business operations.

Regulations issued by the IRS have always had a tinge of controversy even when specifically authorized by Congress. When Congress enacts a tax law, nobody in Congress has read it or understands exactly what they have passed. Most times, a tax statute is composed of intentionally ambiguous language that can be interpreted in any number of ways. Congress leaves it up to the IRS to pass regulations, which then have the force of law, to construe what it means and just how they will enforce it.

In effect, Congress delegates the responsibility and cedes its authority to establish tax law to the IRS bureaucracy. Congress knows that it is easier to raise campaign contributions by making earnest (but empty) promises to the voters that if elected they will simplify the tax law and protect the taxpaying voters from the IRS.

The Treasury and president don't complain about this system. For the administration, it is an effective means of raising taxes or benefiting preferred campaign contributors and voting blocks without having to go through all the hassle of dealing with the politics of Congress.

With the tax law being kept so convoluted, the voters don't have the slightest chance of knowing that they are being had until told by their tax professionals.

These new proposed partnership tax regulations regard the allocation of both recourse and non-recourse partnership liabilities, which would have a dramatic impact on the income tax consequences when partners join or leave a partnership.

The existing regulation dealing with recourse debt (such as personal guarantees and other personal payment options) says that the allocation of that debt is to use what is known as the constructive-liquidation test. This calculation would change in certain critical ways that are more favorable to the IRS and less so to the taxpayer.

Non-recourse debt has its own partnership tax intricacies. Just figuring out the total share of allocable liabilities is a three-tier process. Then it must pass the substantial economic effect test. For this test, tax is irrelevant and is not considered a factor in the economic analysis.

The proposed regulations would eliminate the significant-item and alternative methods that are required now, and in the future, partnerships would use a liquidation-value approach. This would require a determination of what is fair market value. As experience has shown, the IRS and taxpayers can have radically different views as to what constitutes fair market value.

What does this all mean to investments and businesses, such as in the real estate industries, which are taxed as partnerships?

It means that the professional tax accounting and advisory fees, as well as legal fees, would increase. Partnership agreements would need to be amended to avoid possible adverse tax consequences.

This is just another example of the continuing tax war of the government versus the taxpayers.

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Kleinfeld
Partnership taxation is already one of the most complicated areas of tax law. The IRS is proposing to add another level of intricate regulations that would substantially change how partnerships can be used for investment and business operations.
tax, partnership, recourse, debt
505
2014-08-20
Monday, 20 Oct 2014 08:08 AM
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