Modernizing Partnership Taxation

However, due to deliberate policy choices, drafting accidents where the rules do not achieve what lawmakers might have had in mind, and neglect in updating or fixing outdated rules, partnership tax rules are in need of modernization. [...] Finally, Part III offers both principles and a selection of specific proposals for modernizing partnership taxation, focusing on options most relevant to the 2025 tax debate. [...] Finally, Part III offers both principles and a se- lection of specific proposals for modernizing partner- ship taxation, focusing on options most relevant to the 2025 tax debate. [...] For example, in one high-profile case a high- net-worth individual organized a complicated network of offshore entities that included LLCs, trusts, and other pass-through entities to own various investments and conceal the income from those investments.23 Partnership tax returns are complex for similar reasons. They must reflect not only the complexity of these ownership structures, but also [...] The basic task of partnership tax law is to deter- mine how a partnership’s economic results are rec- ognized by the tax system and shared by the owners.No single approach to this task is inevitable; indeed, U. S. [...] Box 2 provides a summary of some basic tax concepts relevant to Sub- chapter K that will be useful for understanding the fol- lowing discussion as well as the proposals in Part III. [...] For one, under current rules, a partner can effectively avoid disguised sale treatment by creating tax basis in its partnership in- terest that does not necessarily reflect economic real- ity; such basis can be used to achieve the economics of a taxable sale without triggering tax (see Appendix A for additional detail). [...] This creates opportunities for taxpayers to take advantage of tax benefits from shifts and distortions caused by partnership distribu- tions (while avoiding those that are detrimental) and can also create traps for the unwary. [...] The rules have thus been criticized as applying a mechanical test that does not reflect economic real- ity (i.e., does not reflect how partners “actually” bear partnership liabilities as an economic matter), thus creating electivity to minimize tax by manufacturing EROL and outside basis.127 This has wide-ranging ef- fects, but a key example of this flexibility arises in the context of disgui [...] While a reasonable goal of partnership taxation would be to impose the same tax treatment whether someone doesModernizing partnership taxation 29 business on their own or through a joint arrangement with a partner, such pure “neutrality” is often achievable only in the simplest partnership structures and thus can be at odds with other goals, such as minimizing complexity and creating administ