The Negative Capital Account Maze

Outside Hubert I and Hubert II, there has been little discussion of negative capital accounts in the tax context and almost no discussion in the nontax context. Nontax law, however, is critically important. This report provides an integrated discussion of the application of tax and nontax law to negative capital accounts. One of the challenges in writing this report is that it requires a discussion of both the at-risk rules of section 465 and the debt allocation rules of section 752. Complex issues involving sections 465 and 752 and their interaction are worthy of their own articles. Indeed, others have written those articles. In this report, I endeavor to stay focused on the negative capital account issues. So although I am forced to make forays into sections 465 and 752, I try to keep them restrained

Options to Acquire Partnership Interests: Can the Tax Law Keep Pace?

It has become increasingly common for partnerships to issue options that give the holder the right to acquire an interest in the partnership for a set price. The holder of the option will exercise it if he feels that the partnership interest to be acquired is worth more than the exercise price. There is a dearth of authority on the federal tax treatment of option transactions, and the Service has recently asked for guidance from the tax bar as to what approach it should take. This article focuses on one piece of the partnership option puzzle, options to acquire partnership interests where the option is received in exchange for services (services option). While the term partnership is used through the article, the reader is asked to recall that for federal income tax purposes, it normally includes limited liability companies provided they have more than one member

In Defense of the PIP Regulations

The section 704(b) allocation Regulations contain a highly complex safe harbor, the substantial economic effect rules. If an allocation fails to comply with the safe harbor, it will only survive scrutiny if it is in accordance with the partners\u27 interests in the partnership (PIP). Given the complexity of the safe harbor, one might expect the PIP Regulations to be similarly complex, but nothing could be further from the truth. The PIP Regulations are, by tax standards, concise and straightforward. Some have argued that the PIP Regulations do not provide enough guidance, and that a more complex and comprehensive set of regulations would be preferable. In this Article, I argue that judges have made successful use of the PIP Regulations, and that a more complex set of PIP Regulations would achieve little and indeed might cause more problems than they solve. Accordingly, I argue against any substantial amendment to the PIP Regulations, though I would provide a safe harbor for target allocations

Last Gasp Estate Planning: The Formation of Family Limited Liability Entities Shortly Before Death

Family limited partnerships have been popular gift and estate tax planning vehicles for many years. In recent years, family limited liability companies (LLCs) have also become common, particularly in those states that have updated their statutes to take the check-the-box regulations into account. LLCs with more than one member are usually classified as partnerships for federal income tax purposes. In a typical structure, when there is adequate planning, the donors form a limited partnership or an LLC (jointly, \u27family limited liability entity\u27 or FLLE), to which they contribute assets expected to appreciate in value. This article will focus on such use of FLLEs as found in the Strangi case and offer proposals for reform

Complexity Cubed: Partnerships, Interest, and the Proposed Regs

New section 163(j) strictly limits business interest expense (BIE) deductions to large (and possibly not-so-large) taxpayers. Generally, BIEs may only be deducted to the extent that they do not exceed 30 percent of adjusted taxable income plus business interest income. Section 163(j)(4) requires partnerships to calculate this limitation at the partnership level. In this report, I focus on how section 163(j) applies to partnerships. Given my focus, I leave to others a more comprehensive review of section 163(j) as a totality,1 as well as the coverage of S corporations. I will tend to give fairly short shrift to the portions of the statute and proposed regulations (REG-106089-18) that do not primarily apply to partnerships. For the most part, I assume the reader is well-versed in subchapter K. I begin by laying out some background to the enactment of section 163(j) and its application to partnerships

Integrating Subchapters K and S and Beyond

This Article builds upon a similar, lengthier effort that I published in the Tax Lawyer in 2009. While there is overlap, this Article contains much new material. Important case law and tax proposals from the House Ways and Means Committee have come out in the interim. Due to space limitations, unlike my Tax Lawyer effort, this Article attempts to avoid prolixity. It assumes the reader has good knowledge of both Subchapters S and K and the tax entity selection process. If you are not that reader, a review of my Tax Lawyer article or Professor Mann\u27s article in this symposium edition will fill in the gaps. Generally speaking, I recommend repealing Subchapter S, but integrating its more legitimate benefits into Subchapter K. I also make Subchapter K available to most nonpublic C corporations, putting most closely held businesses on a level playing field

Last Gasp Estate Planning: The Formation of Family Limited Liability Entities Shortly Before Death

Family limited partnerships have been popular gift and estate tax planning vehicles for many years. In recent years, family limited liability companies (LLCs) have also become common, particularly in those states that have updated their statutes to take the check-the-box regulations into account. LLCs with more than one member are usually classified as partnerships for federal income tax purposes. In a typical structure, when there is adequate planning, the donors form a limited partnership or an LLC (jointly, \u27family limited liability entity\u27 or FLLE), to which they contribute assets expected to appreciate in value. This article will focus on such use of FLLEs as found in the Strangi case and offer proposals for reform