Charlene Luke (Florida) presents Partnership Tax Restraints on Tax Attribute Markets: Time for an Entity-level Solution? at Georgia today as part of its Faculty Colloquium Series. Here is the abstract:

This Article considers partnership tax law in terms of two long-standing doctrinal standards: the owner of an income-producing asset pays the tax produced by the asset, and the earner of income pays the tax on the income. Partnership tax rules more closely aligned with the owner-pays standard appear to be more robust than the rules more aligned with the earner-pays standard. For example, compare the strongest rules relating to ownership of built-in gains and losses—§ 704(c)—with the weakest relating to allocation—the substantiality requirement. That the weaker rules have closer ties to the “earner pays” standard is perhaps not surprising given the difficulty in tracing partnership items back to individual partners. Similar tracing difficulties are, however, also present in assigning ownership of underlying partnership assets. The multiplicity of rules relating to assignment of ownership of partnership assets—the hot asset rules and book revaluation election—may, however, mask that the same tracing difficulty is present.

The tracing ambiguity and the tax attribute shifting opportunities it creates could be resolved by eliminating special allocations. Such an approach would, however, also eliminate the flexibility goal still viewed as a fundamental component of partnership tax. This Article suggests another approach: an entity level tax. The proposed tax could be structured so as to continue flexibility while designating an earner and owner to which income could be more readily traced. The proposed tax is not envisioned as a double tax but would instead be designed as a withholding mechanism, though one requiring that any credit for the withheld tax be stapled to the partnership income producing the tax. The proposed tax would bring new complexity to an already complex regime. The complexity of the rules necessary to safeguard flexible allocations and to prevent the use of partnerships as tax attribute markets emphasizes the fundamental incompatibility between the two goals.