Chris William Sanchirico (Penn; Google Scholar) & Reed Shuldiner (Penn), Deferring Income with Tiered and Circular Partnerships:

By phasing entities’ taxable years in tiered and circular partnership structures, taxpayers can indefinitely defer tax with minimum complexity and friction. Existing rules restricting a partnership’s choice of taxable year based on partners’ taxable years are ill-adapted to handle tiering and circularity.  Even strengthening such rules so that they look through tiers of partnerships would do little to temper the deferral opportunity. More drastic measures are required if Congress and Treasury wish to effectively limit these opportunities.

Conclusion
By carefully phasing taxable years in tiered and circular partnership structures, taxpayers can indefinitely defer tax with minimum complexity and friction. Existing rules that restrict partnerships’ taxable years are ill-adapted to handle tiering and circularity. Even strengthening such rules to look through tiers of partnerships would do little to temper the deferral opportunity

If Congress and Treasury wish to effectively limit these deferral opportunities, more drastic measures are required. One possibility would be require partnerships to estimate and report to different-year partners on a monthly basis such partners’ distributive shares. Each such partner would then take its monthly distributive share into income in the partner’s taxable year containing that month. Admittedly, this would be a major change with major administrative implications. One might, however, regard the issues it addresses as equally major.

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