This week, Assaf Harpaz (Georgia; Google Scholar) reviews a new work by Theodore P. Seto (Loyola LA; Google Scholar), No More Tiers: Rebuilding Auditability in Partnership Taxation.
Over the past decades, large partnerships have grown increasingly complex, often featuring multiple layers of ownership structures with numerous tiers. Large partnerships are rarely audited, and when audits are performed, they rarely yield positive revenue for the Treasury. In this insightful and thought-provoking contribution, Ted Seto argues that the complexity of large partnerships renders them effectively inauditable. The author categorically proposes “no more tiers”: prohibiting entities from qualifying for Subchapter K treatment if any of their interests are owned, directly or indirectly, through disregarded entities, by partnerships.
According to the Government Accountability Office, in tax year 2019 there were over 20,000 large partnerships, defined as partnerships with at least $100 million in assets and 100 or more total partners. Nevertheless, in the same tax year, the IRS audited only 54 large partnerships (0.27%), down from 1.4% in 2007. More than 80% of large partnership audits conducted between 2010 and 2018 resulted in no change to tax liability, and the average adjustment was negative for audits that did result in a change. The author posits that the core return on investment of IRS audits of large partnerships is negative, and there is no reason to believe that devoting more resources to such audits would change that outcome. For comparison, the 2019 audit rate for corporations with assets of over $100 million was 7.3%, over 25 times higher than the audit rate for partnerships of comparable size. Here, the author may wish to add what he views would be a good baseline or optimal audit rate for partnerships.
These low large partnership audit rates are attributable to their structural complexity and the immense difficulty of auditing them. Tracing allocations, basis, and liability shares across interdependent entities demands the simultaneous examination of every partnership, while routinely doing so in different jurisdictions and multiple tax years. Consequently, audits often crumble under the administrative burden or simply exceed the statute of limitations. The author explains that tiers make partnership audits exponentially more difficult, if not impossible, and Subchapter K was simply not designed to deal with the problems that tiering creates.
To demonstrate this point, the Article proceeds with the useful hypothetical of enforcing the regulations under IRC § 704(b) (substantial economic effect) with respect to tiered partnerships. Audit complexity can increase exponentially with the number of tiers, possibly to millions of audits. Tiered partnerships can also generate substantial tax deferral through alternating partnerships with different taxable years. Given enough tiers, especially where ownership is circular, income may go unreported or untaxed indefinitely. Similarly, debt allocation rules under IRC § 752 create significant tax planning opportunities, because determining an ultimate owner’s outside basis requires tracing liabilities throughout the entire chain.
The Article then introduces the proposed solution: that Congress should disqualify from partnership treatment entities whose interests are owned by other partnerships, either directly or through disregarded entities. The proposal rests on the premise that auditability is not a secondary administrative concern. In an income tax system, the ability to trace income to taxpayers and verify reported tax liabilities is a constitutive condition of substantive law. In other words, an income tax is not a tax if there is no effective ability to audit. The author characterizes the “no-tiers” rule as a blunt, transparent, administrable, and durable rule that provides administrable certainty, while also explaining that the proposal does not require an overhaul of Subchapter K’s existing rules. Instead, it re-establishes the factual conditions required for Subchapter K’s existing doctrinal mechanics to operate as intended.
The Article then examines various design and implementation considerations. Of course, tiered partnerships can serve legitimate non-tax business purposes (e.g., financing flexibility, including liability segregation). Accordingly, the proposal does not prohibit tiered partnerships for non-tax purposes and relates solely to their characterization for federal income tax purposes. Under the check-the-box regulations of Treas. Reg. § 301.7701-3, this would limit the ability of eligible entities to elect to be treated as partnerships for federal income tax purposes. The author acknowledges the practical risk of inadvertent disqualification—noting that S corporations face a similar issue—yet the possibility of inadvertent disqualification has not proven fatal to the S corporation regime. The author suggests that Congress provide a statutory cure period during which an inadvertent disqualification can be corrected retroactively without loss of partnership status (like the S corporation model). The author also recognizes that partnership agreements could include transfer restrictions that prohibit partners from transferring their interest to an entity treated as a partnership for federal income tax purposes without the consent of all remaining partners or the managing partner. Here, the author may wish to elaborate more on the proposal’s categorical nature. The supporting data focuses on approximately 20,000 large partnerships, yet the proposal would prohibit all tiered partnership structures, including those in which auditing could be feasible.
The author concludes by addressing Pigouvian solutions proposed in prior literature, which generally aim to internalize external costs to the partnerships. The author argues that Pigouvian taxation would not require resulting revenues to be devoted to large partnership audits. Furthermore, the author is concerned that a uniform tax calibrated to average harm will over-deter some actors and under-deter others. The author does not provide an exact revenue estimate for a “no-tiers” rule yet believes that, based on Government Accountability Office data and IRS partnership statistics, several billion dollars in annual tax revenues are plausible. The larger revenue effect, however, is likely to come from deterring aggressive reporting and changing behavior ex ante.
Here is the rest of this week’s SSRN tax roundup:
Reuven S. Avi-Yonah (Michigan), Birthright Citizenship, Taxation, and the Draft (June 28, 2026)
Reuven S. Avi-Yonah (Michigan) & Tamir Shanan (Coll. Mgmt., Haim Striks Fac. L.), Has the Time Come for the US to Adopt an Excess Profits Tax? (June 26, 2026)
Reuven S. Avi-Yonah (Michigan), Is Cost Sharing Valid Under Loper Bright? (July 20, 2026)
Richard Barnes (Washington State U., Dep’t Acct.), A Mandate Without a Remedy: The IRS’s Unkept Promise of Electronic Signatures and the Limits of § 706(1) (June 19, 2026)
Grant Christensen (Alabama) & Andrew D. Appleby (Tennessee), State Tax Exemptions for Tribal Cultural Property, 136 Yale L.J. F. 1 (2026)
Mark J. Cowan (Boise State U., Dep’t Acct.), Joshua Cutler (Boise State U., Dep’t Acct.), Jared Flake (Boise State U., Dep’t Acct.), & Nicole Holden (Boise State U., Dep’t Acct.), Replacing Worship and Weariness with Wariness: AI and the Needs of the Tax Student (June 30, 2026)
Adrienne DePaul (Tennessee, Haslam Coll. Bus.), Frank Murphy (Connecticut, Sch. Bus.), & Mary E. Vernon (U. Illinois Chicago, Dep’t Acct.), The Determinants of the EU Tax Haven List (July 21, 2026)
Helen Fielder (Independent), Bitcoin, Property or Money? Reframing the Debate Before the High Court Part II—Following the Logic: Returning to the Common Law Method (June 29, 2026)
Keigo Fuchi (Chuo L. Sch.), Introduction to the Evolution of the Concept of Income in Japanese Tax Law (June 22, 2026)
Travis Gilly (Real Safety AI Found.), The Residual Vehicle: Section 503 Enforcement, Federal Contractor Disability Hiring, and the Underutilization of Existing Civil Rights Authority (May 26, 2026)
Andrew Granato (Texas) & Pranjal Drall (Yale), Private Credit’s State Backstop: How Private Equity Socializes Risk Through Insurers (July 21, 2026)
Jeffery M. Kadet (Washington) & Reuven S. Avi-Yonah (Michigan), Periodic Adjustments—Treaties and Other Issues (June 29, 2026)
Mehran Khan, Transparency Without Capacity (July 2, 2026)
Blazej Kuzniacki (Lazarski U.) & Reuven S. Avi-Yonah (Michigan), Rule of Law v. Rule of Power: US Tax Defense Measures in Light of the International Law of Countermeasures (July 3, 2025)
Doron Narotzki (Akron, Daverio Sch. Acct.), Taxing the Chips Behind the AI Boom, Okla. L. Rev. (forthcoming 2027)
Jonas Niyitegeka (Chhatrapati Shahu Ji Maharaj U., Kanpur), Challenges of Taxing Business Profits Arising from Digital Transactions in Rwandan Law: A Critical Analysis of the Legal Framework and the Way Forward (June 22, 2026)
Pasquale Pistone (Vienna U. Econ. & Bus.), João Félix Pinto Nogueira (Catholic U. Portugal), Craig West (U. Cape Town), Alessandro Turina (IBFD), Pedro Schoueri (IBFD), Ivan Lazarov (IBFD), Sergio Messina (IBFD), Sam van der Vlugt (Erasmus U. Rotterdam), & Marilena Pouliasi (IBFD), Fundamentals of Capital Taxation, IBFD (2026)
Amedeo Rizzo (Oxford, Fac. L.) & Elena Villoresi (Bocconi U.), The Italian Cooperative Compliance Regime: Governance, Practical Perspectives, and Future Developments (April 1, 2026)
Ronald Serwanga (Loyola Chicago), Balancing Acts: Tariffs, Proportionality, and the EAC Common Market, 5 J. L., Market & Innovation 193 (2026)
Theodore P. Seto (Loyola L.A.), No More Tiers: Rebuilding Auditability in Partnership Taxation (June 18, 2026)
István Simon (Eötvös Loránd U., Fac. L.), History and Taxation (January 2, 2022)
Bright Usang (U. Calabar, Fac. L.), Reimagining Fiscal Sovereignty: Digitalization and the Emerging Legal Frontiers of Tax Administration in Nigeria (July 20, 2026)
Jingyi Wang (Chinese U. Hong Kong, Fac. L.), Hong Kong’s Strategic Tax Policies for Innovation and R&D: Navigating Regional Competition and Global Minimum Tax Compliance, 2025 Brit. Tax Rev. 649
