Jones on First Impressions and the Flexibility Fallacy

Darryll K. Jones (Pittsburgh) has published First Impressions and the Flexibility Fallacy, 110 Tax Notes 995 (Feb. 27, 2006), also available on the Tax Analysts web site as Doc 2006-3057, 2006 TNT 39-38.  Here is the opening:

Lee Sheppard hit the nail squarely on the head recently when she observed that partnership tax specialists are accustomed to "doing anything they want -- and we do mean anything." [Lee Sheppard, NYSBA Considers Partnership Questions, 110 Tax Notes 448, 448 (Jan. 30, 2006), blogged here] In fact, subchapter K gives new meaning to the phrase "voluntary tax system." There is no greater evidence that partners pay taxes on their own very special terms than that embodied in the substantial economic effect test. Under that standard, partners can trade and deal in tax burdens and benefits in a manner that the Helvering v. Horst [311 U.S. 112 (1940)] Court would never condone. Horst makes it easy to conclude that a 50 percent owner of property is responsible for 50 percent of the tax benefits and burdens arising from property as soon as the corresponding economic benefits and burdens are realized. The substantial economic effect test contradicts Horst's teaching that income from property is taxable to the owner thereof. By allowing partnerships to divide tax benefits and burdens in a manner disproportionate to relative ownership, subchapter K turns Horst on its head. Why should that be the case? Why should we measure partnership tax benefits and burdens so differently from individuals or shareholders, and indeed in a manner that makes no economic sense? Let's look at the history of special allocations before articulating what has become a virtually meaningless, yet rote, justification for the current state of affairs.