Hasen: Partnership Special Allocations Revisited

David Hasen (Santa Clara), Partnership Special Allocations Revisited:

Special allocations of items of partnership income, gain, loss and deduction have long created difficulties for the tax law. The paper argues that most such allocations should not be respected for tax purposes because they inappropriately separate the character of partnership items from the partners that are economically entitled to them. I suggest that special allocations instead ought to be viewed as transactions in partnership interests between or among the partners themselves. A number of consequences follow. I also argue that Treasury's rules for establishing the partners’ interests in the partnership when an allocation fails the test for substantiality are likely inconsistent with section 704(b) of the Internal Revenue Code.