Monday, September 10, 2018
Emily Cauble (DePaul), Taxing Selling Partners, 94 Wash. L. Rev. ___ (2018):
Under current law, when a partner sells a partnership interest, the resulting gain or loss is treated as capital gain or loss, except to the extent that the partnership holds certain items whose sale would result in gain or loss that was not capital. The purpose of the current regime appears to be to prevent taxpayers from obtaining more favorable treatment by selling an interest in a partnership than what would result if the partnership were to sell its underlying assets. Given this apparent aim of legislators, current law produces results for taxpayers that are both unduly favorable and unduly unfavorable. In particular, despite current law’s aim to equate the tax treatment of the sale of a partnership interest with the tax treatment of the sale of underlying assets (at least with respect to the character of income recognized), differences persist. Sometimes sale of a partnership interest produces more favorable tax treatment than the sale of underlying assets. Other times, sale of a partnership interest triggers less favorable tax treatment than a sale of underlying assets.
The current statutory design necessitates piece-meal reform as taxpayers discover new opportunities to exploit ways in which the statute produces unduly favorable results. Most recently, in December 2017, Congress adopted legislative reform to address one such instance involving the sale of a partnership interest by a non-U.S. person. The current statutory design also requires Congress to update the existing statute to take into account potential ripple effects of unrelated legislative changes, and, therefore, the design is error prone because, inevitably, Congress overlooks and fails to address these potential ripple effects. Changes enacted by Congress in December 2017 provide at least one example of this phenomenon. In particular, Congress enacted a new restriction on the deductibility of losses incurred in a trade or business but did not provide for a corresponding modification to the tax provisions governing sale of an interest in a partnership — creating the potential for another way in which the current statutory design is unduly favorable. This Article proposes a better approach to the tax treatment of the sale of a partnership interest that would more effectively serve the aim of equating the tax treatment of the sale of a partnership interest with the sale of underlying assets.