Paul L. Caron

Thursday, March 28, 2013

Cauble: Blackstone's IPO and the Partnership Tax Allocation Loophole

Florida Tax ReviewEmily Cauble (DePaul), Was Blackstone's Initial Public Offering Too Good to Be True?: A Case Study in Closing Loopholes in the Partnership Tax Allocation Rules, 14 Fla. Tax Rev. ___ (2013):

Typically publicly-traded entities must be treated as corporations for tax purposes. Blackstone Group LP is publicly traded; yet, it is not treated as a corporation for tax purposes. Why not? Blackstone Group LP utilizes complex tax structuring in order to qualify for an exception from the typical corporate tax treatment and, in the process, saves millions of dollars in tax liability annually.

Members of Congress proposed reforms that would have prevented Blackstone Group LP from obliterating its tax liability in this manner. Yet, these reforms were not enacted. This Article takes a different approach. It argues that existing law already provides the IRS with the tools needed to challenge the legitimacy of the results claimed by Blackstone Group LP.

In the process, this Article highlights an important and unintended loophole in existing partnership tax allocation rules, specifically, the failure of the rules to adequately address allocations among related partners. Finally, this Article proposes that the IRS use general tax law standards to close this unintended loophole.

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The article zeroes in on what the real problem has been in subchapter K-or at least one of the fundamental problems-the inability to police related party allocations. The problem I have with the article is that it misses what I personally encountered while at the government when I raised this very issue-the refusal of the IRS Chief Counsel international division to write regulations under section 482 governing partnership allocations. The government is fearful that there will be no third party public data available to impose comparable pricing standards on private deals-most partnership transactions. I personally think that explanation never rang true but reality is reality. And in defense of the government, except in clear cases where it is obvious that section 482 should apply, how do you apply the code section to determine, for example, whether a preferred-common allocation among related parties violates section 482 and when it does not. That is the root of the problem I think.

Posted by: Monte Jackel | Mar 28, 2013 8:51:47 AM

Jackel raises a good point or two above.

Treasury's authority to issue regulations subjecting related party allocations within partnerships to section 482 aside, IRS personnel in the field in the early 2000s often issued FPAAs that invoked section 482 as a ground (among others) for invalidating partnership allocations in Son-of-BOSS and DAD shelters. It is pretty easy to find FPAAs submitted in public federal court filings that bear out this observation. More recently, the section 482 approach seems to have waned.

So let me ask.

Why have the international gnomes at IRS monopolized section 482? Back in the day, section 482 applied to domestic transactions as well. It is true that IRS Chief Counsel lawyers often get their heads handed to them by the Tax Court in cross-border section 482 cases, but that is no reason for the IRS to neglect section 482 in other contexts, including partnership allocations.

As between the two statutes, what does section 482 give the IRS from the standpoint of regulating abusive partnership allocations that section 704 does not? On its face, and historically, section 482 is a far more expansive legislative grant of authority to the IRS than section 704.

Within the community of tax practitioners, public and private, who has an interest in exalting section 704 over section 482 as the predominant IRS tool for combating abusive intra-partnership allocations among related parties? Who oversaw the drafting of the section 704 regulations 20-25 years ago? Who has parlayed that experience into a lucrative partnership taxation practice, not to mention a widely read partnership taxation treatise?

Finally, are Treasury and the IRS the victims of regulatory capture?

(Hint: That last question is a softball.)

Posted by: Jake | Mar 28, 2013 6:38:56 PM