Paul L. Caron

Saturday, June 19, 2021

Monroe: Improvisation And Forgotten Taxpayers In Partnership Tax

Andrea Monroe (Temple), Making Tax Law Work: Improvisation and Forgotten Taxpayers in Partnership Tax, 54 U. Mich. J.L. Reform  ___ (2021):

The most troublesome provisions of partnership tax are also its most fundamental, namely the allocation rules that regulate how partners share a partnership’s taxable items.

Complexity is a universal problem faced by partnerships at all levels of wealth, status and sophistication, and the vast majority of taxpayers respond with improvisational tax compliance. In remarkably diverse contexts, improvisation has replaced technical compliance as the norm in partnership allocations. Wealthy partnerships make a strategic choice to improvise, using “target allocations,” while poorer partnerships improvise because they have no other choice, routinely following “intuitive” tax law and hoping for the best.

Reframing this complexity problem as a shared experience of all partnerships exposes the technical and cultural fractures of partnership tax in a new and different light.

First, the technical rules governing partnership allocations do not work as designed for any category of partnership. A second, less explored problem is the professional culture of partnership tax, which takes for granted the technical sophistication of substantive tax law without appreciating the distributional consequences of sustained complexity and improvisation.

Partnership allocations require more than technical solutions. One necessary step is addressing the professional culture of partnership tax to rethink what it means for tax law to work. This article proposes that partnership reforms developed by experts and directed at wealthy and well-advised partnerships should be accompanied by reforms addressing parallel problems faced by forgotten partnerships. The solutions will necessarily differ, but a bilateral focus on the universal problems of all partnerships would represent meaningful progress, signaling a commitment to a fair, principled, and representative system of partnership tax.

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