Paul L. Caron

Thursday, November 4, 2021

Hasen: Three Cheers For Proposed Changes To Partnership Debt Basis Allocation Rules

David Hasen (Florida), Three Cheers for Proposed Changes to Partnership Debt Basis Allocation Rules, 173 Tax Notes Fed. 489 (Oct. 25, 2021):

Tax Notes Federal (2020)In this article, Hasen explains problems with the rules regarding the allocation of basis credit among partners for the partnership’s third-party debt, and why the proposed change from Senate Finance Committee Chair Ron Wyden, D-Ore., would go a long way toward solving them.

Enactment of proposed section 752(e)(1) would represent a substantial improvement over existing law. The PPR aligns basis credit with economic reality; it eliminates tax-motivated manipulations of essentially meaningless risk-of-catastrophic loss allocations; and it eliminates the tax disparity between economically similar recourse and nonrecourse debt arrangements. These reasons alone would suffice to recommend the provision.

Beyond them, the PPR follows a principle that the tax law should have embraced a long time ago, which is that debt is closely similar to a rental arrangement. Viewing debt in this way provides benefits beyond improving the tax rules for partnership borrowing, something that I also argued in the article mentioned above. A considered review of debt so understood could go some way to addressing other problems in the debt area, including the proper treatment of debt cancellation and other matters.

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