Taxation Of Capital Shifts Within Tontine Partnerships: Immediate Taxation, Deferral, Or Exclusion?

John C. Nelson, Jr. (Mississippi), Taxation of Capital Shifts within Tontine Partnerships: Immediate Taxation, Deferral, or Exclusion?:

Tontine partnerships are a fascinating subject with many intricacies and an intriguing history. However, if these entities are ever to regain the massive popularity they once saw, investors will first demand clarity regarding their taxation. More specifically, when a partner of a tontine partnership dies, his capital account shifts automatically to the other surviving partners, and the taxation of these capital shifts is uncertain. This Article seeks to provide clarity by examining three potential methods of taxing these capital shifts, prior to arguing for the option that best complies with modern principles of tax law. Accordingly, this Article begins with an overview of the mechanics of a tontine partnership and a summary of the fascinating history of these entities. Next, this Article turns to a discussion of the tax issue, providing a numerical example that is implemented throughout the Article.

This Article then proposes three possible methods of taxing these capital shifts: (1) immediate taxation, (2) deferral, or (3) exclusion. Finally, this Article closes with an argument that the deferral method is the most appropriate option and should be adopted as the primary method for taxing the capital shifts that occur amongst the partners within tontine partnerships. This method defers taxation until a final surviving partner is identified, thereby allocating the entire tax liability to the partner who actually receives the partnership’s property. Adopting this method would provide clarity regarding the taxation of tontine partnerships, allowing these entities an opportunity to return to their once wide-spread use.