Such special allocations reflect the different economic circumstances of multiple properties inside a single partnership and the varying contributions and levels of risk to individual partners, said Karen Burke, a tax law professor at the University of San Diego.
‘Economic Reason’
“While they can be abused, they do have an economic reason,” she said, suggesting that taxpayers could split apart partnerships and use contracts to replicate what the tax changes might prevent. “If you got rid of special allocations, people would have to recreate them in other ways.”
The proposal would limit special allocations only to net ordinary income and losses, net capital income and losses, and tax credits.
On distributions, current rules say that it’s not a taxable event if a partnership distributes property that has appreciated in value to one of the partners. Taxes are generally triggered only upon sale of the property.
The new rule, mimicking the S corporation structure, says that the distribution is a taxable event to the partnership, which would then flow through to all of the partners.
Unaddressed Issues
The rules leave a number of issues unaddressed, including the tax treatment of private equity managers’ carried interest, the law governing real estate investment trusts and potential changes to publicly traded partnerships such as Enterprise Products Partners LP.
Some of the changes being considered are so dramatic that they might have made sense in the abstract, if the tax code were being rewritten from scratch, Rubin said.
“It would be nice,” he said, “but it might be so painful getting there that it’s just not worth the” effort.