Essay on Taxation in the United States and Partnership

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Federal Library
Federal Editorial Materials
WG&L Federal Treatises
Partnership & Limited Liability Entity Taxation
McKee, Nelson & Whitmire: Federal Taxation of Partnerships and Partners
Part I General Concepts
Chapter 1: An Overview of Subchapter K
¶1.02. The Aggregate and Entity Concepts

¶ 1.02 The Aggregate and Entity Concepts
Subchapter K represents a blending of two views as to the nature of partnerships. The first view is that a partnership is simply an aggregation of individuals, each of whom should be treated as the owner of a direct undivided interest in partnership assets and operations. This is sometimes referred to as the “aggregate” or “conduit” view of partnerships. The second view is that a partnership is a separate entity, with a tax existence apart from the partners. Under this view, a partner has no direct interest in partnership assets or operations, but only an interest in the partnership entity separate and apart from its assets and operations.

¶ 1.02[1] The Aggregate Concept
If a pure aggregate approach to the taxation of partners and partnerships were applied,
Subchapter K would be largely unnecessary. Each partner would be directly taxable on a share of partnership income and would be viewed as owning a direct interest in each partnership asset. Contributions to or distributions from partnerships would be disregarded unless they changed the proportionate interests of the partners in particular properties, in which case such transfers would trigger exchanges (taxable, in the absence of an applicable nonrecognition provision such as § 1031) among the partners.
The sale of a partnership interest would be treated as the sale of undivided interests in partnership assets, with the amount realized by the seller fragmented, asset-by-asset,

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and

the buyer entitled to a cost basis for his interest in each partnership asset. Computation of a

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partner's basis in his partnership interest and determination of the character of the interest would be irrelevant because the partnership interest would not be treated as an asset separate from the partner's interest in the underlying assets of the partnership.

¶ 1.02[2] The Entity Concept
An entirely different scheme of taxation results if partnerships are considered entities separate from the partners. Viewed in these terms, the partnership itself, rather than its partners, would be subject to tax on partnership income, much as a corporation is taxed under Subchapter
C.

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Contributions to and distributions from the partnership entity would generally be taxable

events, in the absence of a specific nonrecognition provision,

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and transfers of partnership

interests would generally be taxed without regard to the character or basis of the entity's assets.

¶ 1.02[3] Blending of the Entity and Aggregate
Concepts
When Subchapter K was codified in 1954, it blended entity and aggregate policies, but it leaned more heavily on the entity view for normative rules and provided aggregate rules as taxpayeroptional alternatives. Over the years, this entity bias has been eroded by numerous targeted changes in the Code's provisions. The mixture of aggregate and entity concepts in Subchapter K may be summarized as follows:
1. The aggregate concept predominates in connection with the taxation of partnership income to the partners and the general nonrecognition provisions for contributions to and distributions from partnerships. (Even in these matters, however, the drafters incorporated certain entity notions, particularly in connection with the computation of partnership taxable income, 38

the adoption of a separate taxable year for the partnership,

treatment of certain transactions between partners and partnerships.

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39

and the

)

2. The entity approach,
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