Formless Partnership Transactions and Deemed Transfers: Connecting the Dots and Completing the Picture

Abstract

[...]federal income tax law does not generally provide rules for taxing such formless transactions-and instead generally provides rules applicable to asset or ownership transfers, which may apply differently depending upon the parties to the transfer, the direction of the transfers and, in transactions involving more than one transfer, the order in which the transfers occurred. While the Internal Revenue Service (the "IRS" or the "Service") has provided some guidance for determining the taxation of these transactions, it is not entirely consistent. [...]outside of this limited guidance, questions abound regarding whether taxpayers must simply assume that a transaction occurred in some particular form or can instead define for themselves the deemed transfers to which the tax law is then applied. [...]taxpayers often must make difficult judgment calls regarding the tax treatment of many partnership transactions and accept a degree of uncertainty. Background Vexing questions regarding the proper analysis and treatment of formless partnership transactions have plagued Subchapter K practitioners for a long time.4 Inextricably related to these characterization issues, and inevitably coming up in any discussion of the topic, are broader questions that have arisen across decades and different areas of the tax law, including: whether and when form should govern over substance and vice versa; when should the step transaction doctrine be applied and when should it be "turned off;" what is the scope of the ability of the Service and taxpayers to ignore steps or "invent" steps that did not actually occur; and so on.5 Is there even a difference between form and substance?