Will I Know It When I See It?

One would think that most fundamental questions in tax law were settled. For instance, when is an organization a partnership for tax purposes? Unfortunately, that is not always (or even often) the case.

Brad Borden of Washburn University School of Law will publish The Federal Definition of Tax Partnership in an upcoming issue of the Houston Law Review. The paper is now posted on SSRN. As Borden explains in the abstract:

[C]ourts, Treasury, and the IRS generally have not considered the purposes of partnership tax law in the more than 150 instances they have interpreted and applied the definition of tax partnership. As a result, those efforts have produced ten separate tests for defining tax partnership, perpetuating the definition's uncertainty. This Article identifies and evaluates each of those tests and recommends abandoning tests that do not incorporate the purposes of partnership tax law and consolidating the remaining tests. Based on that consolidation, the Article proposes a new definition of tax partnership. The proposed definition incorporates the purposes of partnership tax law, and, because partnership tax law was intended to govern substantive-law partnerships, it includes some aspects of the substantive-law definition. Nonetheless, by using tax-specific terminology and relying on the purposes of partnership tax law, the proposal clarifies the definition of tax partnership and moves away from the substantive-law definition.

The simple definition:

A tax partnership is two or more persons, at least one of whom provides significant services, who have (or will have) common gross income.

It probably comes as a great surprise to non-tax practitioners, but the question of whether an arrangement is or is not a partnership for tax purposes arises fairly often. While obviously borne in academe where Borden currently resides, the article provides useful guidance to work-a-day practitioners.