Proposed Changes to Partnership Tax Rules Would Raise $172 Billion

Tax Reform

Senate Finance Committee Chairman Ron Wyden (D-Ore.) released the outline of a bill that would significantly alter the tax rules for partnerships. Billed as reducing “partnership tax complexity,” these changes would restrict the ability of partnerships to allocate income and deductions unless those allocations are in line with the partners’ ownership percentages. Sen. Wyden indicated these changes would raise $172 billion in additional tax revenue over the next 10 years and that this proposal will be considered for inclusion as part of the massive tax overhaul plan Democrats are now assembling.

Wyden includes several examples of what his proposal is intended to do, the following which is taken directly from his summary materials and reflects his perspectives:

  • Contributions and distributions of appreciated (or depreciated) property are generally tax free. Partnerships are supposed to allocate built-in gains and losses on contributed property in a way that limits abuse, but they get to choose among three or more allocation methods. Only one —the “remedial method” — actually prevents tax from being shifted between the partners. The discussion draft would require partnerships to use the remedial method, making sure gain and the related tax liability, cannot be shifted.
  • Upon a change in the interests of the partners, a partnership can elect — but is not required — to revalue its assets to prevent the shifting of built-in gain and loss. The discussion draft would require such revaluations.
  • The partnership tax rules afford tremendous flexibility in the allocation of partnership income and losses among partners. The discussion draft would remove optionality and in doing so, simplify administration and curtail abuse. For certain related-party partnerships, the discussion draft would require all income and loss to be allocated pro-rata.

Legislative text is not yet available, but a short summary can be found here and more detailed analysis can be viewed here.

NAHB opposes tax hikes on businesses and will remain actively involved as this tax package moves through Congress.

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