7.2 Partnership Anti-abuse Regulation

• Library: Limited Liability Companies in Virginia (Virginia CLE) (2017 Ed.)

7.2 PARTNERSHIP ANTI-ABUSE REGULATION

7.201 Background. On May 17, 1994, the IRS published Prop. Treas. Reg. § 1.701-2, which was aimed at preventing the use of partnerships to avoid taxes. Under the proposed anti-abuse regulation, if the IRS found that a partnership was formed or availed of in connection with a transaction or series of related transactions (individually or collectively referred to as "the transaction") with a principal purpose of substantially reducing the present value of the partners' aggregate federal tax liability in a manner that was inconsistent with the intent of Subchapter K, the IRS could disregard the form of the transaction and recast the transaction for federal tax purposes as it deemed appropriate. For example, the IRS could disregard the purported

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partnership in whole or in part; treat one or more of the purported partners as not a partner; treat the partners as owning their respective shares of the partnership assets directly; adjust the methods of accounting used by the partnership or a partner to reflect clearly the partnership's or the partner's income; disregard the allocations of the partnership's items of income, gain, loss, deduction, or credit; or otherwise preclude the intended tax treatment.

Although government officials indicated that the...