Collaboration agreement gives rise to partnership treatment.

• Author: Nakamoto, Erin

In Chief Counsel Advice (CCA) 201323015, the IRS ruled that a joint collaboration between two corporations was a partnership for U.S. federal tax purposes and the entity could not elect out of the application of subchapter K of the Code. Additionally, the IRS Office of Chief Counsel (OCC) ruled that the determination of the Sec. 199 domestic production activities deduction (DPAD) for deemed partnerships producing qualified products must be done at the partner level. The OCC focused on factors from the U.S. Supreme Court in Culbertson, 337 U.S. 733 (1949), and the Tax Court in Luna, 42 T.C. 1067 (1964).

Findings

Corporation A and Corporation B collaborated to develop and market Product. According to the CCA, they entered into an agreement under which A granted B rights to co-promote Product. The two corporations kept complete and separate records. Moreover, the agreement specified that B would play the primary role in management, finance, and operations. A submitted its records to B so that B could determine the joint venture's net income. B paid A for its allocable share of profits and losses. These reimbursements were originally treated as royalty payments from B, but, at some point during the venture, A claimed amounts from B as qualified production activity income (QPAI) for A's DPAD.

A and B charged all costs incurred against operating profits of the joint venture. A and B were allocated their share of profits and losses as determined in the agreement. A and B never filed a Form 1065, U.S. Return of Partnership Income, nor did they file a written election under Sec. 761 (a) to elect out of subchapter K. The agreement did not state whether the collaboration should be treated as a partnership for federal income tax purposes; however, side agreements included provisions that their relationship should not be treated as a partnership, agency, employer-employee, or joint venture.

Collaboration as a Partnership

Sec. 761 (a) defines a partnership as "a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title [subtitle], a corporation or a trust or estate." Partnerships must include at least two partners.

Joint undertakings formed merely to share expenses are not considered a partnership. However, any of the previously mentioned factors, as defined in Sec. 761 (a), could give rise to a...