Proposed partnership anti-abuse regulations.

• Position: Tax Executives Institute's Federal Tax Committee

On May 12, 1994, the Internal Revenue Service issued proposed regulations under section 701 of the Internal Revenue Code to prevent taxpayers from using the rules governing partnership entities to produce tax results that are either inconsistent with the intent of subchapter K or that differ from the underlying economic arrangements of the parties or to circumvent the intent of other Code provisions through transactions conducted through partnerships.

The proposed regulations (PS-27-94) were published in the Federal Register on May 17, 1994 (59 Fed. Reg. 25581), and in the Internal Revenue Bulletin (1994-23 I.R.B. 29).(1) A public hearing on the proposed regulations is scheduled for July 25, 1994. Tax Executives Institute is pleased to submit its comments on the proposed regulations. In summary, we believe that--

* The proposed regulations do not properly balance taxpayers' need for meaningful guidance with the tax administrator's desire to prevent abuses by over-formalistic transactions. Existing judicial anti-abuse doctrines already permit the tax administrator to combat abusive transactions.

* The proposed regulations should be withdrawn because (i) their principal effect may well be to inhibit legitimate rather than abusive transactions and (ii) they represent an ill-advised and unworkable attempt to exercise legislative power.

* In the event that a new subchapter K anti-abuse rule is to be promulgated, the effective date should be entirely and purely prospective in effect. The currently proposed rule, broadly construed, would produce inequitable results for taxpayers relying on pre-May 12, 1994 authority.

Background

Tax Executives Institute is the principal association of business tax executives in North America. The Institute's approximately 5,000 members represent nearly 3,000 of the largest companies in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises, including partnerships. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations relating to the subchapter K anti-abuse rule.

Overview

"[A]nyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."

* Judge Learned Hand, Helvering v. Gregory

"[The partnership] provisions are not intended ... to permit taxpayers either to structure transactions using partnerships to achieve tax results that are inconsistent with the underlying economic arrangements of the parties or the substance of the transactions, or to use the existence of the partnerships to avoid the purposes of other provisions of the Code."

* Prop. Reg. [sections] 1.701-2(a)

Do the Right Thing.

* Spike Lee

Aphorisms and proverbs are wonderful devices for imparting the wisdom of the ages. The moral of each is concise, generally universal, yet flexible enough to adapt to many situations. More important for purposes of authority figures, aphorisms are inarguable. When evaluating human behavior or providing rules of thumb to guide judgment, however, an aphorism that encapsulates what should or should not be done is clear, if at all, only in hindsight.

And so it is with the Treasury and IRS's proposed prophylactic subchapter K anti-abuse rule.(2) concerned about the use of the partnership rules to "game" the tax system, the government has promulgated Prop. Reg. [sections] 1.701-2 to forestall abuse either of the partnership provisions themselves or of other Code sections through transactions conducted by or through partnerships. Although the goal of ending abuses of the tax system is laudable, promulgating amorphous maxims is, in our view, no way to run an administrable tax system. One person's "abuse" may well be another's "creative tax planning." Judge Hand's unassailable statement in Helvering v. Gregory concerning the proper role of tax planning must, in specific cases, be weighed against the tax collector's interest in preventing circumvention of prescribed tax rules. In their current form, the proposed regulations inadequately balance these interests.

Prop. Reg. [sections] 1.701-2(b) states--

The provisions of subchapter K and the regulations thereunder must be applied in a manner consistent with their intent.... Accordingly, if a partnership is formed or availed of in connection with a transaction or series of related transactions (individually or collectively, the transaction) with a principal purpose of substantially reducting the present value of the partners' aggregate federal tax liability in a manner that is inconsistent with the intent of subchapter K, the Commissioner can disregard the form of the transaction.

Thus, rather than describing the nature of the offending transactions the Treasury and IRS have promulgated a general anti-abuse rule. Indeed, the Treasury and IRS appear to be attempting to limit debate on the proper scope of tax planning--or precisely defining what is or is not an "abuse"--by invoking the shibboleth of "anti-abuse" rules. By providing little or no useful information on the "bad" transactions to be avoided, however, the Treasury...