Too Big to Fail: The Problem of Partnership Allocations (Part 1‪)‬

INTRODUCTION All is not well with partnership taxation. Its problems are legendary, and have been documented by both longstanding and recent scholarship. (1) Subchapter K, which sets forth the rules governing the taxation of partnerships and their partners, (2) suffers from matchless complexity. (3) These rules require navigation through an impossible maze of technical provisions that has become incomprehensible to many, if not most, partnerships. (4) At the same time, subchapter K offers an irresistible playground for taxpayers who pursue tax-sheltering activities, thereby inspiring many of the most abusive transactions in recent history. (5) In addition to the extraordinary public cost of tax shelters, with some estimates exceeding ten billion dollars annually, (6) tax shelters imply that the federal income tax system principally rewards wealthy, well-advised taxpayers who are skilled or lucky enough to discover new tax-saving techniques. (7) In doing so, tax shelters adversely affect compliance rates and undermine the fairness of the federal income tax system. (8)