A Partnership Mark-to-Market Tax Election

Abstract

The rules of subchapter K of the Internal Revenue Code impose substantial compliance burdens on partnerships and substantial administrative burdens on the government. These burdens could make the option to have periodic deemed realizations of gains and losses on partnership assets attractive to many partnerships. Although deemed realizations would impose valuation costs and a slightly higher expected tax liability for partners than they bear under current law, for many partnerships, the tradeoff likely would prove worthwhile, especially if partners could continue to take advantage of the long-term capital gain preference for gains that would be taxed at preferential rates in the absence of deemed realizations. This article describes some of the compliance burdens faced by partnerships and proposes a partnership election that would provide for mark-to-market taxation of partnership property. The article also describes two secondary elections for partnerships making the mark-to-market election. One would preserve capital gain treatment for assets that would be subject to such treatment in the absence of the mark-to-market election; the other would reduce valuation costs.