Lingering Partnership Classification Issues (Just When You Thought It Was Safe To Go Back Into the Water)

Abstract

This article discusses the federal income tax law relating to the classification of entities as partnerships for federal income tax purposes, with a focus on the practical problems that lawyers often encounter in distinguishing partnerships from associations under the four factor test set forth in Regulations section 301.7701-2. Partnership classification issues arise with respect to both general and limited partnerships formed under state partnership statutes and certain partnership-like foreign entities. Moreover, the recent proliferation of other types of entities seeking partnership classification, such as "master limited partnerships," limited liability companies, business trusts, common law trusts and grantor trusts with partnership "fallback" positions, has focused renewed attention on those issues and raised still more classification issues. The Internal Revenue Service's recent published rulings have addressed some of these issues, but a number of issues remain.