The Omnipresence of Subchapter K in the International Arena?

Abstract

The purpose of Subchapter K is to provide certainty as to the appropriate focal point for making tax determinations, i.e., at the partner level or the partnership level, dictating which level is determinative for what purpose. Subchapter K generally ensures that partners are ultimately taxed similarly under the three possible methods of realization upon their investment. Whether (1) the partnership run its course and disposed of its assets for cash and liquidated thereafter, (2) the partner sells his partnership interest to another for cash, or (3) the partnership liquidates by distributing its assets to the partner for sale thereafter, the amount and character of the gain or loss is generally the same, albeit with some deferral in the liquidation context. Regardless of the method chosen, tax consequences ensue. Subchapter N’s treatment of inbound and outbound activity reflects different overriding purposes. Regarding inbound activity, the goal is to ensure that foreign persons are subject to tax on income, whether investment or business oriented, derived with a nexus to the United States. Regarding outbound activity, the focus is on the avoidance of double taxation by United States persons on income earned abroad as well as limiting the deferral of income by United States persons investing abroad through foreign corporations.The difficulty arises when partnerships operate internationally, i.e., where Subchapter K and Subchapter N may potentially overlap. Does Subchapter K always control; does Subchapter N? Is the entity approach determinative, the aggregate, or either depending upon the context? What is the ideal model for resolving such issues? Subchapter K is frequently viewed as omnipresent; however, not all issues involving partnerships in an international tax setting should be governed by it. In fact, most can, and should, be resolved under the statutory regime and governing principles of Subchapter N. In those infrequent cases where Subchapter K has a role to play, the recognition of its structural integrity, employing both the aggregate and the entity methods, requires the application of either method, depending upon the context in which the issue arises. In essence, such a transaction should receive treatment similar to that which would be accorded to such a transaction if it were exclusively domestic.