AICPA Sends Comments to Congress on Proposed Reforms in Subchapter K (Taxation of Partnerships)


Good tax policy and efficient administration have been a cornerstone of advocacy for the American Institute of CPA (AICPA) since its inception. In a letter sent to Congressional leaders by the Senate Finance Committee and the House Ways and Means Committee, AICPA expressed deep concern about recent proposals for the reform of Subchapter K in the Draft discussion on transfer reform.

These proposals target perceived and actual abuses with the aim of closing the tax gap, but they do not conform to the AICPA principles of an objective framework of good tax policy and misinterpret the story of subchapter K dating back to the Internal Revenue Code (IRC) of 1954.

Flow-through entities, and particularly partnerships taxed under IRC Subchapter K, generate significant business income reported to the Internal Revenue Service (IRS). Partnerships are the backbone of many small and new businesses. “Partnership” is the ubiquitous business structure for private equity investments, personal service businesses, and many start-ups. Good partnership tax policy and effective administration of this system should ensure fairness, simplicity, neutrality and certainty.

The AICPA urges the Senate to follow the House and not to include the Subchapter K changes in reconciliation legislation. The AICPA also recommends considering fundamental and structural changes to Subchapter K only after careful study and sufficient input to address policy considerations and mitigate unintended consequences due to the complexity of Subchapter K. Introducing significant changes would also require the Treasury Department to provide additional guidance, which could create uncertainty as to when (or if) regulations are released or finalized.

The AICPA comments raise several practical issues and specifically address the following points:

  • Safe Harbor Income Allocation
  • Section 704 (c) Corrective Method and Mandatory Re-evaluations
  • Liabilities without recourse under section 752
  • Mixing Bowl Transactions under Section 704 (c) (1) (B) and Section 737
  • Mandatory basic adjustments under Articles 734 and 743
  • Continuation of the partnership
  • Section 163 (j) Limitation of commercial interest

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