Where Partnership Tax Problems Actually Originate
Subchapter K allows partners to allocate income, loss, and basis in ways that diverge sharply from their capital contributions, and every one of those allocations must survive scrutiny under rules that reward precision and punish shortcuts. A capital account never maintained on the terms the regulations require, or a basis disparity nobody addressed at the right moment, can turn a routine transaction into a costly correction years later.
Erik Lincoln, founding member of Lincoln PLLC, brings a dual JD/CPA credential, decades of combined experience as a former Big Four Senior Tax Manager at Ernst & Young and a former BigLaw equity partner at Moore & Van Allen, and admission to the U.S. Tax Court to every partnership matter our firm reviews. He has been recognized by Super Lawyers, named to Best Lawyers in America, and honored on Business North Carolina’s Legal Elite list for tax.
He works directly with the operating partnerships, real estate ventures, funds, and referring professionals who bring these matters to the firm, which means the attorney handling the matter is the attorney you speak to. Our tax law team also handles the S corporation and business sale matters that often intersect with a partnership engagement.
Areas of Partnership Tax Counsel
We support closely held partnerships, funds, real estate ventures, and the professionals who refer them.
Capital Accounts and Section 704(b) Allocations
Section 704(b) allocations are respected only if they have substantial economic effect or are consistent with the partners’ interests in the partnership, which turns on whether capital accounts are maintained under the regulatory safe harbor.
Section 704(c) Built-In Gain Allocations
When a partner contributes property with built-in gain or loss, the choice among the traditional method, curative allocations, and the remedial method determines who bears the tax burden and when, and the ceiling rule can produce results the partners never intended.
Section 754 Elections and Basis Adjustments
A Section 754 election permits basis adjustments on transfers of a partnership interest and on certain distributions. Adjustments are mandatory even without an election where the partnership has a substantial built-in loss or a substantial basis reduction.
BBA Centralized Partnership Audits
Since 2018, the IRS generally determines and collects any understatement at the partnership level. We review eligibility to elect out under Section 6221(b), the modification process under Section 6225, and push-out elections under Section 6226.
Partnership Tax Counsel for Admissions, Exits, and Incentive Grants
Lincoln Tax & Business Attorneys help partnerships, funds, and real estate ventures manage the partner-level transactions their operating agreements usually do not address.
Admissions, Exits, and Transfers
Partner-level transactions carry their own set of rules that the operating agreement usually does not address.
- Section 751 recharacterization on sale of a partnership interest
- Section 736 payments to a retiring or deceased partner
- Disguised sales under Section 707(a)(2)(B)
- Debt-financed distribution analysis
Partnership Liabilities and Section 752
We determine how partnership liabilities are allocated among the partners under Section 752, which in turn determines outside basis, at-risk amounts, and whether allocated losses are usable at all.
- FIRPTA withholding on U.S. real property interests
- Permanent establishment and treaty-based deal structuring
- Section 1446(f) withholding on foreign partner transfers
- Post-acquisition international reporting
Profits Interests and Carried Interest
Granting a service partner an interest in future profits works only if it is structured to fall within the safe harbors of Revenue Procedure 93-27 and Revenue Procedure 93-28.
- Grant documentation within the safe harbors
- Section 1061 three-year holding period on exit
- Fund and real estate venture incentive structures
- Carried interest realization timing
Partnership Agreement and Audit Regime Review
A partnership agreement that has never been reviewed against the current audit rules is a live risk rather than a theoretical one.
- Partnership representative authority and designation
- Annual eligibility to elect out under Section 6221(b)
- Correcting a prior year through an administrative adjustment request
Frequently Asked Questions About Partnership Tax
Should Our Partnership Make a Section 754 Election
It depends on what is happening with the partnership’s ownership. A Section 754 election generally helps when a partner sells an interest, dies, or receives a distribution and there is a meaningful gap between the partnership’s basis in its assets and a partner’s outside basis. Once made, the election applies to all future transfers and distributions until revoked with consent.
Who Should Be Named Partnership Representative
The partnership representative is the sole point of contact with the IRS during a BBA audit, and the individual partners have no independent right to participate or challenge the partnership’s adjustments. The representative does not need to be a partner, but should have the authority and judgment to bind the partnership on modification requests, push-out elections, and settlement decisions.
Can Our Partnership Elect Out of the BBA Audit Rules
Only if the partnership qualifies as an eligible partnership, meaning it has 100 or fewer eligible partners for the year and none of those partners is itself a partnership or a trust. The election is made annually on a timely filed return, so eligibility has to be confirmed each year.
How Is a Profits Interest Taxed When It Is Granted
A properly structured profits interest is generally not a taxable event at grant, provided the grant fits within the safe harbors described in Revenue Procedure 93-27 and Revenue Procedure 93-28. Section 1061 also imposes a three-year holding period for the grantee to receive long-term capital gain treatment on an applicable partnership interest.
What Happens to a Partner’s Basis When the Partnership Takes On Debt
Partnership debt increases each partner’s outside basis according to how the liability is allocated among the partners under Section 752, and that allocation depends on whether the debt is recourse or nonrecourse. Outside basis, in turn, determines how much of an allocated loss a partner can actually use.
Put Experience on Your Side
Erik Lincoln has been recognized by Super Lawyers across multiple years and Business North Carolina’s Legal Elite, and works with CPAs and attorneys nationwide from Lincoln PLLC’s Charlotte headquarters. If you are structuring or evaluating a business transaction, schedule a consultation to discuss the tax due diligence your deal need’s.